SBA Loans: Types, Requirements And How To Get One

A small business administration loan, or SBA loan, could help you kickstart or grow your small business. Depending on your situation, you might qualify for an SBA loan worth millions of dollars. Although you must repay the funds, these government-backed loans could help you push your business forward.

Let’s explore what SBA loans are, what you can use the funds for, how to get an SBA loan and more.

What Is An SBA Loan?

A U.S. Small Business Administration (SBA) loan is partially backed by the government. Since the government offers backing, this eliminates some of the risk to lenders. As a result, lenders are able to work with small businesses and offer lower interest rates.

What Can SBA Loans Be Used For?

An SBA loan can help you move your business goals forward. But different types of SBA loans are designed for different purposes, which we will explore below. Additionally, there are some restrictions on how you can use the funds.

Below is a quick look at some of the common ways SBA loans are used.

• Purchasing a franchise
• Short-term working capital
• Long-term working capital
• Refinancing existing debt
• Equipment purchases
• Commercial real estate purchase, expansion, or construction
• Covering payroll
• Purchasing inventory

Types Of SBA Loans

SBA loans come in a few different flavors.

Beyond straightforward loans, the SBA also offers other financial products, like lines of credit. But we focus on the different types of SBA loans below.

7(a) Loan

The 7(a) loan is the most common type of SBA loan. It’s available through banks, credit unions, and other financial institutions. In general, this loan is intended to help grow a business, cover equipment purchases, or serve as working capital.

As of writing, the maximum loan amount is $5 million. To qualify, you must have an operating business for profit that is located in the U.S. Additionally, the business must be creditworthy with a reasonable ability to repay the loan.

One type of SBA 7(a) loan is the SBA Express loan, which offers up to $500,000, In general, this loan process is faster than a regular SBA 7(a) loan.

504 Loan

The SBA 504 loan is intended to help businesses finance major fixed assets. For example, you might use the funds to purchase existing buildings, land, new facilities or long-term machinery. But you cannot use the funds as working capital or for ramping up your inventory. You can apply for this type of loan through Certified Development Companies, which are the SBA’s community-based partners.

Qualified borrowers can tap into a loan of up to $5.5 million. The business must have a tangible net worth of less than $15 million, an average net income of less than $5 million after taxes in the last 2 years and be a for-profit company in the United States.

SBA Microloan

An SBA microloan involves loans of up to $50,000. Small businesses and selected not-for-profit child care centers can apply for these loans to start or expand a business. On average, SBA microloans are approximately $13,000.

In general, SBA microloans require a personal guarantee from the business owner. If approved, you can use the funds to rebuild, repair or improve your small business. But you cannot use the funds to purchase real estate or pay off existing debts.

SBA Loan Requirements

When applying for an SBA loan, the type of SBA loan you choose may have different requirements. But at the very least, you’ll need to meet the following requirements:

• Be a for-profit business
• Be a business with physical operations in the United States
• Be creditworthy
• Be reasonably able to repay the loan
• Be a small business, according to the SBA definition
• Have exhausted non-government funding solutions

Pros And Cons Of SBA Loans

As with all financial products, SBA loans come with advantages and disadvantages to consider. We take a closer look at the pros and cons below.

How To Get An SBA Loan

If you are interested in getting an SBA loan, use the steps below as a guide.

1. Check your eligibility: Start by confirming your eligibility. In general, you’ll need to have at least 2 years in business and strong numbers to qualify.

2. Shop for a lender: You can use the SBA’s Lender Matching tool to explore your lender options. Shopping around can help you find the best rates for your situation.

3. Gather your documentation: Any lender will require extensive documentation on your business’s financial situation. Be prepared to provide business tax returns, bank statements, a personal financial statement, financial projections and more.

4. Submit an application: After applying, it might take days or weeks to hear back. For a faster turnaround, consider pursuing the SBA Express loan option.

SBA Loan Alternatives

An SBA loan isn’t the only way to obtain the funds you need for your business. Take a look at some of your other options below.

Personal Loans

Personal loans involve borrowing money from a financial institution that you can use for any purpose. Once you’ve obtained a personal loan, you can pour those funds into your business. But you’ll be on the hook as an individual to repay the funds.

In general, personal loans come with lower interest rates than credit cards. Plus, you usually don’t have to put down collateral for a personal loan, which could make it the right choice for business owners with limited assets.

Business Credit Cards

A business credit card comes with a line of credit that you can use to make purchases for your business. If you need money to cover business purchases, a credit card could be the solution. But credit cards tend to come with sky-high interest rates, which can ultimately be a big drain on your business.

If possible, only tap into a business credit card if you can confidently repay the funds each month.

Home Equity Loans Or HELOCs

Homeowners with substantial equity in their homes can tap into those funds through a home equity loan or HELOC. In either case, you can use the funds any way you see fit. As a business owner, you might choose to use those funds to cover business-related expenses.

The downside of a home equity loan or a HELOC is that your home will be used as collateral. If you’re unable to keep up with the payments, you risk losing your home. Before moving forward, make sure you are comfortable with the risk of using your home as collateral.

The Bottom Line

An SBA loan could give you access to the funds you need to push your business forward. While there are several different types of SBA loans to consider, many business owners can find the funding solution they are looking for through an SBA loan. 

As you build your business, it’s helpful to get a complete picture of your finances. If you want a way to easily track your personal and business expenses in one place, download the Rocket Money^SM app today.