What are SBA loans and how do they help your business?

SBA loans can be a powerful tool for small business owners to gain access to the funding they need.

If you're struggling to secure financing for your business—whether for new equipment or startup costs—SBA loans could provide the support you need. 

SBA stands for the U.S. Small Business Administration, which backs SBA loans with a partial guaranty. A guaranty describes a promise to pay money if the other party cannot. This government-backed financing offers benefits for borrowers and lenders, increasing access to funds while reducing overall lending risk. 

Because of their broad applications, SBA loans support small businesses' launch, growth and development, helping business owners realize their goals.

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What to know about SBA loans

If you're a business owner weighing your financing options, there are many things you should know about SBA loans—starting with what they are. An SBA loan is administered by participating lenders (like banks or credit unions) and is partially guaranteed by the U.S. Small Business Administration.

When applying for an SBA loan, the lender then applies for a guaranty. With an SBA guaranty, the lender reduces risk by guaranteeing they may still be paid if you default on payments. The SBA may guarantee up to 85% of the loan value, depending on the type of loan, the lender and your eligibility. The borrower associated with the loan will also pay a fee to the SBA.

SBA loans help cover business-related expenses, such as inventory, equipment and real estate. Because the guaranty adds a layer of security for lenders, SBA loans increase access to financing for business owners who may be unable to secure traditional funding.

What can I use an SBA loan for?

SBA loans are available for small businesses to use for a variety of business expenses, including:

  • Real estate: Purchase property or construct a building to help you expand services or make room for more employees. 
  • Startup: Cover startup expenses, like purchasing inventory or paying wages. 
  • Expansion and improvement: Expand, convert or enhance existing structures.
  • Normal operating expenses: Cover the costs of normal operating expenses for things like rent, utilities and insurance when you launch your business.
  • Debt consolidation, refinancing and repayment: Manage outstanding business debts, like consolidation, to lower your repayment costs, subject to SBA program parameters.
  • Supplies and equipment: Purchase or rent items necessary for your business, like commercial-grade equipment, to help you more efficiently manage your business.

Each loan type has approved and prohibited uses for its funding. For example, SBA 504 loans cannot be used for inventory, and SBA loans can never be used for rental investments. It’s important to work with a lender that will appropriately match SBA loan options with your business's specific needs.

What are the types of SBA loans?

There are several types of SBA loans, including 7(a), 504, microloans, express loans and disaster loans. Each type is unique in its purpose, amount and eligibility.

Loan type Amount (up to) Purpose
7(a) loans $5 million The most common SBA loan. It's ideal if your plan includes purchasing owner-occupied real estate, but it can also be used for startup costs, revolving capital, inventory and supplies, expansion, and refinancing.
504 loans $5 million Funding available through a partnership between your lender and Certified Development Companies (CDCs) to purchase or construct buildings, buy land and long-term equipment, and improve outdoor areas. Funding cannot be used for working capital, inventory, debt management, speculation or investment in rental real estate.
Microloans $50,000 Funding provided to small businesses or some not-for-profit childcare centers through intermediary lenders, which set the requirements and terms. Funds can be used to reopen, rebuild, repair or enhance the business, but cannot be used to pay debt or purchase real estate.
Express loans $500,000 Fast funding can be used for working capital, debt refinancing or business expansion.
Economic injury disaster loans $2 million A disaster loan funded by the SBA that can cover working capital and normal expenses for businesses that have been affected by a declared disaster.
Physical damage loans $2 million A disaster loan funded by the SBA for businesses that experienced physical damage from a declared disaster that isn’t fully covered by insurance or FEMA assistance. Funds cannot be used to upgrade or expand your business, unless mandated by building regulations.
Mitigation assistance loans N/A Those receiving any form of disaster loan can request expanded funding of up to 20% of the original loan’s value to strengthen their structure against future disasters.
Military reservist loans $2 million Funding to cover normal operating costs if an essential employee is called to active duty. Funds cannot be used to cover lost income or profits, to refinance long-term debt, or to expand the business, or in lieu of regular commercial debt.


What are the benefits of SBA loans?

For business owners, SBA loans have several benefits beyond increased access to financing. 

Competitive rates 
SBA loans often offer competitive rates when compared to conventional business loan options. Because the government guarantees SBA loans, they're likely to have a lower interest rate than conventional business loans, depending on factors including the economic environment, type of loan and borrower's risk profile. 

