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The 3 Types Of SBA Loans Business Owners Should Know About

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Small businesses represent the American Dream. A successful small business doesn’t translate to success for just one person — small businesses fuel local economies and provide jobs. When small businesses have the chance to grow and thrive, everybody wins. And that’s why organizations like the Small Business Administration exist.

The Small Business Administration, or SBA, is a government agency that provides the tools and resources needed to help business owners succeed. From training sessions to educational materials, the SBA provides resources and serves as an advocate for small businesses. The SBA has also become known among entrepreneurs for one big piece of the small business puzzle: financing. Through its loan programs, the SBA provides affordable and flexible loan options for everything from expansions to new business acquisitions.

If you’re ready to take your small business to the next level and you need the capital to get there, you can’t go wrong obtaining funding through an SBA loan program. But where do you begin?

Let’s start by learning more about the different types of SBA loans. Once you have a good base of knowledge, you’ll be better able to select and apply for the program that’s right for you.

What Are SBA Loans?

The SBA doesn’t loan money directly to small businesses. Instead, the SBA works with intermediaries to provide low-interest loans with competitive terms to small businesses and startups. These intermediaries could be traditional banks, private lenders, credit unions, or even nonprofit organizations.

The SBA has created a set of standards upheld by its intermediaries to keep loans affordable for small businesses. This way, borrowers can expand and build their businesses without facing high interest rates, daily draws, or other drawbacks they might encounter with more expensive forms of credit. The SBA backs large percentages of the loans given through its programs — anywhere from 50-85% — lowering the risk involved and making lenders more apt to lend to small businesses.

The SBA offers several programs of interest for small business owners. Let’s explore the different types of SBA loans to determine which best fits the needs of your small business or startup.

The SBA 7(a) Loan Program

The SBA 7(a) program is the most well-known among SBA loans. SBA 7(a) loans are extremely popular because of the great terms and flexibility they provide. However, there are several different types to consider, each of which comes with different maximum loan amounts, interest rates, and terms. Read on to find out more about each type to determine which is the right fit.

Types Of 7(a) Loans

  • Standard 7(a) Loans: When most people refer to SBA 7(a) loans, this is the program that comes to mind. Through this program, small businesses can borrow up to $5 million. Interest rates are negotiable and maturity terms are typically 10 years or 25 years, depending on how the money is used. The SBA guarantees 75% to 85% of the total loan amount, putting less risk on lenders so they can feel confident in loaning money to small business owners.
  • Export Express & Export Working Capital Loans: Exporters can get funding through the SBA’s Export Express and Export Working Capital programs. Through the Export Working Capital loan program, small businesses can receive up to $5 million in financing. Under the Export Express program, loans up to $500,000 are distributed. Though these loans are smaller, the benefit is that applications are approved within 24 hours.

SBA 7(a) Loan Uses

SBA 7(a) loans are so popular because there are very few limitations. With Standard Loans, Express Loans, Community Advantage Loans, and Veterans Advantage Loans, funds can be used for a variety of purposes, including the purchase of equipment, expansion, the acquisition of a business, or working capital. Export Express and Export Working Capital loans can also be used for just about any business purpose but are limited to usage only by companies that sell goods or services outside of the territorial United States.

As previously mentioned, SBA CAPLines do have limitations in how they are used. Builder’s CAPLines can only be used for direct expenses related to construction or “substantial renovation” to a residential or commercial building. Contract CAPLines can only be used for the costs of specific contracts and can’t be used to purchase fixed assets, pay back taxes, or refinance existing debt. Seasonal CAPLines are used to fund seasonal increases of inventory or accounts receivable, although in some cases it can be used for increased labor costs. Working Capital CAPLines are used for short-term needs and can’t be used for delinquent taxes or floor planning, and there are also limitations for acquiring fixed assets.

