Education Library · Financing Tools · Article 3
Owners hear about SBA loans from their banker, their CPA and a lot of people selling them. They have a good reputation, and most of it is earned: long terms, reasonable rates and a federal guarantee behind them. They’re also some of the most paperwork-heavy, slowest and most closely underwritten loans a small business can apply for.
The SBA usually doesn’t lend the money
The U.S. Small Business Administration mostly doesn’t make loans. Banks, credit unions and other approved lenders make them, and the SBA guarantees a portion. If the borrower defaults, the SBA covers part of the lender’s loss. Because the lender carries less risk, it can approve terms it might otherwise turn down, like longer repayment periods, smaller down payments or deals where the collateral doesn’t fully cover the loan. You apply through the lender, and the lender decides whether to approve you within the SBA’s rules.
The main programs
7(a) loans are the most common, with a maximum of $5 million. The money can go toward working capital, equipment, real estate, buying a business or refinancing certain existing debt. Equipment and working capital terms often run up to 10 years and real estate up to 25.
504 loans are built for major fixed assets like buildings and heavy equipment. They’re long-term, fixed-rate loans split between a bank, a Certified Development Company backed by the SBA and a down payment from the business.
Microloans are $50,000 or less, made through nonprofit lenders, and are often used by newer businesses that don’t meet a bank’s minimums yet.
What lenders review
Cash flow usually decides it. The business has to show it can comfortably cover the new payment on top of existing debt. Expect the lender to ask for two to three years of business tax returns, personal returns for the owners, a current profit and loss statement and balance sheet. They’ll look at the owners’ personal credit and any history with federal debt, time in business and industry experience, available collateral and a clear, eligible reason for the money. The SBA doesn’t require a loan to be fully covered by collateral, but lenders are expected to take what’s available, which on larger loans can include equity in the owner’s home.
The tax returns carry a lot of weight. If they show little or no profit because everything got written off, that’s a problem, because the returns are what gets underwritten. We talked with the owner of a service company running vans and techs, about $340,000 in revenue, who wanted to roll an existing SBA balance, a van loan and a credit card into one larger SBA loan with some money to grow. His return showed a loss of about $1,000. The plan became working with his CPA to show a real profit this year, even if that meant paying more in taxes, and applying next year with returns that support the request. As Paul put it on that call, “I have to show that I’m profitable so that next year I can go and grab this SBA loan.”
Personal guarantees are required
Anyone who owns 20% or more of the business has to personally guarantee an SBA loan. If you’re looking for financing that doesn’t put you personally on the hook, this isn’t it.
SBA money and MCAs
Under rules that took effect in June 2025, SBA loan proceeds can’t be used to refinance merchant cash advances or factoring agreements. Owners stuck in daily or weekly payment products are often told an SBA loan will clean everything up, and under the standard rule it won’t.
Some banks will handle an MCA payoff themselves with their own separate loan when the business has strong cash flow and the overall deal makes sense to them. The SBA portion still isn’t paying off the MCA. The bank is choosing to take that piece on directly, it usually wants your full banking relationship, and whether it happens is up to the bank.
Be careful with the pitch that goes, “take this bridge loan now and we’ll refinance you into an SBA loan later.” A remodeling company owner carrying about $275,000 in MCAs heard exactly that. The bridge loan had weekly payments, and only after pressing did he find out it would add about $58,000 in cost. He saw the risk on his own: if the SBA loan fell through, he’d be left holding the expensive bridge. A future SBA loan isn’t guaranteed, so it makes sense to price the bridge as if it’s the only loan you’ll get.
A good loan can still be the wrong loan
An exterior services owner used an SBA 7(a) loan to buy an existing company. The revenue he bought had been pushed up by two big storm seasons and a seller who was an exceptional salesman. When the storms passed and the seller was gone, sales dropped well below what the business needed, and the SBA payment of nearly $15,000 a month stayed the same.
Paul’s take on that call: “The SBA, you know, that’s considered some of the best debt that’s out there. The problem is, is when you use that debt to buy a business that was heavily built off of the back of a previous owner… that SBA loan is no longer a good loan, because the numbers that they were built off of no longer support it.”
If you’re using SBA money to buy a business, have the books checked by someone who doesn’t get paid when the deal closes.
SBA loans also aren’t automatically the cheapest money available. One owner we work with had an SBA loan at around 13% and is paying it off with a local bank line of credit at around 7%, with another $100,000 of cash on top.
Fees and timing
7(a) loans carry an upfront guarantee fee, generally a few percent of the guaranteed portion, usually rolled into the loan. Lenders may add packaging or closing costs.
Time is the bigger cost for most owners. Expect several weeks to a few months from application to funding. Paul’s own SBA loan was approved by the end of April, then he waited on final sign-off and the money, and closed at the end of July. If you need money in ten days to cover a slow month, an SBA loan won’t get there in time. The owners who get them on good terms usually started getting ready well before they needed the money.
When an SBA loan tends to fit
SBA loans tend to work for a business with steady profit on its tax returns, a specific use for the money like buying a building, buying a competitor or a major equipment expansion, owners who are fine signing a personal guarantee, and enough time to get through full underwriting. They usually don’t work when you need money fast, when the returns don’t reflect the cash flow you actually have, or when the goal is to pay off an MCA.
SBA program rules change from time to time, so confirm current terms with the lender before you apply.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
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