Low fees
SBA loans may charge a percentage of the guaranteed loan amount. An initial guaranty fee and yearly service fee are the most common. The SBA prohibits other fees commonly assessed on traditional financing—like brokerage, application and origination fees—from being charged on SBA loans.

Extended repayment terms
Many SBA loans offer longer repayment terms when compared with traditional financing options. Although these repayment periods vary based on loan type and amount, some SBA-guaranteed loans offer repayment terms as long as 25 years. A longer repayment period means lower monthly payments, so your business will have more to put toward other expenses.

Other potential benefits of SBA loans
Some SBA loans may also offer lower down payments and flexible overhead requirements. In addition, you can combine SBA loans with other financing options—such as Capital One's financing options for businesses—to maximize your borrowing potential.

What are the eligibility requirements for an SBA loan?

Not all businesses or loan structures will qualify for SBA financing. Several factors determine SBA loan eligibility. Some loans may have additional requirements, like collateral; but at a minimum, your business should: 

  • Operate for profit in the United States or its territories.
  • Have reasonable owner equity.
  • Have exhausted exploring other financing options, including personal assets.
  • Meet the size requirements set by the SBA.

What are the terms of an SBA loan?

SBA loan terms vary based on the lender, borrower, loan type and amount. For instance, lenders decide interest rates and requirements for your loan based on your risk and the parameters required by the SBA guaranty. Notably, all SBA loans require 100% personal guarantees of the business owners. This is just one example of why finding a participating lender that best meets your needs can be so important.

Let's say you own a restaurant and want to add a second location, so you apply for a 7(a) loan for $750,000 with a participating lender. The terms could include an SBA guaranty of $675,000 and a 25-year loan term, subject to pledged collateral. However, another lender may offer a non-SBA guaranteed option requiring a larger equity contribution and shorter-term amortization, subject to pledged collateral. The non-SBA guaranteed option could result in less liquidity for your business and higher monthly loan payments.

This is just one example of why finding a participating lender that best meets your needs can be so important. 

How to find a lender for your SBA loan

It's important to work with a lender that will appropriately match SBA loan options with your business's specific needs. If you need a large or complex loan, experienced national financial entities may be more likely to provide the funds you need, but they may also have stricter eligibility requirements and loan terms. Local banks and credit unions usually offer more flexible terms and conditions, but they may not have the capacity or expertise to provide significant loan amounts.

Once you determine which entity type may be best suited to service your SBA loan needs, you can search for lenders in your state on the SBAs website.

How to apply for an SBA loan

If you'd like to pursue an SBA loan, here's how to apply:

Check your eligibility. 
Along with the requirements noted above, businesses must meet SBA size standards, be able to repay the loan and have a reasonable business purpose. 

Gather the needed documents. 
If you believe you're eligible, prepare the paperwork. You'll need the following: 

  • Your personal and financial information, including documentation of assets, liabilities, income and tax records for the past three years. You'll need the SBA Borrower Information Form (Form 1919), a personal financial statement and a statement of personal history (SBA Form 912).
  • Your business's records and financial information, including your business license, projected cash flow for the next year, and financial records and taxes from the past three years.
  • Supporting and additional documents as applicable, including appraisals and purchase agreements.

Choose a lender. 
Different lenders may offer different rates and terms. Use the SBA's Lender Match tool to get matched within two days. To find a knowledgeable lender, ask each potential lender the following: 

  • How many SBA loans have you provided?
  • What's the dollar range of SBA loans you’ve made?
  • What SBA loans could you offer for my business?

Wait for approval. 
The approval process could take a few months because your application goes through multiple stages. If you're approved, your lender is responsible for closing and disbursing the loan.

Keep in mind that, unlike some other lenders, Capital One can approve its own SBA loans without prior SBA approval. Capital One is audited by the SBA on a regular basis to ensure that appropriate parameters are being met.

The bottom line

SBA loans require you to exhaust all other financing options, but they provide invaluable support to small businesses that keep the economy thriving. With often-favorable interest rates and extended repayment terms, SBA loans are a great option for securing funds for your business—and the reduced risk to lenders makes them more likely to provide you with funding. Connecting with a lender who understands your business's needs will help you receive the financing that meets those needs. 

Choosing the right lender is critical to the success of your SBA loan. If you've been financially responsible with your business, you could put your business in a great position to be approved for an SBA loan and secure the necessary funds for the next growth opportunity for your business.

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