What is an SBA Loan?

An SBA loan is a loan guaranteed by the Small Business Administration (SBA), a branch of the US government designed to facilitate loans for small business entities. SBA loans are not distributed by the SBA itself, but by certain lenders. Financial institutions who process these applications are partially insured, which encourages them to make loans to small businesses. Because of their low interest rates and flexible repayment options, SBA loans can be a great choice for small business owners looking for a loan. Loans of up to $2 million are available.

Though there are different types of SBA loans, the most commonly used loan is the SBA 7(a). They are most frequently taken out as working capital loans and for equipment purchases. While financial institutions can offer a line of credit under the SBA 7(a), it is very infrequently used or granted. All SBA loans require a personal guarantee of a stakeholder with more than a 20% stake in the business. The other type of SBA loan is called the 504 loan, which is aimed at bigger businesses, looking for loans greater than $2 million. The rates and terms of SBA loans are difficult to top, once you qualify for them. Generally, only larger financial institutions provide SBA loans as opposed to alternative lenders.

Who Should Apply for an SBA Loan?

SBA loans are flexible and offer several different options. But they are mainly geared towards businesses that are already operational and need some extra cash. A two-year business with a profitable balance sheet and a credit score of above 690 would qualify under the SBA 7(a) loan program. A business that shows little profit or loss on its tax return may be declined before the process even begins. SBA loans have generous payment terms and conditions for businesses that are financially strong.


In the event of a default, the government will cover up to 85% of the lenders’ exposure up to $150,000 and 75% up to $2 million. If you are unwilling or unable to make the payments, the lender will collect as per the agreement. Assets used to collateralize the loan may be claimed. If all of these options are exhausted the lender will claim the percentage off of the SBA. When the lender has been paid and if there is still a balance owed, the borrower will have to negotiate with the SBA.


  1. Personal guarantee of the owner of 20% of the company.
  2. Heavy credit checks by the lending institution on the borrower’s credit liability.

Pros and Cons of SBA Loans


  • The reason that SBA loans are so popular is that there is so little cost once the loan is approved. Additionally, there are rarely any pre-payment penalties attached to SBA loans.
  • Terms of up to 25 years, though more often around 10 years.
  • Because the loans are guaranteed in part by the SBA, banks are willing to underwrite the loans to suitable applicants.


  • The biggest disadvantage of SBA loans is that they are notoriously difficult to acquire. The standards can be quite high. New businesses will not satisfy the application criteria, and they are not suitable for new business ventures in general.
  • An incredible amount of documentation is required to pass the application process.
  • For businesses who are looking for quick finance then the SBA program is not the best option. The application process takes a long time.
  • The personal guarantee means that you are personally liable, meaning your personal property is at risk.

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