What is the SBA Loan Program and How does it Work?
Many of us don’t want to admit this, but when it comes to understanding SBA loans, many of us are struggling to understand how they work, who qualifies, what they can be used for, etc. While there are hundreds of articles written on the subject, many are throwing around terminology that we don’t like to admit we are “iffy” with. This breakdown is designed to clearly explain the difference between the types of SBA 7a loans, and then clearly explain the terminology used so that you have a comprehensive understanding.
Before we get to the list of SBA 7a loans, let us first explain what the program is. There is a lot of confusion people have about the Small Business Administration, so let’s clear that up.
The SBA (Small Business Administration) is a government agency created by the U.S. government in 1953 to support small businesses and entrepreneurs. The SBA’s mission is to help small business owners access funding, business mentorship and other resources.
When it comes to funding, the SBA doesn’t lend money directly; instead, it partners with banks, credit unions, and non-bank lenders by guaranteeing a portion of the loans made to small businesses. This guarantee reduces the risk for lenders, making them more likely to offer loans to small businesses that might not qualify for traditional loans.
The SBA offers 3 categories of loans:
- SBA 7(a) Loan Program: The most versatile SBA loan program, covering a wide range of financing needs through various specialized loan types.
- SBA 504 Loan Program: Designed specifically for long-term fixed asset purchases, such as real estate or equipment.
- SBA Disaster Loan Program: Provides emergency assistance for businesses in federally declared disaster areas.
In today’s blog, we’ll focus on 6 different types of SBA 7(a) loans, each tailored to meet specific business criteria and needs. Below the list, you will also find detailed explanations of key terminology to help you better understand the SBA loan options and make informed decisions about which type may be best suited for your business.
1. Standard SBA 7(a) Loan
- Maximum Amount: Up to $5 million
- SBA Guarantee: 85% for loans up to $150,000 and 75% for loans over $150,000
- Collateral Requirement: Required for loans over $25,000 (business assets preferred, but personal assets may be required if business assets are insufficient)
- Loan Term: Up to 10 years for working capital and equipment; up to 25 years for real estate
- Loan Rates: Variable, based on the prime rate plus a lender spread:
- Loans up to $25,000: Prime + 4.25%
- Loans between $25,000 and $50,000: Prime + 3.25%
- Loans over $50,000: Prime + 2.75%
- Uses: Flexible use for working capital, expansion, equipment purchases, real estate, debt refinancing, or purchasing inventory
- Important Notes: The most common and versatile SBA loan type, offering the highest loan limit and broadest applications.
- Turnaround Time: Typically 5–10 business days for prequalification, with full funding in 1–3 months.
2. SBA Express Loan
- Maximum Amount: Up to $500,000
- SBA Guarantee: 50% guarantee from the SBA
- Collateral Requirement: Generally required for loans over $25,000; specifics depend on lender policies
- Loan Term: Up to 7 years for working capital; up to 25 years for real estate
- Loan Rates: Prime rate + lender spread, generally between Prime + 4.5% and Prime + 6.5%, depending on the loan amount and lender
- Uses: Primarily for quick access to working capital, equipment purchases, and small expansions
- Important Notes: Known for faster processing and approval times, typically within 36 hours.
- Turnaround Time: Prequalification within 36 hours; full funding generally in 1–3 weeks.
3. SBA Export Working Capital Loan
- Maximum Amount: Up to $5 million (with a 90% guarantee on the first $4.5 million)
- SBA Guarantee: 90% on loans up to $4.5 million, with no guarantee on amounts exceeding $4.5 million
- Collateral Requirement: Typically required, with flexible options for export-related assets
Loan Term: Up to 1 year, with annual renewal options - Loan Rates: Typically based on prime rate, but rates are determined by the lender; rates are competitive due to SBA’s high guarantee
- Uses: Designed specifically to support export activities, covering expenses such as inventory, production costs, or accounts receivable related to export sales
- Important Notes: Ideal for businesses focusing on export sales, with a flexible collateral structure and high guarantee.
- Turnaround Time: Quick processing, usually within 5–10 business days for approval, and funding in approximately 3–4 weeks.
4. SBA Export Express Loan
- Maximum Amount: Up to $500,000
- SBA Guarantee: 90% for loans up to $350,000 and 75% for loans above that amount
- Collateral Requirement: Generally required but varies by lender and loan purpose
- Loan Term: Up to 7 years for lines of credit; term loans may vary
- Loan Rates: Similar to SBA Express Loans, typically between Prime + 4.5% and Prime + 6.5%
- Uses: Quick financing for businesses focused on international markets, covering export development, marketing, and working capital
- Important Notes: Expedited approval within 24–36 hours, ideal for businesses needing fast funding for export-related activities.
