What Is an SBA Loan?

Securing sufficient capital can be a challenge for many small business owners. To help, the U.S. Small Business Administration (SBA) partners with lenders to back loans that typically offer more flexible terms than traditional funding options.

Here’s everything you need to know about SBA loans, including eligibility requirements, different loan types, and how to apply.

[Read more: Small Business Funding: A Breakdown of Business Loan Types]

What is an SBA loan?

An SBA loan is a federally backed small business loan administered through a separate lending institution with support from the SBA. Because the government partially guarantees them, SBA loans pose less of a risk to lenders. Thus, lenders can offer loans with less stringent terms, including smaller down payments, lower credit standards, and longer repayment periods.

SBA loans can be used for a multitude of business needs, including (but not limited) to startup costs, short-term and long-term working capital, and commercial real estate.

Eligibility requirements for SBA loans

To qualify for an SBA loan, your business must:

• Meet the small business size standard for its industry, based on average annual receipts or number of employees.
• Be registered and legally operate as a for-profit business.
• Conduct business in the United States or its territories.
• Be creditworthy, as well as financially stable and viable.
• Have exhausted non-government options, including personal assets, for financing.

Additionally, many lenders will look for the following before considering any business for loan approval:

• A business plan.
• Financial projections, including the amount and use of funds.
• Collateral to guarantee the loan.
• A solid credit history. While the SBA does not set specific credit score limits, many lenders look for a minimum score of 620; those with lower rates may qualify for startup funding.
• Industry experience (a plus, though not required).

Exact requirements will vary by lender and by SBA loan program; consult with your lender to determine their offerings and your business’s eligibility.

[Read more: Equity vs. Debt Financing: What's Best for Your Business Goals?]

Traditional SBA loan options

The most common types of loans the SBA offers to small businesses include:

• 7(a) loans: The 7(a) loan program is the most common type of loan the SBA offers, and is used for purchasing real estate, working capital, refinancing business debt, and purchasing equipment, furniture, and machinery. The maximum 7(a) loan size totals $5 million.
• 504 loans: The 504 loan program helps companies in need of long-term financing that will in turn “promote business growth and job creation.” Among other uses, this includes buying buildings, land, and machinery or equipment. The 504 loans are only offered from Certified Development Companies (CDCs). The maximum 504 loan size totals $5 million.
• Microloans: For small companies that only need a small boost to help them improve their business, the SBA offers the microloan program. These loans can help businesses with working capital, inventory, furniture, machinery, equipment, and other select uses. They can not be used for existing debts or real estate purchases. The maximum loan size for microloans is $50,000 and the average size loan totals $13,000.
• Other programs: Additionally, the SBA offers several programs that can help small businesses get access to federal contracting dollars, grants, and more.

Is an SBA loan right for your business?

An SBA loan might be right for you if your business hasn’t been able to acquire sufficient funding from non-government sources, and you will be able to repay the loan under the designated terms.

SBA loans offer several advantages for small businesses, including:

• Competitive interest rates: While exact rates will vary by lender and program, SBA loans typically have a maximum interest rate cap. This can help keep interest rates manageable and potentially lower your overall financial obligation.
• Longer, more flexible terms: SBA loans have longer terms than conventional business loans — between 10 and 25 years, depending on your use case — giving you more time to repay them. The SBA can also offer certain flexibilities in repayment, including loan modifications or deferred payments, that traditional lenders can’t always provide.
• Higher loan amounts: SBA loan amounts range from $500 to $5.5 million, depending on the program you apply for. Most non-SBA business loans are capped at $1 million.
• Broader eligibility requirements: Conventional business loans may have more stringent terms to qualify, depending on the lender. With government backing reducing some of the risk, lenders can offer loans to a wider range of eligible borrowers.

As with any financial decision, assess your business’s situation and talk with a financial advisor to make sure your company is healthy enough to take on debt.

[Read more: How to Find Your Small Business Credit Score]

How to apply for an SBA loan

Once you’ve determined your business’s eligibility for an SBA loan, follow these steps to apply and (ideally) secure your funding:

Find an SBA lender

If you’re not sure where to start, SBA’s Lender Match Tool can connect you with prospective lenders; simply answer a few questions, and you’ll receive a list of potential matches within two days. Many small business banks, including Bank of America, Chase, and Wells Fargo, also offer SBA loans.

Prepare your loan application

Specific forms will vary by lender and loan type, but in general, you’ll need to provide the following:

• SBA-specific forms, including the Borrower Information Form, Statement of Personal History, Personal Financial Statement, and Unconditional Guarantee.
• Financial statements from the past three years, including income statements, balance sheets, tax returns, cash flow projections, and collateral details.
• Supporting business documents, including certifications/licenses, loan application history, and an overview and history of the business.

Submit your loan application

You’ll submit your SBA loan application to your lender, who will underwrite the application and determine whether to approve the loan. In some cases, your loan will need to go to the SBA for final review. However, SBA approval is not required for microloans, nor for loans distributed by preferred lending partners (PLPs).

Wait for your funds

Your lender can disburse your SBA loan in 30 to 90 days, with shorter timelines for loans managed by micro-lenders or PLPs.

Sean Peek and Sean Ludwig also contributed to this article.

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