What is an SBA Loan

Small Business Administration (SBA) loans are government-guaranteed loans that small businesses can use to obtain funds for handling expenses. There are many types of SBA loans, each with different purposes and terms. It’s important to understand how they work to help find the best loan for your business.

Let’s explore SBA loans, including how they work and how to apply for one, as well as the available types, benefits and drawbacks.

The basics of SBA loans

An SBA loan is any small business loan backed by the U.S Small Business Administration (SBA). The SBA doesn’t directly lend money to small businesses. Instead, they work with lenders, like banks, to reduce their risk in offering small business loans and lines of credit.

Qualifications for SBA loans may include your business’ size and purpose, as well as your ability to repay the loan. Lenders can set their own requirements outside of those factors, too. However, lenders do have to stick to the SBA's loan parameters. For instance, the SBA dictates which fees lenders can charge borrowers, as well as how you can use loan funds within specific loan programs.

How do SBA loans work?

With SBA loans, you apply for funding through a lender, rather than through the SBA itself. That means you need to follow the lender’s application process to access funding.

The terms of these federally backed loans can be more favorable than traditional small business loans. For example, while SBA loans may require a down payment, the amount may be lower than that of traditional business loans. Borrowers may also be able to access perks like free counseling and education.

Otherwise, SBA loans are generally comparable to other small business loans. Once you get the funds, you repay the loan in installments, as laid out in your loan documents. You still typically need to provide a personal guarantee to qualify for SBA loans. That means you agree to repay the loan even if the business fails.

Types of SBA loans

SBA loans come in many forms. Understanding how they work can help you find options that suit your needs. To help you start, here’s what you should know about three SBA loans offered by Citi:

7(a) loans

The 7(a) loan program is the SBA’s primary loan program. Some of the key factors that determine business eligibility include what your business does and your credit history.

Amounts: $250,000 to $5 million
Terms: Up to 25 years
What they’re best for: General business purposes

504 loans

This loan program offers long-term loans for the specific purpose of financing major assets to grow the business.

Amounts: $250,000 to $10 million
Terms: Up to 25 years
What they’re best for: Purchasing commercial real estate

Express loans

Express loans are a type of 7(a) loan that have a lower SBA guaranty percentage. Lenders also aren’t required to take collateral on loan amounts of $50,000 or less.

Amounts: $10,000 to $500,000
Terms: Up to 10 years
What they’re best for: Covering recurring expenses

Benefits and drawbacks of SBA loans

SBA loans can help small businesses grow, but there can be drawbacks worth considering.

Qualifying for an SBA loan isn’t always simple. At a high level, you generally need to have a U.S.-based, for-profit business and meet the SBA’s size requirements.

Lenders may look at both your personal and business credit when evaluating your application. There may be other requirements, depending on the lender and loan program.

Additionally, you may have to put up collateral and provide a personal guarantee to access SBA loans. It can also take time for SBA loans to process, which may not work for business owners looking for quicker access to cash.

You may use SBA loans for a wide array of purposes, from starting a business to purchasing real estate and equipment. Loan amounts will vary depending on the loan program.

SBA loan interest rates can be fixed or variable, but they're also subject to rate caps. That means there is a limit to how much your loan will cost you, even if your rate can change over time.

How to apply for an SBA loan

The SBA loan application process depends on the lender you choose. In general, it’s similar to the process of applying for a conventional business loan. However, there may be some additional requirements, depending on the loan type.

You may want to consider factors such as:

• Interest rates
• Fees
• Terms
• Collateral requirements
• Funding timelines
• Loan amounts
• Credit requirements

Once you choose a lender, you can contact them to walk through their loan offerings. To apply for a business lending account, you’re typically asked to bring required documents, such as:

• Business financial statements
• Business license
• Tax returns
• Bank statements
• Business projections

If approved, you could receive your funds and start putting your business plans into action.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.