SBA Loan Guide for Small Businesses

While some entrepreneurs tap into their own savings to start or expand their business, others must rely on outside sources. Loans backed by the US Small Business Administration, or SBA, are a popular option—especially among early-stage small business owners.

While SBA loans offer attractive terms and may come with other benefits, many factors impact the decision to apply for this type of funding. Having a solid understanding of the most common loan programs and what they can be used for may help streamline the SBA loan application process.

What is an SBA loan?

To fully understand what SBA loans are and how they work, it's helpful to take a step back and consider the history and mission of the SBA.

The agency was created in 1953 to aid, counsel and protect small businesses. To fulfill this mission, it offers several programs and initiatives—including education and mentorship—that are designed to support the success of small businesses. It also advocates on behalf of small business interests in Congress.

The SBA loan program is a key component of its mission. In 2022, the SBA backed almost $43 billion in funding for small businesses across the country. These government-backed loans offer multiple benefits, including favorable interest rates, longer repayment terms and financing to meet a wide array of needs.

How do SBA loans work?

Because the SBA is a guarantor, not a lender, the agency doesn't loan money directly to business owners. Instead, it backs small business loans that have been fulfilled by third-party lenders, including banks.

For lenders, this government backing helps reduce risk—enabling the SBA to extend loans to businesses that may not meet traditional small business loan requirements. In turn, this makes it easier for small business owners to access the capital needed to achieve their goals.

What can SBA loans be used for?

The SBA offers several loan programs designed to meet a variety of purposes. Thanks to their competitive terms, flexible overhead requirements and favorable rates and fees, SBA loans are often an attractive funding option for small businesses at all stages of growth.

Some common uses for the funding include:

• Business expansion costs
• Working capital
• Inventory
• Debt refinancing
• Purchase of fixed assets like property and equipment
• International trade or export financing

Because each loan program is intended for a specific purpose, it's important to familiarize yourself with the most popular SBA loans for small business funding and their requirements.

Types of SBA loans

While the SBA offers a variety of loan programs, the three most popular SBA loans for small business funding are 7(a) loans, Express loans and 504 loans.

7(a) loans

SBA 7(a) loans are the most common loan guaranteed by the SBA due to their flexible use of proceeds. This program provides funds that may be used for a wide range of business goals, from startup costs and real estate to furniture, supplies and equipment. They may also be used for a buyout or buy-in, acquisition, refinance of current business debt or a mix. The maximum 7(a) loan amount is $5 million.

Express loans

Express loans are a specific type of 7(a) loan designed for businesses that want quick access to a smaller amount of capital. While the maximum loan amount is $500,000, Express loans may be used for most purposes covered by the 7(a) program and may offer much faster processing times.

504 loans

Businesses can use 504 loans to finance up to 90% of the cost to purchase or improve major fixed assets like buildings, land, facilities and long-term machinery or equipment. However, SBA 504 loans are intended to promote job creation, so for every $90,000 loaned under this program—or $140,000 for manufacturers—a business must create or retain at least one job. The SBA generally caps its portion of these loans at $5.5 million each, although some companies may qualify for a larger amount or more than one loan. Your SBA loan officer can help you determine how much you may be eligible to borrow.

SBA loan eligibility requirements

While specific eligibility requirements will vary depending on the type of SBA loan you choose, several requirements apply to all loan programs. To qualify, your business must:

• Be a for-profit company located in the US
• Be unable to obtain needed financing through conventional means
• Be able to demonstrate a need for financing
• Illustrate how the SBA loan will be used for business purposes
• Not have defaulted on any federally backed loans

How to apply for an SBA loan

Because the SBA is only a guarantor, you'll apply with a bank or another type of lender. If this is your first time applying, search for an experienced SBA lender with a deep understanding of program requirements. As you research, you may come across a Preferred Lender Program, or PLP, lender.

The Preferred Lender Program allows a select group of financial institutions to make underwriting decisions. PLP lenders generally have extensive knowledge of the SBA loan approval process, which makes them well-equipped to help SBA loan applicants navigate common questions and issues.

Likewise, PLP lenders are authorized to process applications in-house rather than sending them to the SBA for underwriting, so the time between completing the application and getting a decision may be much quicker.

SBA loan documentation requirements

After you've chosen a lender, it's time to gather documentation for the SBA loan application process. For starters, you may need to prepare the following:

• Copies of your business license and lease
• Financial statements, including a profit-and-loss statement and financial projections
• Business and personal tax returns from the past 3 years
• Business debt schedule
• Personal financial statement

It's a good idea to include a copy of your business plan and a funding request that outlines how much you'd like to borrow, what the funds will be used for and how you plan to repay the loan.

You'll also be required to fill out the necessary SBA-related documents. This aspect of the process may be complicated for first-time borrowers.

The bottom line

Details matter when it comes to applying for SBA loans. For many business owners, the application process may feel daunting and time-consuming, which might make working with a PLP lender helpful for first-time applicants. Your SBA loan officer can guide you through the process, work with you to ensure you have your documentation in order and answer any questions you may have along the way.