What is an SBA loan and how does it work?

Whether you’re launching a new business, purchasing equipment or planning for growth, U.S. Small Business Administration (SBA) loans can help support your goals.

SBA loans are small business loans backed by the U.S. Small Business Administration through a partial guarantee. This guarantee means the SBA agrees to repay a portion of the loan if the borrower can’t, helping reduce overall lending risk while expanding access to financing for small businesses.

Learn how SBA loans work, what they can be used for and which types may be right for your business.

What you’ll learn:

• SBA loans are issued by banks and other financial institutions and backed by the U.S. Small Business Administration through a partial guarantee.

• Small businesses can use SBA loans to pay for business expenses such as real estate or startup costs, debt consolidation and working capital.

• SBA loan programs range from microloans of up to $50,000 to real estate loans of up to $5.5 million.

• While SBA loans can have stricter eligibility requirements than other business loans, they may offer lower interest rates and fees, higher loan amounts and longer repayment terms.

An SBA loan is a type of small business loan issued by participating lenders, like banks or credit unions, and partially guaranteed by the U.S. Small Business Administration. SBA loans help cover business-related expenses, such as inventory, equipment and real estate. 

Because the guarantee adds a layer of security for lenders, SBA loans can help increase access to financing for business owners who may be unable to secure traditional funding.

When you apply for an SBA loan through a bank or credit union, the lender then applies for an SBA guarantee. This guarantee reduces risk for the lender because the SBA agrees to repay a portion of the loan amount if the borrower defaults. The SBA may guarantee up to 85% of the loan value, depending on the type of loan, the lender and your eligibility. 

The borrower may have to provide a personal guarantee to secure the loan. This means that if the borrower defaults on payments, the lender may be able to pursue the borrower’s personal assets to recover losses. Most SBA loans require business owners to provide either a limited or unlimited personal guarantee.

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

• Working capital: Increase liquidity for short-term operations.

• Real estate: Purchase property or construct a building to help you expand services or make room for growth.

• Startup costs: Cover startup expenses, like purchasing inventory or paying wages.

• Expansion and improvement: Grow, convert or enhance existing structures.

• Operating expenses: Cover costs like rent, utilities and insurance.

• Debt consolidation, refinancing and repayment: Manage outstanding business debts, subject to SBA program parameters.

• Supplies and equipment: Purchase or rent items necessary for your business, like commercial-grade equipment.

Keep in mind that each loan type has approved and prohibited uses for its funding.

There are several types of SBA loan programs, and each type is unique in its purpose, amount and eligibility:

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
• Demonstrate a need for funds and the ability to repay the loan
• Show that other financing options, including personal assets, have been explored
• Meet SBA size requirements

There are a few things to consider when deciding whether an SBA loan is right for your business.

Here are some of the advantages of SBA loans:

• Competitive rates: Because the government guarantees SBA loans, they may offer lower interest rates than conventional business loans, depending on factors like the economic environment, type of loan and the borrower’s risk profile.

• Higher loan limits: Compared to commercial loans, SBA loans can have higher lending limits—up to $5 million for a 7(a) loan.

• Low fees: SBA loans may charge a percentage of the guaranteed loan amount. An initial guarantee fee and an annual service fee are the most common. The SBA limits or prohibits many fees commonly assessed on traditional financing—like brokerage, application and origination fees—helping keep overall borrowing costs lower.

• Extended repayment terms: Although these repayment periods vary based on loan type and amount, some SBA-guaranteed loans offer repayment terms of up to 25 years. A longer repayment period can result in lower monthly payments, so businesses can have more money to put toward other expenses.

• Flexible loan terms: Some SBA loans may offer lower down payments and more flexible requirements than traditional financing. In addition, SBA loans can be combined with other financing options to help increase your borrowing potential.

Here are some potential downsides of SBA loans:

• Stricter qualifying guidelines: Business owners may have to meet more restrictive eligibility requirements when applying for an SBA loan.

• Longer approval process: It typically takes anywhere from 30 to 90 days to get an SBA loan approval.

• Personal guarantee: If your business can’t make payments on the SBA loan, you could personally be responsible for paying back the funds.

• Down payment: SBA loans may require a down payment—anywhere from 10% to 30%—before securing funding.

If you’d like to apply for an SBA loan, here’s how:

Businesses must meet SBA size standards, be able to repay the loan and have a reasonable business purpose, though they may need to meet other requirements too.

If you believe your business is eligible, prepare the necessary paperwork. Depending on the lender and loan type, you may be asked to provide the following: 

• Personal and financial information, including documentation of assets, liabilities, income and personal tax records for the past three years. 

• SBA forms, such as the Borrower Information Form (SBA Form 1919), a personal financial statement and, if applicable, a Statement of Personal History (SBA Form 912).

• Business records and financial information, including your business license, projected cash flow for the next year and financial records and tax returns from the past three years.

• Supporting documents, as applicable, including appraisals and purchase agreements.

Different lenders may offer different rates and terms. Use the SBA’s Lender Match tool to potentially get matched with participating lenders 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 loan programs could you offer for my business?

The approval process can take several weeks to a few months because your application typically 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 may be able to approve certain 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.

With often favorable interest rates and extended repayment terms, SBA loans can be a great financing option for your business. The SBA guarantee also reduces risk for lenders, which may increase access to funding for eligible borrowers.

If you’re exploring other options to support your business’s financing needs, Capital One offers business credit cards that you can check for pre-approval before applying—with no impact on your credit scores.