How Does an SBA Loan Work?

The U.S. Small Business Administration partners with lenders to provide loans for small businesses. The SBA does not write loans but guarantees them, which means that if the borrower defaults, the SBA covers a portion of the outstanding balance. This minimizes the lender's losses. The SBA only guarantees loans that meet its eligibility guidelines.

Benefits of SBA Loans

New businesses have a high failure rate. and consequently most lenders are reluctant to lend to start-up businesses. Generally, lenders write loans only for businesses that have been in existence for at least two years. The SBA has no seasoning requirement for businesses, which means new businesses can qualify for loans. Generally, the SBA guarantees loans only for borrowers who are unable to obtain reasonably priced loans from other sources. In the absence of SBA guarantees, many small-business owners would have to rely solely on personal funds to establish their businesses.

Types of Loans

The SBA guarantees a variety of different loans designed to help businesses faced with different challenges. The 7(a) loan program includes loans designed to help businesses negatively affected by the North American Free Trade Agreement to expand and recover market share from foreign competitors. Express loans are designed to help people such as military veterans establish businesses, while export loan programs help small businesses become international exporters. The CDC/504 program finances projects designed to rejuvenate communities, while other loans are catered to businesses in rural areas.


When you apply for an SBA loan you must meet the SBA's underwriting guidelines as well as the guidelines of the particular lender that writes the loan. Both the SBA and lenders check your personal credit report and the credit report of any other business owner acting as a guarantor of the loan. You must have sufficient income to cover the loan payments and your existing personal debts. The business must have sufficient revenues to cover the loan obligations, while start-up businesses must provide the SBA with an action plan that includes profit projections.

Other Considerations

SBA loans typically have variable rates that are fixed at a certain margin to U.S. Treasury yields. For many businesses, SBA-backed loans are the cheapest or the only lending option. However, lenders will offer rates below SBA levels to creditworthy business customers since established businesses expose lenders to lower levels of risk. For creditworthy clients, non-SBA business loans are quicker and easier to qualify for because you do not have to complete two separate applications, one for the lender and one for the SBA.