Types of SBA loans: Which one is right for your business?

The Small Business Administration (SBA) helps connect American business owners with resources to help them start, grow and run successful enterprises. SBA loans are some of the agency’s most popular programs. SBA loans allow business owners to preserve cash for operating purposes. These loans preserve your cash by generally requiring less money down on your project, and they offer longer terms and amortizations than conventional lending options, allowing you to keep more cash on hand and make lower monthly payments.

Even though these are government loan programs, you’ll apply for an SBA loan and work with your local Chase branch as a preferred lender. But first, you’ll need to figure out which types of SBA loans will work best for you and your business.

The most common types of SBA loans

Designed to help businesses meet a variety of challenges. the main SBA loan types consist of:

• 7(a) loans: Loans for a wide range of activities, such as owner-occupied real estate, equipment purchases, and debt refinancing, changes in ownership such as acquiring another business or partnership buyouts
• 504 loans: Long-term financing for owner-occupied commercial real estate and long-term machinery and equipment projects
• SBA microloans: Loans capped at $50,000 that are focused on startup costs and expansion for smaller businesses and certain not-for-profit childcare centers; offered by community development lenders and listed on local SBA District Office websites
• SBA disaster loans: Special loans for businesses and nonprofit organizations that need to repair or recover from a federally declared disaster such as a hurricane or tornado; issued directly by the SBA, not through lenders

Benefits of SBA loans

• Lower down payments: SBA loans often require smaller down payments compared to traditional financing options, making it easier for small businesses to get started or expand without needing a large cash reserve.
• Longer repayment terms: SBA loans come with extended repayment terms, which can significantly reduce the monthly payment amount and ease the cash flow pressure on small businesses.
• Competitive interest rates: The interest rates for SBA loans are typically lower than those of many other types of business loans, making them a cost-effective borrowing option.
• Variety of loan types: What are the different types of SBA loans? The SBA offers loan programs including 7(a) loans, 504 loans, and microloans, each designed to support different aspects of business growth and development.
• Counseling and education: Borrowers of SBA loans often have access to a range of free or low-cost business counseling and training services, providing valuable support for making informed business decisions and fostering growth.
• Accessible to new businesses: SBA loans are accessible to startups and newer businesses that might not qualify for traditional bank loans due to lack of credit history or collateral.
• Loan guarantee: The SBA guarantees a portion of the loan, reducing the risk to lenders and making it more likely for small businesses to be approved for funding.

What is an SBA 7(a) loan?

The 7(a) loan is the SBA’s standard loan program. Flexible enough to cover a variety of business purposes, it can be used for things like business acquisitions, real estate or equipment purchases, tenant improvements and working capital.

7(a) loans can go up to $5 million, with the exact amount dependent on your credit history and other factors.

SBA 7(a) loan requirements

• Your business operates in the United States
• You’ll use the funds for a sound business purpose
• You’re up to date on any existing debt payments you owe to the federal government

You’re eligible to apply for an SBA 7(a) loan if you operate a for-profit business in the U.S., except for a few industries that are ineligible — banking, investing, insurance and gambling. The SBA website lists full eligibility requirements. 

What is a 504 loan?

The 504 loan program was designed to encourage economic development by providing long-term, fixed-rate financing for major business expenses.

With a 504 loan, the SBA can finance up to $5.5 million per business for commercial real estate and equipment projects. For qualifying “green” energy projects, the program offers financing up to $5.5 million per project, with the SBA portion capped at three projects for a total of up to $16.5 million.

When to apply for an SBA 504 loan

• Consider applying for a 504 loan if you need financing for major fixed assets like commercial real estate, construction projects or long-term equipment. 504 loans are administered through Certified Development Companies (CDCs), which partner with the SBA. You can find your local CDC using the SBA’s online resource.
• Businesses must use 504 loan funds for fixed assets like land, facilities, machinery or equipment. That includes construction, renovations, upgrades, and purchasing long-term equipment.

What is an SBA microloan?

True to their name, microloans are the smallest program the SBA offers. Microloans help smaller businesses pay for startup costs.

You can use a microloan for working capital or to purchase inventory, supplies, furniture, machinery or equipment. However, you’re not allowed to pay down debts or put the money toward purchasing real estate. This program is best for smaller businesses operating in the community, like childcare centers, but the eligibility rules are entirely set by the local SBA lending partners.

What is an SBA disaster loan?

SBA small business disaster loans offer low-interest loans to businesses impacted by federally declared disasters. You can find a list of eligible disasters online. These loans offer low-interest rates and up to $2 million to repair or replace real estate, machinery, equipment, fixtures, inventory or leasehold improvements.

Beyond SBA loans

Outside of SBA loans, a range of other options to finance your business can help you start, grow or run your business:

• Business lines of credit provide a business with a set amount of money from which it can borrow over a set period. As with a credit card, business owners can pull funds as needed, paying interest on the money used — often at lower interest rates and with higher spending limits than a credit card. A business line of credit is a great option if your business needs periodic access to flexible cash.
• Business credit cards can be a good way to make business purchases without disrupting cash flow. Obtaining a credit card is often an easier process than applying for other types of business loans, though they typically have higher interest rates and aren’t the best option for carrying high balances.
• Equipment financing loans are specifically earmarked to pay for new equipment or machinery. Applying is usually a simple process because you often need to provide only basic business information and documentation about the price of the equipment.
• Working capital loans are designed to help business with daily operations. This option helps businesses cover financial shortfalls but may require business owners to provide collateral as part of the agreement.
• Accounts receivable financing is helpful in sourcing cash quickly. Business owners provide lenders with a set of invoices and a request for funding in exchange for a percentage of the invoice total.
• Merchant cash advancements give your business a sum of cash upfront in exchange for a portion of your company’s future sales. While this is a fast way for a business to access capital, it is typically regarded as the last option when seeking a business loan.

Get started with an SBA loan

Once you’ve sorted through the requirements of different SBA loans, you might be ready to apply. Speak with a Chase business banker to learn which financing options, including SBA loans, can help your business.