Last Updated January 6, 2025
For many small businesses in need of funding, one of the best ways to get a cash infusion is through an SBA loan, which are somewhat different from traditional bank loans.
Understanding key elements of an SBA loan—such as loan eligibility requirements, the different types of SBA loans, and even the pros and cons of SBA loans—will help you determine if this option is right for your business.
In this guide, we’ll cover what you need to know about how SBA loans work so you can make an informed decision for your own funding needs.
What Are SBA Loans?
An SBA loan is a loan for small businesses that is partially guaranteed by the U.S. Small Business Administration (SBA). The government doesn’t provide these loans directly; instead, the SBA works with lending partners to reduce their overall financial risk and make it easier for small businesses to get needed capital via loans. Loan amounts can range from as little as $500 to as much as $5.5 million.
What Can SBA Loans Be Used For?
SBA loans can be used for a wide range of business activities. Many businesses use an SBA loan to improve their working capital or cash flow to cover short- or long-term business expenses or to fund growth and expansion.
SBA loans are regularly used for a wide variety of business purchases, such as buying or renovating real estate, purchasing equipment and other supplies, or funding startup costs like inventory and payroll. In some cases, an SBA loan may also be used as a way to refinance other existing loans by paying off those debts and getting more favorable interest terms through an SBA loan.
While some SBA loan programs do have restrictions regarding how funds can be used, ultimately, they cover most standard business expenses.
How Do SBA Loans Work?
To apply for an SBA loan, you will actually make your application through a bank or credit union that is part of the SBA program. The lender will then apply for a loan guarantee with the SBA. If you have at least 20% ownership in your company, the government also requires that you provide an unconditional personal guarantee for the loan.
Essentially, by giving the lender your personal guarantee and a government guarantee, their risk of a loan default decreases, which makes them more likely to work with you and provide more favorable loan terms.
If you are approved for an SBA loan, your lender will manage the closing process and the disbursement of the funds. You will repay the lender rather than the government.
SBA Loan Eligibility Requirements
Now, you might be wondering, what are the qualifications for an SBA loan, and does my business qualify for SBA loan programs? To qualify for an SBA business loan, you must be operating a for-profit business that is physically located in the United States. The business must be creditworthy and demonstrate its ability to repay a loan.
Your business must also be considered a small business, meaning it is independently owned and operated with fewer than 500 employees. Larger businesses do not qualify.
Finally, to qualify for an SBA loan, you must have exhausted other financing options—meaning you were unable to get financing at reasonable terms through non-government lending options.
What Are Typical Interest Rates on SBA Loans?
As with other types of small business loans, SBA loan rates can vary over time. For example, in December 2024, the current SBA loan interest rates ranged from 12.5% to 15.5% for fixed-rate 7(a) loans, 6.093% to 6.495% for 504 loans, and 8% to 13% for microloans.
Factors That Dictate SBA Loan Interest Rates
As illustrated above, one of the main factors that dictates the interest rate on SBA loans is the type of loan you get. Your interest rate will also vary based on the loan amount, the length of the loan, and your overall creditworthiness and financial status. A business that is deemed a higher financial risk will have less favorable loan terms than a company with a strong financial background.
What Are the Different Types of SBA Loans?
There are several types of SBA loans you could apply for—here is an overview of the most common types.
| SBA Loan Type | Credit Size | Purpose |
| 7(a) loan | Up to $5 million | Real estate; working capital; purchasing equipment and supplies; refinancing business debt. |
| Disaster loan | Up to $2 million | Repairing physical damage and covering operating expenses resulting from a declared disaster. |
| Microloan | Up to $50,000 | Working capital; purchasing equipment, inventory, and supplies. |
| 504 loan | Up to $5.5 million | Purchasing real estate, machinery, or equipment; upgrading facilities; and changing ownership. Cannot be used for working capital, inventory purchases, or real estate investments. |
| Working Capital Pilot program | Up to $5 million | A line of credit for a variety of business activities and needs. |
7(a) Loan Program
The 7(a) loan program is the SBA’s primary loan for small businesses. Loans of up to $5 million are available through this program, and funding can be used for almost all business needs. This includes purchasing or improving real estate, as well as buying equipment, machinery, furniture, and other supplies. These loans can also be used to complete ownership changes, refinance existing debt, or help address working capital needs.
Disaster Loan Program
The disaster loan program offers up to $2 million but is unique in that it is only available to businesses located in a declared disaster area. These loans are designed to help businesses recover from their physical and economic losses caused by disasters such as hurricanes, flooding, or wildfires.
