SBA Loans: The Basics


The Small Business Administration (SBA) is a government agency that was founded in 1953 to offer business support to small business owners across the United States of America. One of the forms of support the SBA offers is financing, in the form of loans. The SBA also helps small scale entrepreneurs improve their business processes, learn how to take advantages of opportunities when they present themselves and how to get access to other forms of financing.

An SBA loan is a small business loan characterized by long repayment periods, low down payments, and low interest rates while being guaranteed by the government. It is crucial to know that the agency itself does not provide the loans directly. The loans are offered by lenders and the SBA guarantees the loan, effectively promising to pay back the lender a portion of the loan if the borrower defaults. The guarantee is a risk reduction tool for lenders which enables them to offer more loans to more small businesses on better terms. Increasing the incentive to lend by financial institutions is the motive behind the creation of SBA loans.  

SBA 7(a) Loan Program

The 7(a) program is the most popular among the SBA loan programs. This is because the loan is pretty flexible and can cover most general financing needs. Needs like working capital, relinquishing old debt obligations and renovating the business premises are the main reasons for applying for a SBA 7(a) loan.

SBA 7(a) loan terms include:

  • A maximum loan amount of $5 million.
  • Repayment periods of up to 10 years for working capital loans or up to 25 years for commercial real estate loans.
  • To be used for general financing needs

The 504 Loan Program

The 504 Loan Program is also popular but much more specific than the 7(a) program. You use the 504 loan to specifically buy major fixed assets, more particularly owner occupied commercial real estate and/or heavy equipment.

The terms of an SBA 504 loan are as follows:

  • No maximum loan amount, but for practicality’s sake, around $22 million
  • Repayment period of 10 to 20 years
  • To be specifically used to buy fixed assets

SBA Loans Cost

One of the most pertinent questions you should ask before applying for an SBA loan is, “how much will an SBA loan cost?” The answer to that question will depend on the type of SBA loan that you choose.

Simply put, an SBA loan is the cheapest source of financing available to small business owners. The SBA decides the maximum amount that can be charged on any of their loans.

The two popular SBA loan programs both have different fees, repayment terms and interest rates as we will see below:

SBA 7(a) Loan Program Fees


The SBA charges a fee for providing additional security for the loan, known as the guarantee fee. Though the lender usually pays the guarantee fee, they can pass it along to the borrower as an expense of the loan.

They charge a guarantee fee of 1.7% of the loan amount for loans up to $150,000, 2.25% for loans between $150,000 and $700,000, and 2.625% on loans exceeding $700,000. For loans over $1.333M, the fee increases slightly based on the loan amount. If you’re in that bracket, we can calculate the exact fee for you.

Depending on the lender from which you acquire the loan, you may be liable to pay an origination fee or loan packaging fee. The fees may seem like a burden, but they are paperweight compared to the burden a smaller, faster to process but much more expensive loan would be.

Interest rates

SBA 7(a) loans come with either a fixed or variable interest rate which is usually adjusted every quarter. The lender that finances your loan will be the one to decide which to offer.

The SBA has a cap on the spread a bank is allowed to place above the loan’s base interest rate, minimizing how much profit the bank can make off your SBA loan. This protects you as a borrower.

If your loan amount exceeds $50,000 and the repayment period is less than 7 years, the loan’s interest rate will be determined by the Prime Rate and the maximum allowed spread on the rate is 2.25%.

If your SBA loan is more than $50,000 and has a repayment period of more than 7 years, the loan’s interest rate will be determined by the Prime Rate and the maximum allowable spread will be 2.75%. It is paramount to understand that the interest rate on an SBA loan is also determined by your credit history and the repayment terms.


The repayment terms of an SBA 7(a) loan are the best you will find in the market. You should expect to make monthly payments for 25 years if you acquire a commercial real estate loan, and 10 years for equipment loans or working capital loans.

SBA 504 Loan Program Fees

Interest rate

To put it in extremely simple terms, you should expect an interest rate of 4-5% on the loan. However, you will not know the exact interest rate on the loan until 45 days after acquiring the loan.

The reason for the complication arises from the fact that a 504 loan comprises of two separate loans. One is from the lender which makes up 50% of the total loan amount and the other loan is from the Certified Development Company (CDC) and makes up 40% of the total loan amount. The other 10% comes from your down payment.


The repayment terms for SBA 504 loans is 25 years.

SBA Loan Requirements

There are personal and business requirements that one needs to fulfill in order to qualify for an SBA loan. The actual requirements to qualify for the loan will be decided by the individual financial institution from which you acquire the loan.

However, generally speaking, a business should qualify for an SBA loan if they have been in operation for at least 3 years, have a good credit history, have not recently experienced any bankruptcies or foreclosures and have enough cash flow to make monthly payments on the loan for the entire duration of the loan. Startups will be considered depending on the lender, if you have a solid business plan and relevant experience in the industry which the business is operating.

The ability to come up with cash flow to make the monthly loan payments should be demonstrated using tax returns and financial statements from both the business and the owner. Moreover, the business should not have any delinquencies or have defaulted on any government loans in the past to qualify.

To qualify for a commercial real estate loan through the SBA, the real estate needs to be majority owner-operated. This means that at least 51% of the square footage of the property you plan on purchasing or refinancing should be occupied by and used by your business to qualify for an SBA loan.

Also, there are exceptions. The business owner must be a US citizen or a legal permanent resident of the United States.

The business owner’s credit score must be 650 or above for SBA loans up to $350,000 and a credit score of over 660 for commercial real estate loans up to $15 million.