SBA Loan FAQs

Welcome to our comprehensive FAQ page where we address the most common questions related to Small Business Administration (SBA) Lender topics. Whether you’re a business owner seeking financial assistance or a curious individual interested in understanding the SBA loan process, structure, terms, eligibility requirements, or the best practices for utilizing the loan proceeds, you’ve come to the right place. Our aim is to provide clear and concise answers to help you navigate the complexities of SBA loans. Below are the frequently asked (FAQs) we received relate to SBA lending.

FAQs are sectioned by topic:

  • General SBA Lender Questions
  • SBA Loan Approval Process
  • SBA Loan Structure and Terms
  • SBA Loan Eligibility Requirements
  • Use of SBA Loan Proceeds
  • After the SBA Loan is Obtained

What is an SBA lender?

An SBA lender is a financial institution, typically a bank, that is authorized by the Small Business Administration (SBA) to provide SBA-guaranteed loans to small businesses.

How do SBA loans work?

SBA loans are government-guaranteed loans provided by participating lenders. The SBA guarantees a portion of the loan to the lender, reducing the lender's risk and making it more likely that the loan will be approved. Because the SBA guarantee to the SBA lender, which varies from 50% to 90%, SBA loans are an attractive option for borrowers who cannot obtain a traditional commercial loan.

What is the SBA 7a loan program?

The SBA 7(a) loan program is the most popular SBA loan program for small businesses and provides funding for a wide range of business purposes.

What is the SBA 504 loan program?

The SBA 504 loan program provides long-term, fixed-rate financing for the acquisition or renovation of fixed assets, such as land and buildings. SBA 504 loans are not as popular as 7(a) loans due to the complicated nature of the 504 program and the length of time required to close a 504 loan.

What are the advantages of getting an SBA loan versus a traditional commercial loan?

Some of the advantages of getting an SBA loan include longer repayment terms (10 or 25 years), lower down payments (as little as 10%), no debt covenants, and no collateral required.

What are the disadvantages of getting an SBA loan?

Some of the disadvantages of getting an SBA loan include a longer application process, stricter qualifications, and a higher down payment requirement. Additionally, SBA loans are not always the best option for businesses with poor credit or those looking for short-term financing.

What are the advantages of using an SBA preferred lender?

SBA preferred lenders are financial institutions that have been designated by the Small Business Administration (SBA) as being experienced and reliable in processing SBA-guaranteed loans. Some advantages of using an SBA preferred lender include faster processing times and less paperwork. We only refer borrowers to SBA preferred lenders.

How many SBA lenders are there?

There are over 4,000 banks and financial institutions in the U.S., but on average in any given year, only 1,200 will make at least one SBA loan. As we discuss in our analysis of SBA loan data, the top 13 banks issue ~ 33% of all SBA 7a loans each year.

How do I choose an SBA lender?

We recommend selecting an SBA lender that meets three criteria: 1) lends in your geography 2) lends in your industry 3) underwrites at least 50 SBA loans per year. Our Lender Connect tool at SBALenders.com can help you find such lenders.

How long does it take to get an SBA loan?

The time it takes to close an SBA loan depends on a variety of factors. The biggest variables impacting timing are size of the loan (smaller is better), loan program (SBA Express is the fastest), SBA lender (experienced, high volume SBA preferred lenders move the fastest), and whether real estate is involved. Real estate deals take longer due to requirements for third-party appraisals and environmental studies. Some loans can be approved and funded within a month, while others may take three or four months.

What is the SBA Express loan program?

The SBA Express loan program is a loan program offered by the Small Business Administration (SBA) that provides small businesses with access to funding quickly and with less paperwork than traditional SBA loans.

Can I have more than one SBA loan at a time?

Yes, you can have more than one SBA loan at a time, but it will depend on the lender's policies and the type of loan you are applying for.

What documentation is required to apply for an SBA loan?

The documentation required to apply for an SBA loan can vary depending on the lender, but may include financial statements, tax returns, business plan, and personal financial statement.

How do I apply for an SBA loan?

To apply for an SBA loan, you will need to find an SBA-approved lender, complete a loan application, and provide documentation such as financial statements and tax returns. Unlike the Economic Injury Disaster Loan (EIDL) program, the SBA does not lend directly through the 7(a) loan program. Rather, the SBA provides a guarantee to the lender in the event of a loan loss, which incentives SBA lenders to make loans that may not make were the guarantee not provided.

Is it possible to obtain an SBA loan without tax returns?

It is possible to obtain an SBA loan without tax returns, but the lender may require additional documentation and the loan application may be subject to additional scrutiny. Most SBA lenders want to see a business having filed two full years’ tax returns, and they will verify those tax returns were filled with the IRS by submitting Form 4506-T, Request for Transcript of Tax Return.