SBA 7(a) Loan Rates & Fees

The loan rates and fees for SBA 7(a) loans are extremely competitive with traditional loans. The rates and fees vary depending upon the type of loan selected. It’s also important to note that down payments, collateral, and personal guarantees are typically required for all SBA 7(a) loans. Here’s a look at SBA 7(a) loan base rates and markups:

The interest rates for SBA 7(a) loans are set by the lender, but all interest rates must fall below the maximum rates put in place by the SBA. For Standard 7(a) loans, the interest rate is based on the current prime rate. Lenders can add between 2.25% and 4.75% to the prime rate, depending upon the total loan amount taken and the repayment terms. For real estate, repayment terms up to 25 years are available. Business acquisitions and equipment financing come with terms up to 10 years. For working capital, the loan maturity is 7 years.

A one-time guarantee fee up to 3.75% may be passed on to the borrower. Additional fees may also be required by the lender, including but not limited to closing costs or referral fees. A prepayment penalty applies when the loan is paid within the first three years when the repayment terms are 15 years or longer.

The maximum interest rate for SBA Express loans is slightly higher. Lenders can charge the current prime rate plus an additional 4.5% to 6.5% based on the amount borrowed. Terms are the same for SBA Express loans as Standard 7(a) loans. A guarantee fee of up to 3% can be passed on by lenders to borrowers of Express loans, while additional fees including packaging fees and closing costs may also apply.

SBA Community Advantage Loans:

Community Advantage loans have a maximum rate set by the SBA as the prime rate plus 2.75% to 6%. Repayment terms for these loans are similar to Standard 7(a) loans – up to 25 years for real estate and up to 10 years for acquisitions, inventory, equipment financing, and other expenses. Closing costs and fees for appraisals, reports, and other costs may be passed on to the borrower.

Veterans Advantage Loans:

Veteran’s Advantage loans come with the same repayment terms and interest rates as Standard 7(a) loans. The difference is in the guarantee fee, which is reduced by 50% for loans from $125,001 to $350,000.

Export Express & Export Working Capital Loans:

Repayment terms remain the same as other 7(a) loans, while interest rates are set between 4.5% and 6.5% on top of current prime rates. A guarantee fee up to 3% will also be paid and varies based on the term length and amount borrowed.

Repayment terms for CAPLines are up to 5 years. A maximum interest rate of the prime rate plus 2.25% to 4.75% has been set by the SBA. A one-time guarantee fee between 2% and 3.75% will also be charged, as well as additional expenses similar to other SBA 7(a) loans.

SBA 7(a) Loan Borrower Requirements

There are a few requirements set by the SBA that apply across the board for all SBA 7(a) loans. All businesses must be based in the United States and must be for-profit. All applicants must qualify as a small business with 500 or fewer employees and a net worth below $15 million. Businesses must not be engaged in illegal operations.

Borrowers must have a solid credit history, with a recommended score of 680 or higher. Borrowers should be prepared to offer adequate collateral, including personal real estate if needed. Personal guarantees are required. The applicant must also show a legitimate business need for the loan and must have exhausted other financial options before applying.

All applicants should be prepared to show documentation for ownership, personal and business credit, and financial outlooks. Startups are required to have a solid business plan prepared. Anyone applying for the Veterans Advantage program must have a business that is at least 51% owned and controlled by a veteran, servicemember, reservist, or National Guard member. A current or widowed spouse is also eligible to apply.

Borrower requirements for SBA 7(a) loans:
• In business at least 2 years
• Owner’s personal credit score is 650 or above
• Business credit score is 150 or above
Visit the SmartBiz website
Read our full review

The SBA CDC/504 Loan Program

The SBA’s CDC/504 loan program is a bit different because instead of working with one intermediary, a borrower works with two: a participating lender and a Certified Development Company.

With these loans, the SBA provides up to 40% of the total cost of a project through a Certified Development Company. A traditional lender, such as a bank or credit union, provides 50% of the total project cost. The borrower is responsible for the remaining 10% of the total project cost. The maximum SBA loan amount distributed through this program is $5 million.

SBA 504 Loan Uses

While there are some limitations, the CDC/504 loan program can be used in a variety of ways to update, expand, or improve a small business. These loans can be used to purchase buildings or land, improve land, renovate facilities, or purchase long-term fixed assets. Debt can be refinanced using these funds provided that the debt is connected to the purchase or renovation of facilities or equipment.

