What exactly is an SBA loan?

How does it work?

The loans fall into three main categories — 7(a) term loans, property and equipment loans (CDC/504), and microloans — all of which require extensive paperwork.

Response times on applications can be as short as three weeks. How much does it cost?

85% of the SBA loan amount is guaranteed by the government, making the option appealing to lenders as they know most of their money will be repaid. At the same time, the government places a cap of around 2.5% on how much the lender is allowed to make on a loan.

Although each loan type will have a different cost, SBA loans will be cheaper than equivalent offerings from banks or alternative lenders.


6.75% to 13%

Good to know

SBA loans require the disclosure of a large amount of financial and personal information. Business owners are expected to present a full résumé (including all personal background information), as well as a business plan explaining how the money will be used and personal credit reports on all business owners. In addition, the business will need to provide at least 2 years of financial information — tax returns, balance sheets, profit/loss statements, potential assets.

Types of loans

7(a) term loans are offered to businesses looking for working capital. 7(a) loans are a secure, low-cost way of financing medium and long term investments, including expansions, renovations, purchases, business acquisitions, and even debt refinancing.

Loans have a $5 million maximum limit, with a guarantee fee applied to loans of $150,000 or more.

Interest rates can be fixed or variable, depending on the loan and partner lender, but always within the pre-determined spread.

CDC/504 loans are designed for businesses with fixed asset financing needs — usually real estate or equipment.

Total cost can be complicated to calculate, but will always be lower than financing an asset with general working capital. Down payments are required for the CDC/504 program, usually 10% of the loan value, on top of a 3% financing fee. The loan is then placed into a pool created by a Certified Development Corporation and sold to investors. With all this combined, an CDC/504 will usually cost under 9% interest.

Microloans are for businesses looking to borrow $50,000 or less.

There are commonly fewer fees applied to microloans, but interest rates can rise to 13%. Although higher than other SBA loans, SBA microloans offer much better rates than comparable products from banks or nontraditional lenders.