Credit Infocenter

Small Business Loans FAQs

Written by: Kristy Welsh

Last Updated: October 17, 2017

If you're planning to start a business or if you are an owner of a small business, you know how difficult it is to raise working capital for day to day expenses and expansion. In order to grow your business, you need to expand, and to expand, you need money. It is a vicious cycle — but if it works out, you can reap the rewards of a thriving company.

There are a lot of options available to business owners but knowing what are the good ones and which are the bad ones, can make or break your business. Below are some questions we have received from our readers — hopefully these will help you in your decision making for your business.

What is an SBA Loan?

SBA loans are government-backed loans available through commercial lenders who follow SBA guidelines. SBA works with lenders to provide a partial guarantee for loans, reducing lenders’ risk, increasing small business lending, and helping expand small business economic activity. The SBA does not make direct loans to small businesses, except for the disaster loan program, to repair physical and economic damage caused by a declared disaster. 

What are the main reasons small businesses seek financing?

Small businesses borrow for four principal reasons: 1) starting a business, 2) purchasing inventory, 3) expanding the business, and 4) strengthening the firm. Firms choose different means of financing depending on the intended purpose. 

How much can I borrow?

SBA does not set a minimum loan amount. The average loan extended to U.S. businesses in 2016 ranged from $671,000 to $850,000, according to data from the Federal Reserve. Depending on the type of loan and the lender, averages may range from $13,000 to $1.2 million.

What are the fees and interest rates associated with an SBA loan?

Loans guaranteed by the SBA have fees bases on the loan's maturity and the dollar amount guaranteed, not the total loan amount. On loans under $150,000 made after October 1, 2013, the fees will be set at zero percent. On any loan greater than $150,000 with a maturity of one year of shorter, the fee is 0.25 percent. On loan with maturities of more than one year, the normal fee is 3 percent on loans $150,000 to $700,000 and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.

The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. The maximum rate is a base rate and an allowable spread.

Aren't SBA guaranteed small business loans only for businesses that are not creditworthy by traditional banking standards?

On the contrary, SBA financing will not be extended to any business that does not demonstrate the ability to repay debts. The longer terms allowed with SBA financing can enable your company easier debt qualification based on lower payments.

What else do I need to know?

  • Debt to worth ratio should generally not exceed 4:1
  • Sufficient cash flow to meet proposed debt service
  • Personal guarantees are required
  • Life and hazard insurance is required
  • Current appraisals are required on real estate collateral

What are some common myths about SBA financing?

  • It does not take 6 to 9 months to get funded. On average, it takes 45 to 60 days to process an SBA loan from submission to final funding.
  • You do not have to be turned down by a bank prior to applying for an SBA loan.

Can SBA loans be used to refinance existing business debt?

Yes, in most cases.

Can SBA financing be used for construction?

Yes, as long as the business will occupy at least 67 percent of the new building. The construction loan will convert to a fully amortized loan at the end of the construction. If an existing building is financed or refinanced, your business must occupy at least 51 percent of the facility.

Are there any special 7(a) loans available?

SBA offers several special purpose 7(a) loans to aid businesses that have been impacted by NAFTA, provide financial assistance to Employee Stock Ownership Plans, and help implement pollution controls. Here is a list of the special programs available. For more detailed information, go to SBA.gov.

  • CAPLines — This program is designed to help small businesses meet their short-term and cyclical working capital needs.
  • SBA Export Loan Program — SBA is helping small business exporters by providing a number of loans designed to help develop or expand export activities.
  • Advantage Loans — SBA guarantees three types of 7(a) business loans; Small/Rural Lender Advantage Loan, Community Advantage Loan, and Small Loan Advantage.