SBA loans, explained: 7(a), 504 and microloans

The SBA is a federal agency, but in its 7(a), 504 and microloan programs it is not the lender. A private lender reviews the application, decides whether to lend, sets the terms within the SBA’s rules and collects the payments. The SBA’s role is to reduce the lender’s risk, which can make lenders willing to offer longer repayment periods or smaller down payments than they would on a conventional loan.

That backing protects the lender, not the borrower. If a business stops paying an SBA-backed loan, it still owes the debt, and the lender can still pursue any collateral and any personal guarantees the owners signed. The SBA’s loans overview (opens in a new tab) describes each program and how they differ.

Because each lender makes its own decision, two lenders can look at the same business and respond differently. Some lenders make many SBA loans and know the paperwork well; others make few or none. The SBA’s disaster loans work differently, with the SBA lending directly, and are outside this page.

The 7(a) program (opens in a new tab) is the SBA’s most widely used and most flexible loan program. A lender makes the loan, and the SBA guarantees part of it. Businesses use 7(a) loans for a broad range of purposes, including:

• Working capital to run day-to-day operations.
• Buying equipment, furniture or supplies.
• Buying, building or improving owner-occupied real estate.
• Refinancing certain existing business debt.
• Buying an existing business or a partner’s share of one.

There are several kinds of 7(a) loan, including versions with a faster SBA review process, export-focused loans, and CAPLines, which are revolving lines of credit for short-term and cyclical needs. Interest on 7(a) loans is often tied to a published base rate such as the prime rate, with a maximum spread the SBA sets. The current limits and caps are on the SBA’s 7(a) page.

The 504 program (opens in a new tab) provides long-term, fixed-rate financing for major fixed assets that help a business grow, such as buying land or a building, constructing or renovating facilities, or buying long-lasting machinery and equipment.

A 504 project is usually financed in three parts. A bank or other private lender provides one portion. A Certified Development Company (CDC), a nonprofit organization that works with the SBA to promote economic development in its area, provides another portion backed by the SBA. The business owner contributes the rest as a down payment.

Because 504 loans are for fixed assets, they are generally not used for working capital, inventory, or real estate held as an investment for rent. Owners who need operating cash often look at a 7(a) loan, a working capital loan or a business line of credit instead. If a building or equipment is the goal, the equipment financing and construction loans pages explain the alternatives.

Microloans (opens in a new tab) are smaller loans made through nonprofit, community-based intermediary lenders that receive funding from the SBA. They are often used by startups and very small businesses for working capital, inventory, supplies, furniture, fixtures, machinery or equipment.

Each intermediary sets its own lending and credit requirements, and many ask for collateral and personal guarantees from the owners. A notable feature of the program is that many intermediaries also offer business training or technical assistance, and some ask borrowers to take part in it. For a new business without much history, that combination of a smaller loan and hands-on help is the reason many owners start here.

The SBA sets baseline eligibility rules, and each lender adds its own credit standards on top. In general terms, SBA programs look for a business that:

• Operates for profit and does business in the United States.
• Is small under the SBA’s size standards for its industry.
• Has owners who have put their own money or equity into the business.
• Has looked at other financing sources, including personal assets, before turning to an SBA-backed loan.
• Is in an eligible industry and uses the loan for an eligible purpose.

Meeting the SBA’s rules does not mean a lender will say yes. Lenders still look at the ability to repay from cash flow, credit history, collateral, management experience and the plan for the money.

SBA loans are known for paperwork. Gathering documents early can shorten the back-and-forth. Lenders commonly ask for:

• A business plan, especially for a startup or an acquisition. The business plan guide covers what goes in one.
• Business financial statements, such as a profit and loss statement and a balance sheet, and sometimes projections.
• Business and personal tax returns.
• A personal financial statement for each owner, listing assets and debts.
• Ownership and formation documents, licenses and any leases or purchase agreements.
• Personal guarantees from owners above a certain ownership share, as the SBA requires.

The get loan-ready guide walks through organizing these, and clean books from the bookkeeping basics guide make most of them easier to produce.

The SBA runs a free online tool called Lender Match, described on its loans page (opens in a new tab). You answer questions about your business and financing needs, and SBA-participating lenders that are interested may contact you. Lender Match is not an application and does not commit you or any lender to anything.

Many owners also start with an SBA resource partner. These organizations offer free or low-cost counseling on business plans, financial statements and loan applications:

• SCORE, which matches owners with volunteer business mentors.
• Small Business Development Centers, often hosted by colleges and universities.
• Women’s Business Centers, which serve women entrepreneurs and others.
• Veterans Business Outreach Centers, for veterans, service members and military spouses.

The SBA lists them on its resource partners page (opens in a new tab), and its fund your business guide (opens in a new tab) explains the wider range of funding options.

Two SBA loans of the same size can cost very different amounts. When comparing offers, ask each lender to put these in writing:

• The interest rate, whether it is fixed or variable, and what base rate it follows.
• The SBA guaranty fee, which lenders may pass on to the borrower, and any lender fees.
• Packaging or referral fees charged by anyone who helped prepare the application.
• Whether there is a prepayment penalty, which can apply to some longer-term SBA loans paid off early.
• What collateral the lender will take, including any lien on personal real estate.
• The expected timeline from application to closing.

Questions to ask a lender:

1. Which SBA program are you suggesting, and why that one?
2. What are the rate, the base rate it follows, and every fee, including the guaranty fee?
3. Is there a prepayment penalty, and how is it calculated?
4. What collateral and personal guarantees will you require?
5. What is your usual timeline, and what tends to slow it down?