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What small business owners need to know about SBA’s loan guarantee program

Small Business Majority

Are you a small business owner interested in taking out a loan? The U.S. Small Business Administration’s loan guarantee program can help small business owners who are unable to get loans from traditional banks.

The SBA does not make the loans directly to small business owners, nor does it set rates. It guarantees a portion of the loans (up to 85%) made by lenders. These lenders include banks and microlender organizations. By guaranteeing a portion of the loan, SBA allows lenders to make loans to small businesses that might not otherwise meet their criteria or may be deemed too risky.

The lender decides if they will make the loan internally or if the application has some weaknesses that will require an SBA guaranty. The SBA guaranty assures the lender that if the borrower does not repay their obligation and defaults on their loan, the SBA will reimburse the lender for its loss, up to the percentage of SBA's guaranty. Despite this guarantee, the borrower is responsible for the full amount borrowed.

SBA loans also help to bridge the gap in lending to minority, women and veteran business owners who all face unique challenges in accessing capital.

The primary SBA loan programs are:

  1. 7(a) or Community Advantage loan:  This is the most widely used SBA loan of up to $5 million that covers a wide range of uses including working capital, expansion, renovation, inventory and exporting. There is no minimum loan amount.
  2. 504 or Growth loans: These loans are typically larger, and are usually used for fixed assets, such as purchasing a building or large equipment for longer-term investments.
  3. Microloan program: The SBA works with microlender organizations to provide small loans or microloans up to $50,000. There is usually no minimum loan amount and covers a wide range of uses.

Now let’s review some pros and cons of SBA loans.

On the plus side, SBA loans typically have better interest rates, longer loan terms, and there are no balloon payments. It’s a good option if you’re unable to get a bank loan. There also are currently no SBA guarantee fees on 7(a) loans under $150,000.

However, the government backstop comes with strict requirements and lengthy application timeframes and it’s a drawn out process – it can take months to get an approval. Personal collateral also is often required.

That being said, here’s a word of advice. If you’re applying for an SBA loan, your lender will provide a robust checklist of documents for you to compile, such as business financial statements and tax returns. Be sure to double, if not triple check to ensure that the required documents are submitted to your lender. Applications with outdated or missing documents can really delay the process, and may even result in a denial.

SBA-supported organizations in your area such as SCORE, Women’s Business Centers and Small Business Development Centers (or SBDCs) can help you with your application.

For information, visit sba.gov or check out www.sba.gov/tools/linc to find an SBA lender near you. 

This work is supported by the Sam's Club Giving Program.