Small businesses are one of the major contributors to the world’s economy. According to a report published by Forbes, nearly 33.3 million businesses in the United States are qualified as small businesses. This data is revealed by the Small Business Administration, which implies that small businesses are generating significant employment. However, these businesses find it difficult to when it comes to secure finances for their business. In such a scenario, Small Business Administration (SBA) loans come into the picture.

This article will help you gather understanding about SBA loans, their types and how these loans work. We will compare different types of SBA loans available for small businesses depending on their interest rates, funding period, allowable usage and qualifications. So, get ready to explore the tiniest detail about SBA loans.

What is an SBA Loan?

All small businesses need some funds from time to time to cover various costs like working capital, startup costs, real estate purchases, and more. To manage these expenses small businesses can get SBA loans which will help them cover these costs. SBA loans are provided by private lenders who are backed by the federal government, like the Small Business Administration.

SBA offers different types of loans to businesses which have varying interest rates, allowable usages, qualifications, loan terms and more.

 

How does an SBA loan work?

The next you should know after understanding the concept of SBA loans is the process of SBA loans. So, when you apply for an SBA loan, your request will then be processed by the lender which can be a bank or credit provider. They then apply to the SBA for the loan guarantee, and if approved then the government will pay the guaranteed amount to the lender.

An unconditional personal guarantee is required by the SBA, where it will hold 20% ownership in the company. If you face trouble during repayment, this guarantee will put you on the hook.

The loan disbursal is processed only in the scenario of approval from the government. Once you are approved for an SBA loan, the lender will release the money and close the loan.

Types of SBA Loans

There are distinct small business loan options which are funded by the government and have their terms and conditions. You can choose the type of loan suitable for your business depending on the usage of the fund. Let us explore different types of SBA loans-

 

SBA 7(a) loans

This is one of the most common types of SBA loans which are applied by the borrowers. The reason why it is most preferred is the range of its usage. SBA 7(a) loan can be used for various business purposes including equipment purchase, daily working capital requirements, real estate, inventory, and also for the acquisition of another company.

SBA 7(a) is a small business loan that is issued by a private lender and backed by U.S. SBA (partially). Qualifying for SBA 7(a) loans can be difficult but they are perfect options for businesses due to their long-term repayment and low interest rates. As per the statistics available, SBA guaranteed more than 57,000 7(a) loans in fiscal year 2023.

Apart from standard SBA 7(a) loans, other types of loans fall under the category of 7(a) like SBA express loans, SBA CAPLines, and SBA Export loans.

 

Qualification Requirements for SBA 7(a) Loans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	2 years (recommended) but can vary according to lender
Down Payment	10% minimum
Annual Revenue	Depends on lender
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Yes

Rates and Terms for SBA 7(a) Loans

Maximum Interest Rates	Fixed- 13.50% to 16.50% Variable- 11.50% to 15.00%
Maximumloan amount	Standard 7(a) loan- $5 million Small 7(a) loan- $500,000
Funding speed	45 to 90+ days
Repayment Term	10 years

Allowable Usage

SBA 7(a) loan can be used for several business purposes and if you use it for the following reasons then you are eligible to get the fund-

• Use it as working capital
• For constructing a new building
• To purchase new equipment, materials, supplies and more
• Improving the infrastructure of existing building
• Acquiring a new business

 

SBA Express Loans

SBA Express Loans as the term indicates, this type of loans can be funded quickly as compared to other SBA loans. However, the funding is not as good as other SBA loan programs. In this, the approval process is solely handled by the lenders, and they can use their guidelines and process to approve the funding and do not require review from SBA.

In SBA Express loans, individual lenders can provide up to $500,000 as funding that is backed by the government. SBA Express loans fall under the SBA 7(a) loan program and offer competitive interest rates.

There are two options to apply for SBA Express loans, and this depends on the type of lender you choose-

• A Line of Credit– It will allow you to draw funds as per your needs; till the credit limit is issued by the lender.
• A Term Loan– It will issue and disburse your fund in a single go. The only advantages associated with this type are lower rates and longer repayment periods.

 

Qualification requirements for SBA Express Loans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	2 years (recommended) but can vary according to lender
Down Payment	10% minimum
Annual Revenue	Depends on lender
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Loan amounts up to $50,000- Not required Loan amounts exceeding $50,000- Typically required

Rates and terms for SBA Express Loans

Maximum Interest Rates	Fixed- 13.50% to 16.50% Variable- 11.50% to 15.00%
Maximum loan amount	$500,000
Funding speed	10 to 45 days
Repayment Term	10 years (for revolving credit lines)

Allowable Usage

Funds disbursed by lenders in SBA Express loans can only be used for the following purposes-

• Use it as working capital
• For filling up inventory
• Purchasing machinery and new equipment
• In real estate
• To purchase furniture, supplies and fixtures
• Cover the business debt

 

SBA Export Loans

SBA Export loans are of three different types; including SBA Export Express, SBA Export Working Capital, and SBA International Trade.

SBA Export Express loan program issues funding in an accelerated timeline. Here, the lenders are the delegated authorities who can issue the approval and funds without separate approval from the SBA.

The SBA Export Working Capital loan program provides funds to businesses that need additional working capital to support additional exports. The funding amount is higher than the SBA Export program but the approval period is longer.

The SBA International Trade program helps businesses in growing and developing export markets internationally. They can use this fund for financing and equipment purchasing.

