Small business owners are always on the hunt for ways to expand and improve their companies. For many, a small business loan might make the most sense. After all, it’s not often that a small business has the hundreds of thousands in liquidity necessary to implement their ideal growth strategy.
When you’re on the hunt for a small business loan, one thing that’s a good idea to prioritize is getting a manageable interest rate. The search for lower interest rates and favorable loan terms leads many entrepreneurs and business owners to look into SBA loans, as they often offer better annual rates than many privately-backed options. Using an SBA loan to boost your growth sustainably could be an important breakout moment for a small business.
If you’re curious about SBA loans and how you can use them to develop your business, continue reading through our guide. Or, if you know what you’re looking for, just click on one of the links below to find the answer to your question.
- What is an SBA loan?
- What kinds of SBA loans are there?
- What interest rates are offered on SBA loans?
- How do I get an SBA loan?
- What are the SBA loan repayment terms?
- What if I am denied an SBA loan?
- Building a better business
What is an SBA loan?
SBA loans are loans backed by the Small Business Administration, or SBA, as a way to incentivize small businesses and promote growth. One common misconception is that small business owners seek out SBA loans through the SBA itself. In fact, these loans are actually still issued by banks or other creditors.
The difference is that, while regular small business loans offered by these institutions tend to have higher interest rates, creditors are able to offer SBA loans at lower interest rates. That’s because the SBA insures a portion of the creditors’ funds against potential losses if the business fails. So, if you default, the private lender doesn’t suffer the consequences as badly as they would if they were fully responsible for the amount loaned.
These lower interest rates also mean that SBA loan requirements can be strict, and may have a more stringent application process than a typical bank-offered business loan.
The standard SBA business loan, and the one you’ve likely heard of, is the 7(a) — it’s the most general-purpose form of loan that the SBA offers through its program. The 7(a) can be used for expansion and renovation of your business, purchasing new capital like machinery and equipment, purchasing real estate (both land and buildings) for your business, and in some cases, it can even be used to refinance existing debts.
There are, however, other kinds of SBA business loans that may be better suited to your particular situation than the standard 7(a). First we’ll cover what different kinds of case-specific SBA loans exist, then we’ll go over important information you may want to know if you’re considering applying for one.
What kinds of SBA loans are there?
The purpose of SBA loans is to promote growth in small business. But small businesses don’t all operate under the same conditions and with the same challenges, so the SBA has a number of different programs built to suit each case. Here’s a list of the different kinds of SBA loans and the situations they’re tailored to:
- 7(a) loan: This is the flagship of the SBA loan program, and is used for general business expansion needs, like renovation, purchasing capital, hiring employees, or refinancing debt. These are typically 5-10 year repayment loans, but can be up to 25 years for real estate. The maximum loan amount is $5 million.
- 7(a) small loan: Essentially the same as the 7(a) loan, the 7(a) small loan provides smaller businesses with the capital they need for essential business functions. However, these loans are capped at $350,000.
- SBAExpress: SBAExpress loans are offered on many of the same conditions as the standard 7(a). However, requests are processed much faster for businesses that need capital quickly. These loans are also capped at $350,000.
- SBA Veterans Advantage: This loan program offers modifications of the 7(a) and SBAExpress programs specifically for veterans. Veterans Advantage loans function the same as the program under which they’re processed (either 7(a) or SBAExpress), but the benefit is that they charge no guarantee fee for loans under $125,000, and 50% the standard guarantee fee for loans under $350,000 — we’ll cover more on guarantee fees in the next section.
- CAPLines: These loans are designed to meet short-term working capital needs of small businesses, like contracting, building, seasonal capital requirements, and resolution of short-term debts. There are four sub-programs for specific desires: (1) Working Capital, (2) Contract, (3) Seasonal, and (4) Builders.
- Community Advantage: This program is based on the 7(a) loan but is directed at underserved communities. They are only available through mission-driven lenders (those who serve underserved communities), and are capped at $250,000.
- International Trade: This is an up to 25-year loan directed specifically at business owners who conduct international trade. It can be used for permanent equipment, facilities, working capital necessary for trade, and refinancing debt related to trade. This loan has a $5 million cap, and functions generally the same way as 7(a) — apart from the requirement that business owners use the proceeds for international trade-related costs.
- Export Working Capital Program: This is an up to $5 million short-term loan offered to small businesses that export products. It’s designed to boost working capital and give an edge to your company. Terms are similar to 7(a), though the repayment time frame is generally around one year, and occasionally up to three years.
- Export Express: This is a variant of the SBAExpress loan tailored to small businesses who export product. The terms are mainly the same as the SBAExpress, but borrowers must demonstrate that the loan will enable them to expand into a new export market or expand within an existing export market.
- 504 Loans & Refinancing Program: The 504 program is an economic development program instituted by the SBA. These loans differ from the standard 7(a) and related SBA loans in many crucial ways. To find out more about the 504 program specifically, visit the SBA’s website.
