How Do SBA Loans Work?

Author: / 5 May 2020 / Business

The U.S. Small Business Administration is a federal agency that provides support to entrepreneurs and small businesses. While the SBA has always offered small business loans, the CARES Act allocated $360 billion to Paycheck Protection Program loans, which was depleted in a matter of weeks with the approval of 1.6 million applications.

Hundreds of thousands of applicants have their applications in limbo, so Congress is expected to replenish the small business loan program with another $350 billion in the coming weeks, according to Treasury Secretary Steven Mnuchin. In the meantime, we’ll discuss how these SBA loans work, so you can decide if it’s something you wish to pursue as the funds become available.

How Do SBA Loans Work?

The SBA does not issue loans directly but instead sets the terms that its partners must follow in order to receive guaranteed assurance that 50-85 percent of the loan balance will be repaid by the SBA if the borrower fails to pull through with the funds.

In short, the SBA eliminates some risk to the lender, while also enabling small business entrepreneurs to have easier access to capital.

Precisely how the SBA loan works depends upon which loan you apply for:

7(a) Loan Program

  • This is the SBA’s flagship loan program.
  • Loans are federally guaranteed up to $5 million.
  • The interest rate ranges from 6-8%.
  • Funds can be used for working capital, expansion, acquisition, debt refinance, and equipment purchases.

504 Loan Program

  • This program caters to small business owners who need land, machinery, or facilities.
  • Borrowers can take out federally-backed loans ranging from $125,000 to over $20 million.
  • The maximum interest rate is currently fixed at 6%, though banks may charge interest on their portion.


  • This program provides funds for working capital, inventory, equipment, or startup finances.
  • Federally funded loans can be taken out up to $50,000.
  • Interest rates are slightly above market rate, between 8 and 13%.

SBA Disaster Loan: Paycheck Protection Program (PPP)

  • Small business owners adversely affected by natural disasters or the coronavirus pandemic can apply.
  • Borrowers can take out 2.5x monthly payroll, with a maximum of $10 million.
  • The interest rate is fixed at 1%, payment is deferred six months, and the amount is owed within 2 years.
  • Loan forgiveness is available for employers who maintain payroll for at least two months of loan receipt.
  • The funds must be used on salary, wages, benefits, health care costs, utilities, state/local taxes.

SBA Disaster Loan: Economic Injury Disaster Loan (EIDL)

  • Small business owners adversely affected by natural disasters or the coronavirus pandemic can apply.
  • Borrowers can take out up to $2 million in federally backed funds.
  • The interest rate is 2.75% for nonprofits and 3.75% for small businesses, with a 30-year term possible.
  • Loans under $200,000 can be taken without a personal guarantee and with a one-year deferment.
  • Emergency cash advances can give you $10,000 within 3 days, with no SBA loan repayment requirements.

Who Can Get an SBA Loan?

The most basic SBA loan requirements include:

  • Legitimacy: You have a US-based, for-profit business that is officially registered and operating legally.
  • Size: You employ up to 1,500, have less than $38.5 million in annual revenues, or under $15M net worth.
  • Time in business: You can be a brand-new startup and gain approval, but established businesses can expect swifter approval. Most other lenders require several years in business before loaning funds.

Why Apply for SBA Loans?

The SBA loan process is long compared to other lending products, and highly competitive. However, advantages include:

  • SBA loans are the gold standard of small business funding.
  • The terms are long, and the interest rates are low compared to other types of loans.
  • You don’t have to be an established or large business to apply for financing.
  • There is a great deal of flexibility regarding what you can use the money for.

How to Get an SBA Loan

Normally, applying for an SBA loan can take weeks or months. Struggling businesses typically don’t qualify. However, the PPP and EIDL programs work a little differently. The Small Business Administration website is a good place to start if you are pursuing a coronavirus pandemic-related loan. Your SBA district office can also give you the names of local approved lenders if you want a more traditional loan.

How to Pay Back an SBA Loan

Lenders willingly provide the funds you request under the assumption that you’ll pay it all back with interest. However, if you default on your loan, the SBA pays out the guaranteed amount. Defaulters who have signed a contract with a personal guarantee may have personal assets on the hook if the business can’t repay the loan.

Most loans you get through the SBA have to be repaid. Exceptions include the Paycheck Protection Program (provided that you actually use the money to cover eight weeks of payroll costs and do not layoff your workers) and a portion of the Economic Injury Disaster Loan program ($10,000 in emergency aid grant money).

The SBA loan process can be confusing, and they’re not your only option. In some circumstances, it may be advantageous to take out a 401(k) loan. Contact Ubiquity to explore your full range of financial options.

Take the next step – Let me help you.

Contact Jay Jacob, Sr. Retirement Plan Consultant

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357

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