Small business loans: SBA 7(a), 504, microloans and other options compared
Most small business owners who need to borrow end up choosing between three paths: a loan backed by the U.S. Small Business Administration (SBA), a conventional bank or credit union loan, or faster and usually more expensive online financing. The SBA does not lend most of the money itself. It guarantees part of a loan made by an approved lender, which lets that lender say yes to businesses it might otherwise turn down, often on longer terms.
SBA 7(a) loans: the all-purpose option
The 7(a) program is the SBA’s main loan product. According to the SBA, the maximum 7(a) loan is $5 million, and the money can be used for:
- Buying, refinancing or improving real estate and buildings
- Short and long-term working capital
- Refinancing existing business debt
- Buying and installing machinery and equipment
- Furniture, fixtures and supplies
- Buying all or part of an existing business
- A mix of the above
To qualify, the SBA says a business must be an operating, for-profit company located in the U.S., meet SBA size standards, not be in an ineligible line of business, and show it can repay. There is also a “credit elsewhere” test: you must be unable to get the credit you want on reasonable terms from non-government sources.
Most 7(a) term loans are repaid in monthly installments of principal and interest. With a fixed rate the payment stays the same; with a variable rate the lender can change the payment as the rate moves.
How 7(a) interest rates are capped
Lenders set the rate, but federal rules limit how high a variable rate can go. Under 13 CFR 120.214, the rate is built from a base rate (the prime rate or the SBA’s Optional Peg Rate) plus a spread, and the maximum spread depends on loan size:
| Loan amount | Maximum spread over the base rate |
|---|---|
| $50,000 and under | 6.5 percentage points |
| Over $50,000 to $250,000 | 6.0 percentage points |
| Over $250,000 to $350,000 | 4.5 percentage points |
| Over $350,000 | 3.0 percentage points |
The same rule allows rate changes no more often than monthly and bars balloon payments on variable-rate loans. Small loans can carry the widest spreads, so on a modest loan it pays to ask several lenders for their actual spread rather than assume everyone charges the cap.
The SBA also runs a 7(a) Working Capital Pilot for revolving lines of credit. Its terms include a maximum maturity of 60 months and a guarantee of 85% on loans of $150,000 or less and 75% on larger loans.
SBA 504 loans: for buildings and big equipment
The 504 program offers long-term, fixed-rate financing for major fixed assets. It is delivered by Certified Development Companies (CDCs), which the SBA describes as nonprofit community partners, working together with a senior lender such as a bank.
- Terms: 10, 20 or 25 years.
- Rate: pegged to a margin above the current 10-year U.S. Treasury rate.
- Fees: the SBA says these total about 3% of the debt and may be financed with the loan.
- Size: the SBA’s 504 page cites a $5 million maximum in its summary and $5.5 million in its details, so confirm the limit for your project with a CDC.
Eligible uses include buying, building or renovating buildings or land, and machinery and equipment with a remaining useful life of at least 10 years. Some qualifying debt can be refinanced. A 504 loan cannot be used for working capital, inventory, or speculation or investment in rental real estate.
SBA microloans: small amounts, more support
For newer or very small businesses, the microloan program is often the most realistic SBA option. The SBA says:
- Loans go up to $50,000, and the average microloan is about $13,000.
- The maximum repayment term is seven years.
- Rates vary by lender and are generally between 8% and 13%.
- Money can go toward working capital, inventory, supplies, furniture, fixtures, machinery and equipment.
- Microloans cannot be used to pay existing debts or buy real estate.
Microloans are made through intermediaries, which are nonprofit community lenders that set the terms and make the credit decisions.
Choosing the right program
- Buying a building or long-life equipment: start with a 504, then compare a 7(a).
- Working capital, inventory or buying a business: a 7(a), since a 504 cannot fund these.
- Under $50,000, newer business or thin credit file: a microloan.
- Seasonal cash flow swings: a line of credit, either a 7(a) working capital line or a bank line.
The SBA’s Lender Match tool can connect you with participating lenders.
Options outside the SBA
Bank and credit union loans can be cheaper and faster if your business has a few years of steady revenue, good credit and collateral. An existing relationship helps.
Online lenders decide quickly and accept thinner files, but the price usually rises with that convenience. Ask for the annual percentage rate (APR), total repayment amount and every fee in writing.
Merchant cash advances are sold as a purchase of future card sales rather than a loan, and they are often quoted with a “factor rate” instead of an APR. A short repayment period can make a modest-looking factor rate very expensive. Work out the total you will repay and the time you have to repay it before signing.
What lenders will ask for
Have these ready:
- A business plan or a clear explanation of how you will use the money
- Business and personal tax returns
- Recent financial statements and bank statements
- Debt schedule listing existing loans and leases
- Personal financial statements for the owners
Lenders weigh cash flow, credit history, collateral and the owners’ experience. Many ask owners to personally guarantee the loan, which means your own assets are on the line if the business cannot pay.
Red flags
- Upfront fees demanded before a loan is approved or funded
- A broker who promises SBA approval; only the lender (and the SBA) can approve
- Daily or weekly repayments you have not modeled against your actual cash flow
- Pressure to sign quickly, or a contract with blank spaces
Related reading
Compare business lenders on the small business loans page. For borrowing as an individual, see personal loans explained and debt consolidation loans. If you are setting up the business side of your finances, our guide to bank accounts, including business checking, and estate and business planning are good next steps.
Common questions
Does the SBA lend money directly?
For 7(a) and 504 loans, approved lenders and CDCs make the loans and the SBA backs them. Microloans flow through nonprofit intermediaries that make the credit decisions.
How much can I borrow with an SBA loan?
Up to $5 million through 7(a), up to $50,000 through a microloan, and multimillion-dollar amounts for qualifying fixed-asset projects through 504.