What is an SBA loan?

What is an SBA loan?

Every small business owner has heard the term SBA loan. But how much do you know about what it is and how it really works?

An SBA loan is a loan that is partially guaranteed by the government’s Small Business Administration. The loan actually comes from traditional banks and lenders—some specialize in the SBA program—not from the government, as people often think. These loans can help small businesses with poor credit or limited collateral get financing—since they are partially guaranteed, the lending institution knows it will recoup at least some of the loan back and therefore is more willing to lend.

Another benefit for small businesses is that often the terms of the loan are such that a business can make lower payments over a longer period of time. This gives breathing room to startups and other businesses who have limited cash flow. And since the SBA limits the interest rate spread that lending institutions can charge, the cost of the loan is generally less for the borrower than it would be otherwise.

There are many types of SBA loans, but the most commonly used is the 7(a) Loan Program. This type of loan is the most flexible and allows business owners to borrow money for a variety of needs—working capital, machinery, furniture, general business costs, among other needs. The maximum amount you can borrow under the 7(a) Loan is $5 million. The SBA guarantees 75 percent of loans over $150,000 and 85 percent of loans under that amount.

Of course, if you want to apply for an SBA loan, keep in mind you’re dealing with the government—expect a pile of red tape and paperwork to get the ball rolling. Still, if you get the financing you need, a payment plan you can work with, and an interest rate you can afford, then isn’t it worth it?