What are SBA Loans and What Can You Use Them For?

The Small Business Administration (SBA) delivered over $52.4 billion in capital, disaster relief, and bonding to businesses and communities in FY ’23, and serves a vital role in funding small businesses and budding entrepreneurs through its loan programs. When evaluating this financing option, it is important to know what an SBA loan is, its diverse applications, how to apply for one, and the pros and cons of them in the marketplace.

An SBA loan is a term loan or line of credit offered by financial institutions and backed by the Small Business Administration. They are generally designed to fund uses within working capital and business expansion and purchases.

Except in disaster recovery situations, the SBA does not directly lend money to small businesses. Instead, they set guidelines and reduce lender risk by backing or guaranteeing a portion of the loan (up to 85% of the principal). This surety means private lenders can offer more competitive rates and favorable terms for customers, while also encouraging small businesses – that may lack conventional funding options – to innovate and expand.

Understanding the distinct types of SBA loans is key for businesses seeking financial support. The SBA has a comprehensive range of offerings, but most often funds these loan types:

The 7(a) loan is the most popular SBA loan option and offers ample flexibility in the use of funds, including acquisition financing, commercial real estate purchases, equipment purchases, debt refinancing, partner buyout, working capital, and more. 

SBA Express Loans are part of the 7(a) program and designed for businesses who need quicker and faster response times to smaller loan amounts.

SBA 504 Loans focus on long-term, fixed-rate financing for the acquisition of real estate, infrastructure purchases and improvement, and equipment upgrades. The project has three main partners: a Third-Party Lender [such as Pathward] provides 50% or more of the financing; a Certified Development Company (CDC) provides up to 40% of the financing through a 504 debenture (guaranteed 100% by SBA); and an applicant (Borrower) injects at least 10% of the financing.

In addition, the SBA offers loans for businesses in underserved markets and those that face economic injury due to disasters.

Getting an SBA loan requires meeting specific eligibility criteria, emphasizing factors such as business size, industry, and creditworthiness. For a deeper dive into credit considerations, check out our article on the "Five Cs of Credit." Below is a primer on eligibility criteria for the following loan type: 7(a).

• Access to critical capital 
• Competitive, capped interest rates 
• Extended repayment terms, easing cash flow 
• Lower initial down payments required 
• Wide range of loan amounts and use of loan proceeds 
• Light on financial and reporting covenants 

• Lengthy approval process and closing/documentation process 
• Unprofitable business and individuals with low personal credit scores may not qualify 
• Personal guarantee risks personal assets 
• Rates sometimes less competitive than conventional lending 
• Stringent eligibility criteria 

SBA loans provide versatile funding options for small businesses, such as the following:

• Acquisition Financing
• Commercial Real Estate
• Debt Refinancing
• Emergency and Disaster Relief
• Infrastructure Improvement
• Working Capital

For more information on approved uses, please visit SBA.gov’s terms, conditions, and eligibility page.

1. Get prepared: Lenders will want your business to be prepared with the following: business plan, collateral, credit history, financial projections, industry experience, and planned amount and use of SBA funds. Once you gather these materials, you will be ready to contact a lender like Pathward.

2. Gather Required Documentation: Prepare the necessary documents for your application. These typically include:

• Borrower Information Form or SBA Form 1919
• Business Certificate/License
• Business Financial Statements (e.g., Profit and Loss Statements and Projected Financial Statements)
• Business Overview and History
• Income Tax Returns
• Personal Background and Financial Statement
• Resumes

3. Provide Additional Documentation if Necessary: If your loan application involves purchasing an existing business, be prepared to furnish additional documentation as required.

4. Understand Processing Time: SBA loans typically take longer to process and close compared to conventional loans, typically ranging from 60 to 90 days as opposed to 30 to 45 days. However, some financial institutions, like Pathward, who prove reliability, experience, and good performance of SBA loans are granted Preferred Lending Program status. This can expedite the process by handling all loan procedures in-house, which can expedite processing time.

Navigating SBA loan requirements can be complex. Since 2016, Pathward’s been an SBA Preferred Lender, and has experienced sales, underwriting, and closing teams that can critically evaluate the pros and cons of applying for an SBA loan, assess businesses on a case-by-case basis, and discuss the options available to you.

Our goal is to offer a balanced perspective and simplify the process with a step-by-step guide that clarifies the rules and structured requirements and the processing of loan applications.

As an SBA Preferred Lender, we can handle the loan from consultation to close. We recommend reaching out to our Structured Finance team to learn more or apply.