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What is an SBA loan?

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Last editedMay 20212 min read

If you’re looking for ways to fund your small business, the U.S. Small Business Administration (SBA) works together with participating lenders to offer a selection of government-backed loans. Here’s what you need to know about SBA loans, including how to apply.

SBA loans explained

An SBA loan is backed by the U.S. federal government, issued by private lenders (usually banks) to eligible small businesses. To apply, you submit your SBA loan application directly to the lending institution. The lender applies to the SBA for a loan guarantee, which means that if your business defaults on the loan the government will pay the lender. Due to this guarantee, lenders are able to offer very low interest rates and flexible terms.

However, be aware that to take out an SBA loan you’ll need to offer an unconditional personal guarantee to the government that uses your personal assets as collateral.

Types of SBA loans

There are three primary loan programs to choose from:

7(a) loans

The SBA’s 7(a) loan program is its primary tool for providing small business assistance. Approved loan purposes could include working capital, equipment purchases, and business expansion. Approved lenders include banks, credit unions, and specialized companies, offering loans up to $5 million. There’s also a wide variety of 7(a) subtypes to choose from, including options for veterans and express versions of the 7(a) loan with faster processing times.

504 loans

The SBA’s 504 loan program is designed to help businesses purchase long-term, fixed assets like machinery, equipment, facilities, and property. It’s most commonly used to purchase commercial real estate. Approved lenders include both traditional lenders like banks and credit unions, who work along Certified Development Companies (CDC).


While the previously mentioned loan types can soar up into the millions, microloans are capped at $50,000 and are designed to purchase everyday supplies along with machinery, equipment, start-up inventory, and working capital. Loans are issued by community-based non-profit organizations rather than traditional lenders.

Loans like PPP and EID are also available to offset the costs of COVID-19 damages. We’ll look at how these work in the next section.

SBA disaster loans for coronavirus relief

The SBA steps in to help small businesses recover during times of economic downturn and declared disasters. Coronavirus relief falls under this category. At the moment, there are two main types of SBA disaster loans you can get to help offset the impact of coronavirus.

Paycheck Protection Program (PPP) loans

There have already been two rounds of the Paycheck Protection Program (PPP), which offers a government-backed loan to keep employees on staff with full payroll and benefits. SBA loan forgiveness is available with this type of assistance, meaning businesses that qualify may not need to make repayments.

Economic Injury Disaster (EID) loans

Businesses meeting SBA loan requirements and experiencing temporary loss of revenue can apply for low-interest EID loans, at a fixed rate of 3.75% for businesses and 2.75% for non-profits. These can be spread out over 30 years, with no prepayment penalties. Loans can be used to pay for any normal operating expenses like rent, utilities, health care benefits, and working capital. In some cases, for businesses in low-income areas, SBA loan forgiveness is available.

As with the main types, you must submit your SBA loan application directly to the lender for processing. Additional forms of assistance include grants for shuttered venues, as well as express bridge loans and debt relief. It’s best to visit the SBA website for more details.

Temporary changes to SBA loans

There’s a temporary easing of conditions to make borrowing easier during the ongoing pandemic, in addition to the Paycheck Protection Program (PPP) and Economic Injury Disaster (EID) loans we’ve already discussed.

  • Fees are waived for 7(a) and 504 loans.

  • Borrowing limits are temporarily increased to $1 million for SBA Express loans until October 1, 2021.

  • The government will cover some monthly payments on eligible loans.

It’s a good idea to keep track of the latest coronavirus recovery news to find out about additional temporary changes to SBA loans.

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