Funds from these loans can’t be used for repaying or refinancing debt (other than the refinancing of debt as described above). It also can’t be used to purchase inventory or for use as working capital.

SBA 504 Loan Rates & Fees

The interest rates for 504 loans are based upon the market rate of 5-year and 10-year Treasury issues. The portion that is funded through a traditional lender will be subject to the lender’s own interest rates. Repayment terms of 10 years and 20 years are available for the SBA-funded portion of the loan. Funding fees, processing fees, and closing fees may also apply and can be financed with the loan.

SBA 504 Loans

No maximum, but the SBA will only fund up to $5 million

Fixed rate based on US Treasury rates

  • CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)
  • Possible prepayment penalty

Guarantee required from anybody who owns at least 20% of the business

Collateral required; usually the real estate/equipment financed

SBA 504 Loan Borrower Requirements

SBA 504 loan borrowers must meet all standard requirements set by the SBA. Borrowers must operate a for-profit business and should not be involved in nonprofit, speculative, or passive activities. Borrowers must show a legitimate need for the financing. They must also find a CDC and additional lender that operates in their area. Collateral is generally required, although typically the assets that are being financed serve as collateral. Personal guarantees are also needed from all applicants and owners of 20% or more. Read on to learn more about SBA 504 loans.

Should I Choose An SBA 504 Loan Or A 7(a) Loan?

Wondering which SBA loan is right for you? Here’s a quick comparison of the two.

SBA 7(a) Loans SBA 504 Loans
  • Working capital
  • Commercial real estate purchasing
  • Equipment purchasing
  • Purchasing a pre-existing business
  • Refinancing debt
  • Purchase an existing building
  • Purchase land and land improvements
  • Construct new facilities
  • Renovate existing facilities
  • Purchase machinery and equipment for long-term use
  • Refinance debt in connection with renovating facilities or equipment

504 VS 7(a) Rates & Terms

SBA 7(a) Loans SBA 504 Loans

No maximum, but the SBA will only fund up to $5 million

Variable rate of a base rate plus a markup of 2.25% – 6.5%

Fixed rate based on US Treasury rates

Guarantee fee, other fees from lending partners

CDC servicing fee, CSA fee, guarantee fee, third party fees (most fees are rolled into the interest rate or cost of the loan); possible prepayment penalty

Guarantee required from anybody who owns at least 20% of the business

Guarantee required from anybody who owns at least 20% of the business

Collateral required; specifics vary based on business and loan use

Collateral required; usually the real estate/equipment financed

504 VS 7(a) Borrower Requirements

SBA 7(a) Loans SBA 504 Loans
  • For-profit business considered “small” by the SBA
  • Engaged in business in the United States
  • Not in an ineligible industry
  • Strong personal and business credit
  • Strong business financials
  • Strong business plan
  • For-profit business
  • Tangible net worth less than $15 million
  • Average net income less than $5 million
  • Engaged in business in the United States
  • Not in an ineligible industry
  • Strong personal and business credit
  • Strong business financials
  • Strong business plan

The SBA Microloan Program

Small business owners looking for a smaller loan can apply for the SBA Microloan program. Through this program, borrowers can work with nonprofit intermediaries to receive up to $50,000 in low-interest funding.

SBA Microloan Uses

SBA Microloan funds can be used in almost any way to operate or expand a business. Purposes for these loans range from working capital to purchasing supplies and equipment. However, microloans can’t be used for purchasing real estate or refinancing debt.

SBA Microloan Rates & Fees

The interest rates for microloans are based primarily on the intermediary’s cost of funds. The intermediary may charge this rate plus a maximum of 7.75% on microloans exceeding $10,000, or up to 8.5% on loans that are $10,000 or less. The maximum maturity for microloans is six years.

SBA 504 Loans

Possible fees from the loan issuer

Guarantee required from anybody who owns at least 20% of the business

Collateral normally required, but depends on the lender

  • No down payment for most businesses
  • Possible 20% down payment for startups
  • Possible 10% down payment for business acquisition loan

SBA Microloan Borrower Requirements

Microloans are subject to the same standard requirements set by the SBA, including qualifying as a small business. All businesses must be for-profit, although non-profit childcare centers also may apply.