- Turnaround Time: Prequalification typically within 24–36 hours; full funding in about 1–2 weeks.
5. SBA CAPLines Program
- Maximum Amount: Up to $5 million
- SBA Guarantee: 85% for loans up to $150,000 and 75% for loans over $150,000
- Collateral Requirement: Required; typically secured by inventory, accounts receivable, or other business assets
- Loan Term: Revolving credit lines up to 10 years
- Loan Rates: Based on the prime rate plus a lender spread, typically Prime + 2.25% to Prime + 4.75%, depending on loan amount and lender
- Uses: Supports cyclical or seasonal working capital needs, financing contracts, managing inventory, or covering operating expenses
- Important Notes: CAPLines include Seasonal, Contract, Builders, and Working Capital CAPLines, each with specific qualifications and purposes.
- Turnaround Time: Prequalification within 1–2 weeks; funding usually in about 1–2 months.
6. SBA International Trade Loan
- Maximum Amount: Up to $5 million
- SBA Guarantee: 90%
- Collateral Requirement: Required, generally backed by export-related assets or other business assets
- Loan Term: Up to 25 years, depending on loan use
- Loan Rates: Based on prime rate with a lender spread, generally competitive due to high SBA guarantee; typically between Prime + 2% and Prime + 4%
- Uses: Long-term financing to expand international trade capabilities, including equipment purchases, debt refinancing, and market expansion
- Important Notes: Suited for businesses expanding internationally or facing import competition. Borrowers must demonstrate the loan’s role in supporting international trade activities.
- Turnaround Time: Prequalification within 5–10 business days; funding can take around 1–3 months, depending on lender capacity.
Understanding the Government’s “Guarantee” on SBA Loans
What Does “Government Guarantee” Mean?
When we say that the government “guarantees” an SBA loan, it means that the Small Business Administration (SBA) promises to cover a portion of the loan amount if the borrower fails to repay. This guarantee is designed to reduce the risk for the lender, making it easier for small businesses to qualify for loans with favorable terms. However, the government’s guarantee does not mean that borrowers are off the hook if they can’t make payments.
What a Government Guarantee Doesn’t Mean
A government guarantee isn’t a free pass. It doesn’t mean the government will simply “take care of it” if you can’t pay. Instead, the guarantee is there to protect the lender, not the borrower. If you’re unable to make payments and default on the loan, the lender will still take action to recover the outstanding balance, usually by seizing any collateral you provided. If the lender is unable to recover the full loan amount through collateral, only then will the SBA step in to reimburse the lender for the guaranteed portion of the remaining balance.
What Happens if You Default on an SBA Loan?
Defaulting on an SBA loan is serious and comes with consequences. Here’s what happens if you can’t make payments:
- Collections and Collateral Seizure: The lender will first attempt to collect the unpaid balance by seizing any collateral pledged for the loan, whether it’s business assets (like equipment or inventory) or personal assets (such as real estate), depending on what was agreed upon at the time of the loan.
- SBA Pays the Lender: If the lender can’t recover the entire amount through collateral, the SBA will reimburse the lender for the guaranteed portion—typically 75% to 90% of the remaining loan balance.
- Personal Guarantee Activation: Even after the SBA covers the lender’s loss, borrowers are still responsible for any unpaid amount. The SBA may use collections or other means to recover this balance, meaning your personal finances may be at risk if the loan remains unpaid.
Key Takeaway: The government guarantee is meant to make loans safer for lenders—not to remove your responsibility for repayment. If you default, the lender and the SBA have multiple ways to recover the loan balance, including personal guarantees and collateral.
Understanding Collateral for SBA Loans
What is Collateral?
Collateral is something of value that a borrower offers to a lender as security for a loan. Think of it like a safety net for the lender. If you can’t repay the loan, the lender has the right to take possession of the collateral to help cover the loan balance. In simple terms, it’s a way to reduce the lender’s risk by having something valuable to fall back on.
Collateral for SBA Loans
For SBA loans, collateral can be either business assets (like equipment, inventory, or accounts receivable) or, if necessary, personal assets (like real estate or personal savings). The type of collateral required depends on the loan amount and the lender’s policies, but generally:
- For smaller loans (under $25,000), collateral may not be required.