Does the SBA run your credit?

Your SBA lender will run a credit check and background check prior to loan approval. There will check credit score, history of late or non-payment, bankruptcies, liens, judgments, etc. That's why we ask these questions before introducing borrowers to SBA lenders. If there is a barrier to obtaining an SBA loan, we want both borrower and banker to know that in the beginning of the process. We are still surprised borrowers trying to fudge the application process periodically. That by itself is a crime (bank fraud) and the bank will discover the facts anyway, so just be honest from the beginning to save yourself time and money.

Does an SBA loan require a background check?

Yes, a background check will be done by the SBA lender to search for past crimes, liens, judgments, lawsuits, and the like.

Is it hard to get an SBA loan?

Obtaining an SBA loan is not as easy as many business and loan brokers make it sound. That being said, the easiest SBA loans are 7a loans under $150,000, which are usually underwritten based largely on the credit score of the borrower(s). Larger 7a loans and those including real estate take more time since the bank has more due diligence. SBA 504 loans are the most time consuming and complex SBA loan program. We believe we help make the process easier for borrowers are recommend them only to the top SBA lenders who love their industry and lend in their geographical footprint, saving both lender and borrower time.

How many years is an SBA loan?

For 7a loans, ten years or 25 years for real estate. For 504 loans, 10 years for equipment and 25 years for real estate. The majority of 7a loans are for 10 years. Over 90% of 504 loans are for 25 years.

What is the maximum SBA loan amount?

For a 7a loan, which is the SBA's most popular program, the maximum loan is $5M. For 504 loans, it's $5.5M. For microloans, the max is $50,000. Finally, for disaster recovery loans, $2M is the limit. The EIDL and PPP loan programs are no longer active.

What is the interest rate on an SBA loan?

The interest rate on an SBA 7a loan is slightly higher than traditional commercial loan. See the homepage of SBALenders.com for current maximum rates SBA lenders may charge per SBA mandate. SBA loan interest rates are comprised of a “fixed rate” plus prime rate. The fixed rate is 2.75% - 4.75% depending on loan size, and the prime rate is determined by the U.S. Federal Reserve Bank.

How much down payment is required for a small business loan?

The down payment required for a small business loan can vary depending on the lender, the type of loan, the creditworthiness of the borrower, the borrower’s industry experience, and the type of business. The SBA requires the borrower to inject a minimum of 10% of the project, but SBA bankers may request a larger down payment. A borrower providing 5% - 20% of the cash needed is not uncommon. A seller can finance a portion of an acquisition purchase price with a seller loan, but seller financing can’t be utilized to circumvent the SBA’s 10% down requirement.

Are there any fees associated with SBA loans?

In addition to interest paid monthly to the lender, the SBA charges a one-time guaranty fee that ranges based on the loan size. The maximum guaranty fee is 3.75%.

For an SBA acquisition loan, am I required to purchase 100% of the business?

No, the SBA recently modified the rules related to partial buyouts, so it is now possible for a buyer to purchase less than 100% of a business and still be eligible for SBA financing.

Is collateral required to get an SBA loan?

Collateral is not required, which is an extremely attractive feature for borrowers. However, any collateral that does exist will be pledged.

Are SBA loans personally guaranteed?

SBA loans require a personal guarantee from any owner of >20% of the business, meaning that the owner is personally responsible for repaying the loan.

What is seller financing for a business?

Seller financing for a business is when the seller of a business provides financing to the buyer in the form of a loan. This can include the seller taking a mortgage on the property being sold or holding a note for a portion of the purchase price. The SBA recently relaxed the rules related to seller financing to make this option even more viable in an acquisition.

How much can I qualify for with an SBA loan?

The amount you can qualify for with an SBA loan can vary depending on the lender, the type of loan, the creditworthiness of the borrower, and most importantly, the cash flow of the business. During periods of high interest rates, loan capacity is less. A formula we use to estimate lending capacity is 1 / (10% + current SBA loan interest rate) if a non-real estate loan and 1 / (4% + current SBA loan interest rate). The 10% or 4% figures come from the amortization periods of 10 years or 25 years. In other words, the principal repayment on a 10-year loan is ~ 10% per year. For example, the maximum loan amount for a real estate loan if current SBA loan rates are 9%, would be 7.7 annual cash flow from the business (1 / 4% + 9%). If the business generates $100,000 in annual cash flow, the maximum loan amount would be $770,000.

What credit score is needed for an SBA loan?

