Learn about three core SBA loan programs — and how they might meet your business needs.
You want opportunities that can help your business succeed. The U.S. Small Business Administration (SBA), in partnership with banks and other lending institutions, offers several such opportunities through their loan programs.
The range of SBA loan possibilities might seem confusing, especially if you’ve never applied for an SBA loan before. Here, we’ll explain how SBA loans differ from conventional business loans, explain the differences between most popular types of SBA loans, and explore what each type of loan is meant for. And yes, you can apply for an SBA loan even if you have other business loans and lines of credit.
SBA loans vs. other business loans
Small Business Administration loans are a lot like conventional business loans. You apply through banks and other lending institutions, and you qualify by meeting SBA eligibility requirements and bank underwriting standards. Also, just like conventional business loans, you can typically use the funds to build working capital, finance a project, or purchase a building.
The difference is in the details: Because SBA loans are backed by the government, they allow lenders to be more flexible about features like down payments, repayment terms, and collateral. Keep in mind that SBA loans are also subject to determination of SBA eligibility.
Most popular SBA loans
Most SBA-backed loans fall into three main categories: 7(a) loans, 504 loans, and microloans.1
Here’s some information to know about each.
7(a) loans: This is the SBA’s most popular program.
- What they’re for: Typically used for most business needs, such as buying property or equipment. You can also use it to fund a business start-up, working capital, or a business acquisition — sometimes all in one loan.
- Terms and considerations:
- Most 7(a) loans are 10 years or less. When loans are used to fund real estate construction or acquisition, terms can be up to 25 years.
- SBA loans can offer more flexibility than conventional loans and may require a lower down payment — often around 10%.2
- Loan amounts available up to $5 million.
504 loans: These loans offer long-term, fixed-rate financing for major fixed assets that are likely to promote growth or lead to job creation.
- What they’re for: Typically used for the purchase or construction of large buildings, the expansion of existing operations, or for big equipment or machinery purchases. A key element is that these business projects have an impact on the local economy and may potentially create jobs.
- Terms and considerations:
- 504 loans can provide long terms (up to 25 years), low down payments, and fixed rates.
- The 504 loan program is managed by Certified Development Companies (CDCs), which are non-profit organizations regulated by the Small Business Administration that focus on community economic development. This program actually requires two loans: one from the CDC (which covers 40% of the total amount of the loan) and another loan from a financial institution (which covers an additional 50% of the total amount of the loan). Keep in mind your business will need to cover the remaining 10%. If your business (in almost any industry), needs funds for growth that can support economic development or job creation, contact the CDC about a 504 loan. Learn more about 504 and 7(a) loans. You can also find a CDC near you through the SBA website.
- The maximum amount for a CDC’s portion of the loan is $5.5 million. The maximum loan from the financial institution’s portion varies depending on their lending policies.
Microloans1: A microloan is a smaller loan meant to help businesses with start-up or other costs.
- What they’re for: Typically used for machinery, equipment, supplies, and other start-up costs. Microloans can’t be used to purchase real estate or pay existing debt.
- Terms and considerations:
- Microloans are available from Community Development Financial Institutions (CDFIs) and other non-profit institutions, not banks. Microloans often offer lower interest rates than you’re likely to get from online lenders, with potentially better financing options and repayment terms of up to seven years.
- These loans typically max out at $50,000 and average about $13,000.
Know what you want to accomplish for your business. To get started — and to choose the loan type that’s right for you — you need a clear goal, along with good credit and some working capital.
What kind of loan is right for you?
The Small Business Administration supports a wide range of loan options for business owners — including microloans to help get your started, 504 loans to support economic development and increase employment, and 7(a) loans for a broad range of business needs. Selecting the one that’s right for your business depends on your needs, your desired timeline, and what you hope to accomplish.
So, what’s your next step? Talk to a banker who has experience in business credit, especially SBA lending, to ensure you get a full picture of your options. An experienced banker can work with you to match your business goals with the right loan program. From there, you can move on to the application process. To get started, make an appointment with a Wells Fargo banker.
Source: Wells Fargo is an SBA-preferred lender, Small Business Administration 1, Small Business Administration 2, Small Business Administration 3, Small Business Administration 4
1Wells Fargo does not participate in the SBA Microloan program.
2Lower down payments may result in higher monthly payments and a higher loan balance.