- Disaster loans: The SBA offers loans to businesses, nonprofits, homeowners, and renters in the event that they need to rebuild after a disaster. There are a few different kinds of long-term disaster loans offered at low interest rates offered through the program. More information about SBA loan requirements for disaster help is available online.
Because different kinds of SBA loans are applicable to different business needs, interests rates do vary. Next, we’ll go over what kinds of interest rate you can expect depending on the sort of SBA loan you’re considering applying for.
What interest rates are offered on SBA loans?
Interest rates on SBA loans range from prime rate + 3.35% to prime rate + 6% — the rate may vary depending on the amount you borrow, the type of loan, and the time of the loan’s maturity (that’s the date repayment is due).
Note: The prime rate is a standard interest rate set by individual banks, often in pace with the rate the Federal Reserve targets: generally around 5%.
The primary reason that SBA loans are so attractive to borrowers is that they offer lower interest rates than a standard business loan at a bank. Some, like the 7(a), also offer fixed maturity, which means that you have a better sense of what you’re getting yourself into financially when you sign up for your repayment plan.
If you’re considering applying for the standard SBA 7(a) loan, here’s the breakdown of maximum interest rates you might encounter:
- Paid back in under 7 years:
- $0 – $25,000 prime + 4.25%
- $25,001 – $50,000 prime + 3.25%
- Over $50,000 prime + 2.25%
- Paid back in over 7 years
- 0 – $25,000 prime + 4.75%
- $25,001 – $50,000 prime + 3.75%
- Over $50,000 prime + 2.75%
The other SBA loans that follow the same interest rate structure are:
- 7(a) Small Loans
- SBA Veterans Advantage (applied for through the 7(a) program)
- International Trade
Other loans offered through the SBA loan program have different interest rates from the 7(a) loan. They include:
- SBAExpress: loans $50,000 or less: prime + 6.5%; loans over $50,000: prime + 4.5%
- SBA Veterans Advantage (processed under SBAExpress): loans $50,000 or less: prime + 6.5%; loans over $50,000: prime + 4.5%
- Community Advantage: prime + 6%
- Export Working Capital Program: no maximum, but the SBA “monitors for reasonableness.”
- SBA Export Express: loans $50,000 or less: prime + 6.5%; loans over $50,000: prime + 4.5%
- Disaster loans: as low as 1.875% for renters and homeowners, 2.625% for nonprofits, and 4% for businesses, according to the FEMA website.
It’s important to be aware that interest rates are not the only cost you may be responsible to pay if you acquire an SBA loan. The interest rate alone is not the total cost of your loan, as guarantee fees also may apply. For the 7(a) loan, the guarantee fee rates are:
- $125,001-$150,000: 2.0%
- $150,001-$700,000: 3.0%
- Above $700,000: 3.5% up to 1st million;
- Additional 3.75% fee on guaranty portion over $1 million
(Rates only apply on the portion of the loan that the SBA guarantees for the bank)
Interest rates are an important part of calculating your small business’s financial picture. The cost of chasing your dreams may seem steep, but SBA loans can help manage them thanks to their reasonable interest rates. Of course, that also means the conditions tend to be more strict. Let’s go over what you’ll want to know about SBA loan requirements.
How do I get an SBA loan?
You can apply for an SBA loan through a participating lender, usually a bank, credit union, or online creditor. Remember, SBA loans are not actually provided by the SBA — the administration only backs the loans up. You can search for participating lenders on SBA.gov.
The first step in applying for an SBA loan is assessing your business’s finances. Because SBA loans are so competitive, it can take a fairly robust credit history and invested equity to qualify. While it’s impossible to say ahead of time whether you’ll be approved for an SBA loan, there are some standard SBA loan qualifications.
Read through them to see whether your small business meets the standards, or if there are some areas you could work on before you start putting together an SBA loan application.
1. You must run a for-profit business: to qualify for a 7(a) loan, your business be a for-profit business that operates legally. Some kinds of business are not eligible for SBA loans: companies engaging in loan-packaging, financial speculation, gambling, investing, lending, multi-level marketing, and dealers of rare coins and stamps will not be accepted for an SBA loan.
2. You must run a small business: This may seem obvious, but it’s still important that you make sure your business satisfies the size requirements imposed by the SBA. Size standards vary by industry, so there’s no easily-stated maximum number of employees or number of locations that can be offered as a cutoff. A full explanation of the SBA’s size requirements for loans is available online.
3. Business owners must have invested equity: The SBA requires that borrowers have invested a reasonable amount of equity in their own business, and must have already tried to fund their business plan in another way prior to seeking out the SBA loan. Be sure to have ample documentation demonstrating this if you apply for an SBA loan. Loan companies may also require that you fill out the SBA eligibility questionnaire, available online.
4. Your business must operate in the USA or its territories: While there are SBA loans for businesses seeking to export or do international trade (see “What kinds of SBA loans are there?” above), your business must be based in the USA. Additionally, while any citizen can apply, non-citizens may be subject to certain additional qualifying criteria. These include legal residence (illegal residents are not eligible for SBA loans) and the intention to operate primarily in the USA, and stay in the USA.