The minimum credit score for an SBA loan can vary depending on the lender. Generally, a credit score of 680+ is ideal, 640 – 680 may be sufficient for some SBA lenders, and scores below 640 are challenging for most lenders unless there are mitigating circumstances. We have not seen borrowers with credits scores in the 500s be approved for an SBA loan.

Do you have to be profitable to get an SBA loan?

The business needs to be profitable ideal on a historical basis or at minimum on a projected basis to obtain an SBA loan. Even if the loan is fully collateralized, SBA lenders will not write loans for businesses with cash flow deemed inadequate to cover the SBA loan payments.

Is it possible to get an SBA loan with bad credit?

It is very difficult to get an SBA loan with bad credit. However, if a borrower can provide a detailed explanation behind the credit score that is satisfactory to the SBA banks, a loan may still be issued if other aspects of the loan application are stellar. A common example is a borrower with strong personal and business income that had a credit score damaged due to a divorce.

Can I use an SBA loan to start a new business?

Yes, you can use an SBA loan to start a new business, but startup SBA loans are hard to obtain. Borrowers with direct industry experience, successful franchise opportunities, or doctors/dentists looking to branch out on their own are more likely to obtain startup financing.

Can I use an SBA loan to buy an existing business?

Absolutely, you can use an SBA loan to buy an existing business. In fact, most of the loan inquires we receive at SBALenders.com are for SBA acquisition loans.

Can I use an SBA loan to expand my business?

Yes, you can use an SBA loan to expand your existing business. This could include purchasing additional equipment, real estate, or hiring new employees.

Can I use an SBA loan for working capital?

Yes, you can use an SBA loan for working capital, which can include expenses such as payroll, inventory, and bills. However, in general large working capital loans above $350,000 are rare as banks do not like making 10-year loans to borrowers with short-term lending needs.

Can I use an SBA loan for marketing and advertising expenses?

Technically, yes you can use an SBA loan for marketing and advertising expenses, but be advised that many SBA lenders shy away from providing long-term (10+ years) loans for what is deemed to be short-term expenses or working capital needs.

Can I use an SBA loan for franchise fees?

Yes, you can use an SBA loan for franchise fees, which are the costs associated with starting a franchise business.

Can I use an SBA loan for real estate?

Yes, you can use an SBA loan for real estate, which could include purchasing a building for your business or renovating an existing property. SBA lenders view SBA real estate loans as attractive as these loans are often fully secured by the real estate. However, an SBA loan cannot be utilized to buy passive income generating property. The SBA requires that business owners occupy at least 51% of the square footage to run their business.

Can I use an SBA loan for debt consolidation or to refinance an existing loan?

Yes, you can use an SBA loan for debt consolidation, which can help you to lower your monthly payments and simplify your finances. However, an SBA loan can not be used to refinance an existing SBA loan.

What can an SBA loan be used for?

• Business acquisition loans • Real estate, but not passive income projects • Business expansion • Debt refi • Partner buyout or buy-in • Working capital loans (typically <$350,000)

Can I use an SBA loan to pay myself?

Yes, the SBA and your SBA lender allow loan proceeds to pay reasonable compensation to the owners of the business.

Can you get denied for an SBA loan?

Yes. Although lending standards are slightly easier with SBA loans than traditional loans due to the SBA guaranteeing the loan for the lender, SBA loans are still not easy to obtain. The top reasons we see loans denied are 1) lack of profitability sufficient to cover the loan payments 2) low borrower credit score (below 680 typically), or lack of owners' injecting any of their capital into the business or acquisition candidate.

Can SBA loans be discharged in bankruptcy?

SBA loans are dischargeable in bankruptcy. However, borrowers are required to personally guarantee their SBA loans, so they will still be responsible for repaying the loan even if the business files for bankruptcy. The SBA loan may be discharged from the borrower in the case of bankruptcy filings for both the business and the borrower(s).

Can SBA loans be refinanced or repaid early?

SBA loans can be refinanced or paid off, but an SBA loan can’t not be utilized to refinance an existing SBA loan. However, a borrower can take out additional SBA loans with the same or different lenders up to the maximum SBA loan capacity of $5,000,000 for 7a loans and $5,500,000 for 504 loans.

Can SBA go after personal assets?

The SBA lender, and not the SBA itself, may seek to seize personal assets of a borrower in default on an SBA loan. Because of the personal guarantee signed by the borrower, the SBA lender has the right to seize personal assets if selling off the business assets does not adequately satisfy the outstanding loan balance.

Can the SBA take my house?

The SBA lender, and not the SBA itself, may look to seize personal assets including one's home in the event of a loan default. We recommend any borrower understand all the risks associated with taking out any loan, including an SBA loan.