What Are SBA Loans and How Do They Work?

Key insights:

• Small Business Administration (SBA) loans are small business loans that are partially backed by the government
• You can apply for these loans through SBA-approved lenders rather than directly through the SBA
• There are several types of SBA loans with different terms, amounts and purposes
• Understanding the types of SBA loans could help you find the right fit for your business

Let’s explore SBA loans, including how they work and how to apply for them, as well as the available loan types to know.

What is an SBA loan?

An SBA loan is any small business loan partially backed by the SBA. The SBA doesn’t directly lend money to small businesses. Instead, they work with lenders, such as banks, to reduce their risk when offering small business loans and lines of credit.

Qualifications for SBA loans may include your business’s size and purpose, as well as your ability to repay the loan. Lenders can also set their own requirements beyond those factors. However, they must adhere to the SBA’s loan parameters. For instance, the SBA dictates which fees lenders may 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 an SBA-approved lender rather than through the SBA itself. This means you need to follow the lender’s application process to access funding.

The terms of these federally-backed loans may be more favorable than those of traditional business loans. For example, while SBA loans may require a down payment, the amount could be lower than that of traditional business loans. Borrowers may also be able to access benefits such as free counseling and education.

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

What can SBA loans be used for?

You may use SBA loans for a wide array of purposes, from starting a business to purchasing inventory and equipment. Loan amounts can vary by loan program. Some programs allow you to cover recurring expenses, while others are specifically designed to help you recover from declared disasters.

Types of SBA loans

SBA loans come in many forms, so understanding how they work could help you find options that suit your business needs. To help you start, here is what you should know about the most common types of SBA loans:

SBA 7(a) loans

The 7(a) loan program is the SBA’s primary loan program. It provides financial support for businesses’ daily operations, offering funds you can use for short- or long-term working capital. 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
• Purpose: General business purposes

SBA 504 loans

This loan program offers long-term loans for the specific purpose of financing major assets to grow the business. These assets often include existing buildings or land, as well as renting machinery long-term.

• Amounts: $250,000 to $10 million
• Terms: Up to 25 years
• Purpose: Purchasing or constructing commercial real estate

SBA Express loans

Express loans are a type of 7(a) loan that also assists with business operations, including recurring expenses and those needed for expansion. An express loan generally has a lower SBA guaranty percentage, in exchange for giving lenders more say in processing. This helps cut down review time for faster loan approval. Lenders also may not require collateral on loan amounts of $50,000 or less.

• Amounts: $10,000 to $500,000
• Terms: Up to 10 years
• Purpose: Covering recurring expenses

Advantages of SBA loans

The advantages of SBA loans make them an appealing option for many business owners. Since the government backs a portion of the loan, SBA loans may feature longer terms, lower interest rates and lower down payments compared to traditional business loans.

Additionally, SBA loans offer high borrowing limits, with some programs offering up to $10 million. They also provide flexibility in how you use the funds, whether you’re buying real estate, purchasing inventory or recovering from economic loss.

Considerations of SBA loans

While SBA loans can help your small business grow, there are potential drawbacks worth considering. To start, 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. There might be other requirements depending on the lender and loan program.

Additionally, lenders will look at both your personal and business creditworthiness when evaluating your application. You may also have to provide collateral and a personal guarantee. SBA loan interest rates could be fixed or variable, but they’re also subject to the SBA’s rate caps. That means there’s a limit to how much your loan will cost you, even if your rate changes over time.

Lastly, SBA loans can take time to process, which may not work for business owners looking for quicker access to cash.

How to apply for an SBA loan

The SBA loan application process is similar to that of a traditional business loan. However, there might be some additional requirements depending on the loan type and lender you choose. The following steps can guide you when choosing and applying for an SBA loan.

Step 1: Determine your business needs

Before starting the application process, you should know exactly why your business needs funding and how much you require. You should also develop a clear course of action explaining to the lenders how you’ll repay the loan.

Step 2: Check your eligibility

Eligibility is subject to both SBA and lender requirements. Ensure your business qualifies for the specific types of SBA loans you are pursuing, such as meeting the size and industry criteria. SBA lenders typically look for strong creditworthiness, sufficient cash flow and a solid history of years in business.

Step 3: Compare lenders

Take the time to compare various SBA lenders and what they offer to find the right match for your financial situation. You might want to consider factors such as:

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

Step 4: Gather necessary documents

When applying for a business loan, you are typically asked to provide required documents, such as:

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

Step 5: Complete and submit your application

Make sure to follow the instructions, completing all questions and uploading all required documents before you submit the application. If approved, you’ll have the option to receive your funds via direct deposit into your business checking account.

Find the right SBA loan with Citi

Understanding what SBA loans are and how they work is an important first step in securing financing for your business. By exploring the different types of SBA loans and evaluating their advantages, you can make an informed decision.

Citi supports the growth of small businesses by offering SBA 7(a), SBA Express and SBA 504 loans. Funding ranges from $10,000 to $10 million, depending on the loan. Explore these options today and learn what documents to bring to start your application.

SBA loan FAQs

Who qualifies for an SBA loan?

To qualify for an SBA loan, you generally need to operate a for-profit business located in the U.S. You must also meet the SBA’s size standards for a small business and demonstrate an ability to repay the funds.

Do SBA loans have to be paid back?

Yes, SBA loans must be repaid in full, including interest, according to the terms set by your lender. They are not grants, and you typically must sign a personal guarantee stating you will repay the debt even if your business closes.

What’s the difference between an SBA 7(a) and 504 loan?

An SBA 7(a) loan is very versatile and can be used for general business purposes, such as working capital and inventory. In contrast, an SBA 504 loan is specifically designed to finance major fixed assets, such as real estate and large equipment.

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.