Understanding SBA loans
What is an SBA loan?
An SBA loan is a small business loan backed by the U.S. Small Business Administration (SBA). While the SBA doesn't lend money directly, it guarantees a portion of the loan made by approved lenders, such as banks and credit unions. This guarantee reduces the lender's risk, making them more willing to offer favorable terms to small businesses. SBA loans are designed to help small businesses cover various expenses, including startup costs, working capital, equipment purchases, and real estate acquisitions.
How do SBA loans work?
When a small business applies for an SBA loan, the lender evaluates the business's financial health, creditworthiness, and the purpose of the loan. If approved, the SBA guarantees a percentage of the loan, depending on the loan type and amount.
The business then receives the loan amount and agrees to repay it over a specified term, typically with fixed interest rates and regular payments. The SBA's guarantee allows lenders to offer more favorable terms, such as lower down payments and longer repayment periods.
Cons
Lengthy application process – SBA loan application processes can be lengthy and require extensive documentation.
Slow approval process – In some cases, getting approval can take two months or longer, as lenders submit approved applications to the SBA for secondary review.
Credit requirements – While more lenient than some traditional loans, poor credit may prevent approval. A credit score of 680 or higher is ideal for the best odds.
Collateral may be required – Lenders often ask for assets as security, even with the SBA guarantee, and may require a personal guaranty.
Pros
Affordable loan options – SBA guarantees reduce lender risk, allowing more lenient credit requirements and affordable interest rates.
Capped interest rates – SBA loans have maximum interest rate limits, helping keep borrowing costs predictable and lower than many online business loans.
Flexible loan amounts & uses – Borrowers can access funding ranging from $500 to $5 million, covering both minor and major business expenses for a wide range of loan uses.
Long-term repayment options – Terms can extend up to 25 years for certain loans, reducing monthly payments and easing cash flow pressures.
When should I consider an SBA loan?
An SBA loan might be right for your business if:
You’ve been denied a traditional bank loan but still need financing.
You can plan ahead and wait a few months for approval and funding.
Both you and your business have strong credit histories.
Final Thoughts
SBA loans can be a valuable resource for small businesses seeking affordable financing with favorable terms. However, the application process can be rigorous, and not all businesses will qualify.
Ready to explore your options? Start with Mona’s common app to see which lenders may be the best fit for your business.
