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What Is an SBA Loan?
An SBA loan is a business loan backed by the Small Business Administration (SBA), and issued by a private lender. The SBA’s guarantee makes private lenders’ loans more affordable for borrowers and more attractive to lenders. Because the SBA’s guaranty substantially reduces the lenders’ risk of default, they are willing to make SBA loans with lower interest rates and fees, longer terms, more flexible qualification requirements, and/or lower down payment requirements.
SBA loans come in various flavors, but by far the most prominent is the basic 7(a) loan. It can be used as working capital; to acquire land; to purchase, construct, renovate, or expand buildings; to purchase supplies, inventory, or fixed assets; and even to start or purchase a new business.
Among the other common SBA offerings are smaller loans called microloans, and larger loans with longer terms called 504 loans, which are often used for investment in fixed assets and real estate.
How to Choose an SBA Lender
Many banks offer SBA loans, so choosing one for your business can seem like a chore. Here are some steps to take.
- Ask your current bank or lender. If you do your business banking with a large national bank, it likely offers 7(a) and 504 loans. Begin your search there, especially if your bank is a preferred lender, which will accelerate the approval process.
- Visit the SBA’s lender match service. The SBA website features a lender-matching service that will connect you with one or more lenders interested in offering you a loan. You can compare rates and fees and move on to the application.
Once you’ve chosen a lender and a loan, gather financial and other documents and be prepared to fill out many forms. Applying for an SBA loan can be rigorous.
What Is an SBA Preferred Provider?
A financial institution or organization must become certified as an approved SBA lender to offer SBA loans. However, there is another tier of lender status within the SBA program, and it has a big impact on the borrower.
Some institutions are elevated to the Preferred Lender Program (PLP). These lenders have a successful track record of processing and servicing many SBA loans and have demonstrated a solid understanding of effective SBA loan underwriting. Consequently, they are granted the status of Preferred Lenders, which allows them to do their own loan approvals in-house and get streamlined approval from the SBA to finalize the loan.
In contrast, standard SBA lenders must send their applications to the SBA for underwriting and approval, which can take as much as a month to review. Since most business owners are anxious to have their loans approved and funded quickly, choosing a Preferred Lender will deliver the fastest turnaround.
Who Should Get an SBA Loan?
Businesses that meet eligibility requirements that need funding should apply for an SBA loan. Eligible businesses must be incorporated as a for-profit enterprise, do business (or plan to do business) in the U.S. or its territories, demonstrate that there is reasonable owner equity to invest in the business, and show that other funding sources have been used or attempted before seeking SBA funding.
On the flip side, some business owners should not waste their time even exploring SBA loan options. If you have bad credit, have defaulted on a government loan in the past (including a government-backed student loan), or have a criminal record, you are highly unlikely to be approved for an SBA loan of any type. Additionally, some business types are ineligible, such as those involved in gambling, illegal activities, and pyramid schemes, as well as real estate investment firms, religious organizations, and nonprofits.
Frequently Asked Questions
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Getting an SBA loan may be no more difficult than getting a loan from other sources. While program details vary, the SBA says eligibility is generally determined by where the business operates (in the U.S.), creditworthiness, and other factors. The SBA offers a borrower and lender matching tool to help you get started.
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Ultimately, interest rates on SBA loans are set by borrower and lender, but the SBA does set interest rate maximums. These maximums are based on a base or “pegged” rate (the prime rate as published in the Wall Street Journal), with an additional percentage on top, up to the maximum for each type of loan.
Current max rates are:
- $50,000 or less: Base rate plus 6.5%
- $50,001 to $250,000: Base rate plus 6.0%
- $250,001 to $350,000: Base rate plus 4.5%
- Greater than $350,000: Base rate plus 3.0%
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Most SBA loans require a down payment of up to 10%. The actual amount varies, depending on borrower credit score, planned use, collateral, and other factors.
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Based on our research of lender rates and terms, SBA lender data, and more, Live Oak Bank is our pick for the best SBA loan provider. Live Oak offers a broad array of business loan types and has been at or near the top of the list when it comes to the dollar value of loans originated year after year.
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You can expect an SBA loan to take 30 to 90 days to fund. Working with a lender who is an SBA “Preferred Lender” can speed up the process. Coming prepared with all required documents and financial details can help too.
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You can pay off an SBA loan early, but be aware that SBA loans are subject to prepayment penalties. For example, 7(a) loans with terms of 15 years or longer have prepayment penalties and accrue if the borrower repays 25% or more of the outstanding balance in the three years after funds disbursal, on a sliding scale:
- During the first year after disbursement, 5% of the amount of the prepayment;
- During the second year, 3% of the amount of the prepayment;
- During the third year, 1% of the amount of the prepayment.
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To qualify for an SBA loan, your business must be for profit, fall under size and revenue limits, and not be engaged in gambling and certain other kinds of businesses. Business owners can also be disqualified if they are not creditworthy or if they have access to other sources of capital.
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We researched the following leading SBA lenders to create our list of the best SBA lenders: Bank of the West, Byline Bank, Chase, Fundbox, Fundera, Funding Circle, Huntington Bank, Live Oak Bank, TD Bank, U.S. Bank, and Wells Fargo.
How We Chose the Best SBA Lenders
We began our research by looking at the past year’s most active SBA 7(a) lenders, filtering the list to about the top three dozen by both largest amount loaned and highest number of SBA loans processed.
We then filtered by Preferred Lender status, so as to avoid leading readers to any SBA lenders whose process would require an extra month in the timeline for SBA loan approval.
Next, we researched the geographic range of the remaining lenders, opting for those providing nationwide loans or, alternatively, covering as many states as possible. Some analysis was then conducted to compare program features, loan limits, number of available financing choices, the steps involved, and (via the SBA’s annual lender activity report) what the average interest rates were from the lenders last year.