- For larger loans (above $25,000), collateral is typically required.
The SBA generally prefers business assets as collateral, but if those aren’t sufficient, personal assets might be needed. Importantly, even though collateral is usually required, the SBA doesn’t necessarily require full collateral coverage. For example, if a business can only provide assets covering 75% of the loan, it may still qualify. However, the more collateral available, the stronger the application generally appears to lenders.
Why is Collateral Important for SBA Loans?
Since SBA loans are partially guaranteed by the government, the SBA wants to protect taxpayers’ money by ensuring that lenders can recover part of the loan amount if the borrower defaults. Collateral provides that protection. For borrowers, it’s important to understand that offering collateral makes lenders more willing to provide favorable terms and lower interest rates.
Understanding Loan Rates for SBA 7(a) Loans
How SBA Loan Rates Work
SBA 7(a) loan rates are often described as “Prime + a spread.”
- The prime rate (base rate set by market conditions)
- The spread (additional percentage added by the lender)
As of November 2024 the current prime rate is 8%. If the prime rate is 8% and the lender’s spread is 2.75%, the total loan rate is 10.75%.
SBA Rate Caps
The SBA sets rate caps to protect borrowers from excessive interest. Here’s a simplified breakdown:
- Loans up to $25,000: Prime + 4.25%
- Loans between $25,000 and $50,000: Prime + 3.25%
- Loans over $50,000: Prime + 2.75%
These caps help ensure that SBA loan rates remain competitive compared to other types of loans.
Key Factors When Determining Your Rate
Your specific SBA loan rate depends on several key factors. The amount you borrow often influences your rate, with larger loans typically qualifying for lower rates. Your loan term length and current market conditions also play crucial roles in determining your final interest rate.
Understanding the “Term” of a Loan
What is a Loan Term?
The term of a loan is the amount of time you have to fully repay the borrowed amount. In simple terms, it’s the period over which you’ll make regular payments until the loan is paid off. Loan terms can vary widely depending on the type of loan and its intended purpose, ranging from a few months to several decades.
How Loan Terms Work for SBA 7(a) Loans
For SBA 7(a) loans, the loan term is based on how you intend to use the funds. Here’s a breakdown of typical loan terms:
- Working Capital and Inventory: Up to 10 years
- Equipment Purchases: Up to 10 years, based on the expected useful life of the equipment
- Real Estate: Up to 25 years, as real estate purchases are generally long-term investments
Why Loan Terms Matter
The loan term affects both your monthly payment amount and the total interest you’ll pay over the life of the loan:
- Shorter Terms: Lead to higher monthly payments but less interest paid overall, since you’re paying the loan off faster.
- Longer Terms: Mean lower monthly payments, making them easier on monthly cash flow, but more interest paid over time.
For example, a loan with a term of 10 years will have higher monthly payments than a loan with a 25-year term, but you’ll pay less interest in total on the shorter loan.
Understanding Fixed Rates vs. Variable Rates for SBA Loans
What’s the Difference Between Fixed and Variable Rates?
Fixed Rate: With a fixed rate, your interest rate stays the same for the entire loan term. This means your monthly payment amount will also stay the same. Fixed rates are predictable, making it easier to budget for loan payments because they don’t change over time.
Variable Rate: With a variable rate, your interest rate can change during the loan term. This change is often tied to an external rate, like the prime rate (the rate banks use as a base for many loans). If the prime rate goes up, your interest rate – and your monthly payment – will go up. If the prime rate goes down, your rate and payment may go down as well. Variable rates can make budgeting a bit trickier since they’re less predictable.
Which Type Do SBA Loans Use?
Most SBA 7(a) loans have variable rates. This means the interest rate you start with may change during the life of the loan, depending on changes in the prime rate. So, if you have a 10-year SBA loan and the prime rate increases in year three, your monthly payments could increase, too. On the other hand, some SBA loans, like the SBA 504 loan, offer fixed rates for certain portions of the loan, especially when used for large purchases like real estate.
In summary, the SBA 7(a) loan program offers something for nearly every small business, no matter your industry or growth stage. These loans can help with everything from basic working capital to major equipment purchases, seasonal cash flow, and even international trade.
While it’s crucial to understand the fundamentals – like collateral requirements and how interest rates work – don’t let the details overwhelm you. Check out our next blog where we break down the application process and share practical tips to help you secure funding. We’ll focus on what really matters: what you need to qualify, how to apply, and ways to strengthen your application.