SBA Loan Types
The Small Business Administration’s mission is to aid small business owners while strengthening the overall economy. One way they reach this goal is by helping small business owners qualify for loans through four main programs. (The SBA doesn’t make most of these loans directly. You’ll work with an SBA preferred lender.)
Here’s what to know about the different types of SBA loans for small business owners so you can find the right fit for your needs.
SBA 7a loans – general small business financing
7a loans are the most popular SBA lending program. They offer the most flexibility with how you can use the money. Through SBA 7a loans, you can borrow up to $5 million. There is no minimum loan amount, though it typically makes sense to borrow at least five figures to justify the time spent applying.
If you qualify, you can use the money for both short and long-term business spending including:
- Covering working capital expenses like salaries, rent and restocking inventory
- Buying real estate and equipment
- Refinancing existing business debt
- Setting up a line of credit for ongoing borrowing
- Purchasing another business
With 7a loans, you’re still borrowing from a private lender like a bank or credit union (it will need to be a preferred SBA lender). However, the Small Business Administration guarantees repayment of up to 90% of your debt to the lender. Thanks to this government guarantee, lenders can be more accepting of your application. SBA 7a loans are designed for businesses that can’t get financing elsewhere on reasonable terms.
7a loans are for small business owners with at least some proven track record and financial resources. While the exact standards depend on the lender, you generally need to show a history of business cash flow to cover the loan payments, a personal credit score of at least 650, and possible collateral you could put up to secure the loan.
The SBA 7a loan program has many subcategories to fit specific situations. The SBA express loan is a version of the 7a loan that has an accelerated turnaround time for review - for when you need a fast decision. SBA CAPLines are loans and lines of credit under the 7a loan umbrella for specific business needs.
For more information on what it takes to qualify for an SBA 7a loan, as well as the different types, check out this page.
SBA 504 loans – long-term subsidized loans for local economic development
Through the SBA 504 loan program, the Small Business Administration supports small businesses owners who will use the money for some sort of community economic development goal. Possibilities include creating jobs, reducing energy usage, and assisting businesses that have been hurt by a military base closing.
504 loans are typically larger, long-term loans: the shortest SBA 504 loan term is 10 years. You can borrow up to $5 million in this SBA loan program ($5.5 million for certain green energy and small business manufacturing projects.) The SBA allows small businesses to use the loans for long-term investments that meet the economic development goals. This could include buying land and real estate, purchasing new equipment, or renovating your facilities.
You cannot use 504 loans for short-term working capital spending. You also cannot use the money to relocate your business to another area if it will lead to substantial job losses in your current area. To run this loan program, the SBA partners with local nonprofits called Certified Development Companies. The CDCs process your SBA loan application. If you’re approved, they fund part of your loan and a private lender covers the rest of it.
Qualifying for a 504 loan can be tougher than other SBA loan programs due to the financial and community development requirements. It also takes several months to get a decision. In exchange, these loans charge low interest rates compared to private lenders and other SBA programs.
To learn more about the rules, restrictions and benefits of 504 loans, click here.
SBA microloans – small loans with easier borrower requirements
If you’re looking for a small, short-term loan, SBA microloans could be the solution. The maximum loan amount is $50,000. The average SBA microloan is just $13,000. These are small business loans for short-term needs like working capital, restocking inventory and buying new furniture or equipment. You can’t use microloans to buy real estate. The loan amounts are too small and you need to repay the debt too quickly; the maximum loan term is six years.
The SBA provides the financing for microloans. Since they’re a government agency, they can afford to accept a wider range of borrowers than for-profit lenders. The SBA created this program to support those who have historically struggled to access the traditional lending system, like female and minority business owners as well as those starting their very first company. You could potentially qualify for a microloan with little business history or even to start up a new business. You may also qualify with credit issues, so this is a good alternative to a personal loan.
While the SBA funds the loans, they leave the work of managing the loans to intermediaries, usually nonprofits with small business loan experience. The intermediary can explain how to qualify for SBA loans. The borrower requirements, including whether you can qualify with bad credit, will depend on the intermediary you use.
Since new business owners often use these loans, a common requirement is approved business training to learn how to properly use the funds.
Click here to learn more about SBA microloans, as well as how to find one in your area.
SBA disaster loans – financing to help business owners back on their feet
SBA disaster loans are for business owners impacted by a disaster outside their control. This includes natural disasters, like floods and hurricanes, as well as civil unrest and pandemics (the SBA provided disaster loans for COVID-19-related losses but has since ended this program.) To submit an SBA disaster loan application, you must be in a government-declared disaster area.
The SBA offers four types of financing through this program:
- Physical damage loan – Money to repair or replace your physical business assets including buildings, vehicles and inventory. If you live in the disaster area, you can also borrow to repair your home.
- Mitigation assistance – If your business faced physical damage from a disaster, this program lets you borrow to invest in upgrades that will protect against future issues, like elevating your building for floods or strengthening structures against wind damage.
- Economic Injury Disaster Loan (EIDL) – A natural disaster could cause financial damage, like a drop in sales when customers can’t reach your business or you need to temporarily shut down. EIDLs provide money so you can keep up with your bills until things return to normal.
- Military reservist loan – If one of your employees is part of the military reserves and gets called up to active duty, you can borrow to offset the financial hit of losing a key staff member.
Disaster loans tend to offer some of the lowest interest rates of SBA programs to support business owners facing tough times. The exact rates, loan requirements and terms will depend on which program you use.
Click here to learn more about the SBA loan requirements and how to apply for their disaster loans.
