What is a SBA Loan?

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While multinational corporations and conglomerates seem to get the most news, it's small businesses who represent the real engine of growth in America. Routinely cited as the backbone of the economy, small businesses make up an overwhelming majority of the market and employ the largest share of U.S. workers. However, despite this importance to the overall economic landscape, small businesses can often feel underserved by financial institutions.

While lending to small firms(Opens a new window) has recovered in the years since cratering after the Great Recession, it has experienced stagnation and unevenness in institutional readiness to approve smaller borrowers, according to the U.S. Small Business Administration. These conditions might create problems for entrepreneurs with the next million-dollar idea, but not a million dollars in the bank to launch their venture.

Fortunately, the federal government understands the role of small business to the economy and operates an entire agency devoted to that segment. The U.S. Small Business Administration (SBA) is important for a number of reasons, but providing loans is among its most mission-critical functions. The SBA exists not only as a knowledge and advice resource for small business owners but also as a lending partner to small firms.

Whether you're looking for funds to start a small business, finance investment or expansion, or even recover from disaster, the SBA has a menu of loan offerings that can help small business owners. However, before they can take advantage of loans, entrepreneurs need to know exactly what an SBA loan is, how they can qualify and what else they should know about (like how the SBA doesn't actually disperse money itself).

What is an SBA loan?

The first thing small business owners or prospective entrepreneurs need to know about an SBA loan is that the loan does not actually come from the SBA itself. As explained by the agency, the "loan" is made possible by the SBA providing a guarantee to partner banks and lenders for the money they would then extend to small businesses. The guarantee mitigates risk for lenders by ensuring partial repayment should an owner default (in some cases, this can cover up to 85 percent of the loan amount). The SBA also reviews all applications to ensure loans fit within its established lending guidelines and standards.

This financing arrangement creates two general advantages to SBA loans:

  • With the government backing the loan, partner banks and lenders are more capable of offering flexible and attractive loan terms. Often, SBA loans come with lower down payments, more favorable rates or a longer repayment period. 
  • The federal guarantee also opens up the lending pool to small business owners or entrepreneurs who have been denied before, either because of credit history or risk associated with the loan, for example. However, the loan-backing process can encourage more lending to growing firms, unproven startups or businesses run by underserved or protected populations - including women, minorities and veterans.

The amount of an SBA loan can range from between $350,000 to $5 million, generally. Funds can be used for a number of purposes, including working capital and fixed assets.

How do I qualify for an SBA loan?

While an SBA loan is not technically a loan from the agency, the SBA is closely involved in vetting applicants and reviewing materials. In this way, SBA loans are very much like the rest of commercial and private lending in that qualifying standards generally revolve around creditworthiness, risk and business opportunity. In addition, the SBA also requires that businesses meet size definitions, be for-profit, be registered in the U.S., and that owners have equity invested in their venture and have exhausted all other means of available financing with no success.

Regarding the basic documentation you'll need, the SBA notes specific materials to prepare your application, which include: 

  • Personal information, including financial history and income tax returns.
  • Business statements, like cash flow projections and balance sheets.
  • Business valuation and debt schedule.
  • Applicable certifications, licensure or leases.
  • Past loan application history.

Entrepreneurs with no such established business information can still make an emphatic case for their loan worthiness. The SBA advises new businesses and startups to:

  • Describe their plan and business opportunity in detail.
  • Pin down exact capital needs, as well as forecast revenue projections.
  • List out collateral that can be offered.

Which SBA loan is right for you?

When asking "what is an SBA loan?", interested borrowers need to also ask "which SBA loan is best for me and my business?" This is a central question simply because there are many loan options made available by the SBA, some designed to meet specific or urgent needs. Finding the right SBA loan starts with brushing up on the various offerings and their specifics:

7(a) program

The SBA's primary program for lending, the 7(a) program acts as an umbrella for a number of diverse loans, in addition to traditional, mainstream offerings. The Standard 7(a) loan can reach $5 million and can be used for leasing or purchasing new equipment to replace old and inefficient units, or as working capital. Other loans in the program include:

  • SBA Express: Which ensures the SBA will respond within 36 hours of a request ($350,000 maximum).
  • Export Working Capital: Targeted funding for exporting businesses ($5 million maximum).
  • International Trade: Long-term financing designed for businesses growing overseas or facing stiff competition within domestic borders from foreign imports ($5 million maximum).
  • CAPLines: Short-term or seasonal loans made to help small businesses increase inventory, pay labor, finance renovations or tap revolving credit.

CDC/504 program

The CDC/504 loan program is made available to help small businesses finance large-scale investments, namely real estate. The end goal is growth, as physical expansion generates more jobs and business, and the 504 program connects qualified companies with long-term, fixed-rate funding through Certified Development Companies (CDC) to buy fixed assets or modernize operations. Possible uses for a 504 loan include purchasing an existing building, undertaking land improvements (landscaping, parking, utilities), building new structures or upgrading facilities, acquiring long-term machinery and refinancing debt linked to expansion. Particular advantages to this loan program that the SBA highlights include 90-percent financing, no balloon payments and savings used to improve cash flow.


As the self-evident name indicates, this loan program is maintained to extend comparatively small-scale loans. The target audience for these loans includes small businesses in need of working capital or funds to repair furniture, as well as startups that need only a small amount to get off the ground. The maximum loan that can be made under this program is $50,000, while the average amount is $13,000.

Disaster loans

The costs of dealing with a natural disaster can run exceptionally high for small businesses, both in the near and long term, following a calamitous event. Companies that need financing to keep the door open, employees paid and the lights on can look to the SBA, which offers disaster loans of up to $2 million for small businesses, as well as for nonprofits and homeowners. Finding the right lending partner also factors into securing the best SBA loan for you. Given the SBA itself does not disburse funds, working with the most suited SBA partner to your needs is an essential part to taking advantage of such loans. Talk to Comerica Bank today about what SBA loan options are available to your growing small business or new startup.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

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