Microloan Program
The microloan program is a good option for businesses that need a smaller amount of financial support or that may not be able to obtain a traditional loan. Microloans can be used to purchase equipment, inventory, and other supplies or to support working capital needs.
504 Loan Program
The 504 loan program offers loans of up to $5 million for most businesses or up to $5.5 million for small manufacturers and public energy projects. These loans can be used to purchase real estate, machinery, or equipment, upgrade facilities, and change ownership. However, they cannot be used for working capital, inventory purchases, or real estate investments.
Working Capital Pilot Program
The SBA’s recently introduced Working Capital Pilot program offers a working capital line of credit of up to $5 million that a small business can use to fund a variety of activities and purchases.
Pros and Cons of SBA Loans
SBA loans have several pros and cons you should consider when evaluating your lending options.
Pro: Competitive Interest Rates
SBA loans generally offer competitive interest rates thanks to federal rules that require rates to be based on a prime rate plus a markup rate. This can make repayment easier than with other lenders.
Pro: Large Loan Rates
Because SBA loans are partially guaranteed by the government, small businesses can get much larger loans through the SBA program than they could through a traditional lender. Loan amounts of up to $5 million can significantly improve a company’s working capital.
Pro: Favorable Terms
While SBA loan terms vary, loan terms for many purchases can range from 10 to 25 years, helping make repayment more manageable. In addition, SBA loans typically have low yearly service fees. Depending on the nature of the loan, some carry no upfront guarantee fees.
Con: Not Best For New Businesses
A business must prove its creditworthiness to qualify for an SBA loan. As a result, it can be hard to obtain business startup capital with an SBA loan, as lenders want to see a steady financial history.
Con: Slow Funding
Applying for an SBA loan and obtaining funding can be extremely time-consuming. This makes it difficult to address the needs of businesses that have an immediate need for funds.
Con: Collateral Requirements
SBA loans require an unlimited personal guarantee from business owners, and some loans also require a down payment or physical collateral. This increases risk to the borrower.
Alternatives to SBA Loans
If an SBA loan doesn’t seem right for you, there are several SBA loan alternatives worth considering.
Alternative lending options often provide faster access to cash with less stringent eligibility requirements. For example, invoice factoring allows you to sell unpaid invoices for a cash advance, so you can get funds almost immediately. Other lending options are available for businesses with bad credit or no significant credit history.
In-Summary: SBA Loans
Small business owners are increasingly worried about qualifying for financing. With SBA loans partially backed by the government, business owners are more likely to get favorable loan terms and amounts to fund a variety of important business activities. While strict eligibility requirements and a lengthy application process mean they aren’t for everyone, an SBA loan could be a worthwhile option for many small businesses.
SBA Loan FAQs
What SBA loans are forgivable?
Borrowers using the Paycheck Protection Program may apply for SBA loan forgiveness, regardless of the size of their loan. Other SBA loans may also be forgivable under certain circumstances, though this is less common. However, loans can be discharged through bankruptcy.
What businesses are eligible for SBA loans?
To qualify for an SBA loan, you must be a for-profit business with a physical location in the United States. You must be a small, independent business with fewer than 500 employees, be creditworthy, and have exhausted other potential financing options.
What is the 20% rule for SBA?
The SBA requires that all owners with more than a 20% stake in the company must provide an unconditional personal guarantee, meaning they are liable for the loan if the company cannot repay.
What are disqualifiers for SBA loans?
Aside from not meeting basic eligibility requirements (such as being a small, for-profit business located in the U.S.), you may be disqualified due to poor credit history, a lack of collateral, a lack of a solid business plan, or delinquent debts. Certain types of businesses, such as life insurance companies, are also ineligible.
What can I spend my loan on?
Generally speaking, you can spend an SBA loan on real estate, working capital, purchasing equipment, supplies, and inventory, refinancing business debt, and even ownership changes. Some types of SBA loans have limitations on how they can be used, so be sure to confirm if there are any restrictions for your loan.
How long are SBA loans?
SBA loan terms can vary depending on what they are used for. For example, working capital loans can have terms of up to 10 years while real estate loans can offer terms of up to 25 years.
Can SBA loans be forgiven?
Some SBA loans can be forgiven, but the most common options like 7(a) loans and microloans usually cannot be forgiven. Extensions or loan payment deferments may be available instead.
Can you have two SBA loans?
Yes. However, you must meet all lender eligibility requirements, have sufficient collateral, and be current on your existing loans. You cannot exceed the borrowing limit for the type of SBA loans you use.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