 

Qualification requirements for SBA Export Loans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	2 years (recommended) but can vary according to lender
Down Payment	10% minimum
Annual Revenue	Depends on lender
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Export Express- Required for loans greater than $50,000 Export Working Capital- Required

Rates and terms for SBA Export Loans

Maximum Interest Rates	Fixed- 13.50% to 16.50% Variable- 11.50% to 15.00%
Maximum loan amount	Export Express- $500,000 Export Working Capital- $5 million International Trade- $5 million
Funding speed	Export Express- 10 to 45 days Export Working Capital- 30 to 90+ days International Trade- 30 to 90+ days
Repayment Term	Export Express- 7 years (for revolving lines of credit) Export Working Capital- 3 years or less (for revolving lines of credit)

Allowable Usage

If you are applying for SBA Export loans then you should know that the funds can be used for the following uses only-

• Use it as working capital
• To purchase machinery and new equipment
• For acquisition and betterment of facilities
• Improving export operations
• To export financing
• Developing new international market

 

SBA CAPLine Loans

The purpose of the SBA CAPLine loan program is to financially assist businesses for their short-term needs which can be cyclical or seasonal. There are four categories of SBA CAPLine Loans-

• Seasonal CAPLine- This type of fund can only be used for seasonal increases in inventory costs, labour and account receivables. The applicant must be in business for 12 months.
• Working CAPLine- Businesses that cannot meet the credit standards of long-term credit are eligible for this asset-based revolving line of credit. The funds must be used for short-term operational and capital needs.
• Contract CAPLine- This type of fund can be used for direct labor and material costs for fulfilling revolving and non-revolving contracts. The eligibility for this type of loan depends on your previous performance as a contractor.
• Builders CAPLine- This loan can only be approved for homebuilders or construction contractors. The funds can only be used for construction costs including costs of materials, equipment rentals, supplies, landscaping and more.

 

Qualification requirements for SBA CAPLine Loans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	12 months but it can vary depending on lender and loan program
Down Payment	10% minimum
Annual Revenue	Depends on lender
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Required

Rates and terms for SBA CAPLine Loans

Maximum Interest Rates	Fixed- 13.50% to 16.50% Variable- 11.50% to 15.00%
Maximum loan amount	$5 million
Funding speed	30 to 90+ days
Repayment Term	10 years

Allowable Usage

The fund approved by the SBA CAPLine program can be used for the following purposes only-

• Use it as working capital
• To cover the cost of administrative expenses
• For accounts receivables
• To purchase inventory
• For construction and labor costs

SBA 504 Loans

This is a small-business loan which is funded by Certified Development Companies (CDC) and third-party lenders. These lenders and CDC are backed by the SBA itself. The funding is divided into two- 40% funding by CDCs and 50% funding by SBA-approved lenders. Since the loan is funded from different sources, thus the interest rates can vary on different parts of the loan.

If you want to get an SBA 504 loan then you need to find a CDC to work with. The maximum financing amount is $5.5 million.

 

Qualification requirements for SBA 504 Loans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	2 years (recommended) but can vary according to lender)
Down Payment	10% minimum
Annual Revenue	Net income must not exceed $5 million
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Required

Rates and terms for SBA 504 Loans

Maximum Interest Rates	SBA portion of loan 6.361% to 6.526% Lender portion of loan- Varies (can fall between 6% to 12%)
Maximum loan amount	$5.5 million
Funding speed	2 to 4+ months
Repayment Term	10, 20, and 25 years

Allowable Usage

The fund approved by the SBA 504 loan program can be used for the following purposes only-

• To manage buildings and lands
• Purchasing new machinery and equipment
• For landscaping
• Managing streets and parking lots

 

SBA Microloans

All the businesses that require a small amount of funding are perfect for SBA Microloans. This type of loan is provided to small businesses and also to non-profit childcare centers. These loans are issued by intermediary lenders. The funds approved can be used for several purposes to ensure business growth. These funds can help the startup businesses in their setup as well as the expansion of existing businesses.

The funds from SBA Microloans cannot be used for paying business debts and for real estate purchases.

Qualification requirements for SBA Microloans

Credit Score	680 (recommended) but can vary according to lender
Time in Business	2 years (recommended) but can vary according to lender)
Down Payment	10% minimum
Annual Revenue	Depends on lender
Debt Service Coverage Ratio	1.25x (recommended) but can vary according to lender
Collateral	Required

Rates and terms for SBA Microloans

Maximum Interest Rates	8% to 13%
Maximum loan amount	$50,000
Funding speed	30 to 90+ days
Repayment Term	6 years

Allowable Usage

The fund approved by the SBA Microloans program can be used for the following purposes only-

• Use it as working capital
• To fill up inventory
• To purchase supplies and fixtures
• Purchasing new equipment and machinery

 

Pros and Cons of SBA Loans

Pros of SBA Loans	Cons of SBA Loans
Competitive rates	Difficult to qualify
Low fees	Slow funding process
Longer loan term	Collateral is required
Large loan amounts

Conclusion

Different SBA loan types offer competitive rates and terms, and these numbers can vary from business to business. Before applying for a SBA loan, be sure about your eligibility and other qualification criteria. Each SBA loan type has different interest rates, repayment terms, credit scores, and more. Compare all these features from the above sections and find the right SBA loan for your business.