How Do SBA Loans Work?

The Small Business Administration (SBA) is a federal agency designed to help small businesses access funding. SBA loans are comparable with the most lucrative financial products from big banks but are easier to acquire, making them a desirable option for younger businesses who haven’t had time to build credit.

Of course, any business looking for financing would be hard-pressed to find a loan with better terms than an SBA loan. This wide relevancy is because of the unique way the SBA has designed their loan programs.

SBA Loans Are Not Funded by the SBA

The SBA serves as a mediator between your business and a lender by establishing the guidelines for loans and then guaranteeing a portion of those loans. By guaranteeing the loan, the SBA mitigates the risk of the lender, making the loan attractive even if the lendee’s business has a short track record. 

You’ll work through the SBA to find a potential lender, who will then consider your request. Upon approval, you’ll secure a loan with monthly payments, fixed interest rates, and generous repayment terms. In addition, paying off the loan over time will help build your credit, making it easier to secure funding in the future. 

Popular Loan Products Offered by the SBA

The SBA offers 3 popular loan products: the SBA 7(a) Loan, SBA 504 Loan, and SBA Express Loan. 

SBA 7(a) Loan

The SBA 7(a) Loan is the most flexible of the 3. You can use it to:

  • Buy land

  • Cover construction costs

  • Buy or expand an existing business

  • Refinance your existing debt

  • Buy machinery, furniture, supplies, or materials

Best of all, most businesses already meet the requirements for applying:

  • Must operate for profit

  • Must do business in the US or its territories

  • Must have reasonable owner equity to invest

  • Must use other financial resources, such as personal assets, before applying

SBA 504 Loan

The next most popular loan is the 504 Loan. It’s a little more complicated than the 7(a) loan. This loan is used to fund projects, so the SBA will want to examine the project thoroughly. When your loan is funded, the lender will initially cover 50% of your costs, and the SBA will cover 40%, leaving you 10% to fund another way. You also have to guarantee 20% of the loan.

Here are some of the uses approved for an SBA 504 loan:

  • Purchasing existing buildings

  • Purchasing land and land improvements

  • Constructing new facilities

  • Modernizing, renovating, or converting existing facilities

  • Purchasing long-term machinery

SBA Express Loan

Finally we come to the Express Loan. SBA 7(a) loans take a long time to process due to a detailed paperwork process. Express loans are very similar to 7(a) loans except they are approved more swiftly. The loan still won’t be approved overnight, but it is much faster than the 7(a) loan approval process.

Learn more about how to apply for an SBA loan.