5. You have high invested equity in your business: The SBA requires that you already have a substantial amount of money invested in your business before you are considered eligible for a loan. For new businesses or newly-purchased businesses, the requirement is a 3:1 loan to equity ratio. That means that you must have a dollar invested in your business for every three you take out in loans. For established businesses, the ratio changes to 4:1, though the SBA notes that this can vary by industry.
6. Lenders look for responsible borrowers: As with most loans, SBA lenders require that borrowers demonstrate financial responsibility. These factors include:
- The borrower’s ability to repay the loan, as demonstrated by past records and future projections on the amount your business is expected to earn;
- Management capabilities, including past experience in the industry in which your business intends to operate, a well-constructed business plan that shows proof of your ability to succeed, and prior management experience.
- Personal and company credit history demonstrating past ability to take out loans and successfully repay them on time. If you’re unsure of your credit score, it’s a good idea to find out where you stand prior to applying for a loan.
7. Collateral: The SBA requires that you offer your company’s available assets as collateral when you’re accepted for the loan. Basically, that means that if you default on your loan payments, the lender may seize those assets to make up for the amount they lost in their bet on your company. While the SBA notes that simply lacking collateral is not sufficient to deny an otherwise qualified loan application.
In general, these SBA loan qualifications apply to any SBA loan you apply for. However, some additional conditions may apply to some of the targeted loans; for instance, the Export Working Capital Program naturally requires that your business be engaged in exports. It’s a good idea to read up on the specific program you’re applying to before heading to the bank or credit union.
What are the SBA loan repayment terms?
The exact repayment terms on your loan depend on your ability to repay, the amount that you borrowed, and the specific SBA loan requirements your bank imposes. The SBA does offer information on the ranges for maturity expected for each kind of loan in its collection of programs, however. Here are the maturity rates for the different kinds of SBA loans you might consider:
7(a) Loan, 7(a) Small Loan, Veterans Advantage under 7(a), & Community Advantage:
- Precise maturity time depends on the borrower’s ability to repay
- In general, equipment, machinery, and working capital repayment periods are between 5 and 10 years
- Real estate can be up to 25 years
SBAExpress, Veterans Advantage under SBAExpress, & Export Express:
- Up to 5 years maturity time for revolving lines of credit
- Otherwise, repayment period varies under the same conditions as 7(a)
- Up to 10 years maturity
- Builders sub-program maximum is 5 years
- Up to 25 years maturity
Export Working Capital Program:
- 1 year or less maturity time in many cases
- Maximum of 3 years maturity
504 Loan program
- 10 or 20 year maturity
If you’re curious about more financing details, it might be helpful to call your bank or credit union to see what their specific rates and requirements are. The SBA does impose these general standards, but because the loan is still issued through a private lender, some of the repayment details may depend on their specific policies.
What if I am denied an SBA loan?
Unfortunately, because SBA loans are competitive, some seemingly qualified applicants may not be granted a loan. If this happens to you, you might be scrambling to figure out what happens next. Take a deep breath. Getting a loan to grow your small business can be difficult, but it’s not impossible. Here are a few steps you might consider taking if you’re denied an SBA loan.
- Work it out and reapply: It’s possible that your business wasn’t deemed ready for a loan yet, but might still be in the future. If you’re operating at a sustainable level and were hoping to use the loan to grow, then it might be worth it to hang back and wait for the situation to improve a little before applying again. SBA loans are notoriously tricky to secure, so don’t feel too bad if you don’t get one the first time around. It might just be a matter of waiting until your business has been around long enough to be a more convincing candidate.
- Seek funding elsewhere: When you’re tight on cash and need to keep up with overhead, waiting until your finances are in better shape to apply for a loan might not be an option. If that sounds like your situation, don’t despair just yet. It’s possible to get loans at reasonable interest rates even if they aren’t backed by the SBA. It might be worth sitting down with an advisor at your bank or credit union to find out more about your private loan options. It’s also possible that other lenders who offer SBA loans will not be as strict as the one where you first applied; remember, because SBA loans are offered through private agencies, there will be some variation among lenders.
- Focus on finances: If you are consistently having trouble getting a loan, it might be time to reconsider your financial picture. If your credit score is low, you might look into ways to boost it back up to levels that lenders will find more appealing. If your business plan is a little sparse, you may want to think about ways to flesh it out so that it presents a better picture to possible lenders and investors. Getting your finances back on track after a rough patch will be well worth it in the long run. If you haven’t already, creating a business budget can be a worthwhile way to get started on improving your company’s finances.
Getting denied for a loan can be a setback but it doesn’t have to be the end of the world. Often, the key is to buckle down and invest time and energy in improving your business strategy and your profile as a borrower. And if you need a little extra help, consider using an app to help track financial goals for your business.
Building a better business
SBA loans can be an impactful way to grow your business without breaking the bank because of interest rates. Maintaining growth, keeping up with loan payments, and building a consistent customer base are all important parts of running your small business. If you’re curious about these and other aspects of personal finance, Turbo is here to help. Our blog and connected resources can help keep you informed on the aspects of financial wellness that matter most.