Applicants seeking more than $20,000 must pass the SBA’s “no credit elsewhere” test. This simply means that any borrower must have sought other non-federal means of financing before applying. There must also be a legitimate need for the financing, and it should be proven that the small business is set up for a profitable and successful future.

Collateral may be required, but this decision falls upon the lender. The SBA simply requires the lender to use “prudent lending practices” when determining whether a microloan should be collateralized. Credit is also a consideration and scores should be at least 680 upon applying.

How To Apply For SBA-Backed Loans

With so many options, it’s easy to see why SBA loans are the ideal choice for any established small business or startup. Once you’ve found a loan that best suits the needs of your business, it’s time to take the next step and apply for funding.

Before reaching out to a lender, it’s important to make sure that you complete as much legwork on your end as possible. One of your first moves should be to make sure your credit is where it needs to be to qualify. As previously mentioned, a minimum score of 680 is ideal, although higher scores have higher chances of approval. You can easily obtain a free credit report and score online to see where you stand. You can also use your free report to check for any errors that need to be disputed. If there are any negative marks on your report that are accurate, you will need a reasonable explanation for each. Find out more about the requirements needed to obtain an SBA loan.

Once you’ve confirmed that your credit is up to par, the next step is to begin gathering documentation. Requirements vary by lender, but you should expect to provide a minimum of 2 years’ worth of personal and business tax returns, financial statements, business licenses, and financial projections. Startups should have a solid business plan prepared to replace financial documentation that may not be available.

The next step is to find an SBA-approved lender that services your area. Once you’ve found your lender, there is a strong possibility that you will be required to appear in their office. A list of documentation may be provided before your meeting. Some lenders may also allow you to start the application process online or over the phone.

Your lender will go over all required documentation, as well as their interest rates, terms, and other vital information such as down payments and collateral requirements. Make sure that you understand all terms before moving forward in the process. Once you’ve come to an agreement, your application is completed and sent off for approval and underwriting.

At this point, it’s important to understand that the funding process for SBA loans can be lengthy. On average, expect to wait a minimum of 30 to 90 days for your funding. Potential delays may further prolong the process. If you’ve applied for specific programs such as the SBA Express loan program, approval may be received in just days, but additional time will be required to close and fund the loan.

Where Do I Find SBA Loans?

To find an SBA loan in your area, you can visit the SBA’s website for more information. You can use the site’s Lender Match tool to be paired with a lender that can provide the loan you’re looking for. You can also ask for a referral for an SBA-approved lender from your financial institution. Make sure that the lender you choose is authorized to provide the specific type of loan that interests you.

Once approved, the loan will be closed and you’ll receive your funding. The final step is to use your funds responsibly. Remember to always pay your loan based on the agreed-upon terms and use all loan proceeds to further improve or expand your business to elevate your success.

Borrower requirements for SBA 7(a) loans:
• In business at least 2 years
• Owner’s personal credit score is 650 or above
• Business credit score is 150 or above
Visit the SmartBiz website
Read our full review

Quickly compare top traditional loan options:

Lender Borrowing Amount Term Interest/Factor Rate Req. Time in Business Min. Credit Score Next Steps
  $5K – $500K 3 – 36 months x1.003 – x1.04/mo 12 months 500 Apply Now
  $5K – $500K 13 – 52 weeks x1.029 – x1.1872 9 months 550 Apply Now
  $2K – $5M Varies As low as 2% 6 months 550 Apply Now
  $20K – $500K 1 – 4 years 7.99% – 29.99% APR 2 years 660 Apply Now

Erica is a writer based in Greenville, South Carolina. She is a graduate of Limestone College. Initially determined to be an accountant, she put away the calculator and picked up a laptop to pursue her dream of being a writer. Erica has spent the past 10 years writing blogs and articles for hundreds of private clients, and she loves sharing her love of research and the written word with everyone around her.


Post Author: Orion Mitchell

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