Is The SBA Loan A Good Deal?

If you run your own small business, or are thinking about doing so, you’ll probably have heard of SBA loans. These are loans obtained through the U.S. SBA, which stands for Small Business Administration. It’s a Federal government agency, set up in 1953 to support entrepreneurs.

They offer a number of different types of loans for small business, but there are two in particular that are much more widely used than others, namely the SBA 7(a) loans, the SBA 504 loans and the SBA disaster loans. And these are the ones that this article is going to concentrate on today. 

Is The SBA Loan A Good Deal

Introduction to SBA Loans

We’ll start off with the good news. SBA loans are incredibly popular. And with good reason. They are very readily available by lenders, there are some excellent loan options to choose from, they offer some great interest rates, and on terms that can be altered to suit the needs of your business. Sounds like a dream, right?

Why might some people be wary of applying for an SBA loan?

But it’s not all sunshine and rainbows. We’re going to be straight up here and admit that some people are quite wary of applying for an SBA loan.

But the good news is that this reluctance is usually less about the repayment terms and is more commonly because of the process of applying…

First off, you will need a good credit rating. And that goes for both your personal credit rating and your business credit rating. So if you don’t have a particularly good credit rating, of say 680 or lower, then you would have to work on this before you will be considered.

Then there’s the lengthy approval process, which could mean quite the wait before your business could get any of the money. So it’s no good in a business emergency.

Then there’s the size of the loan. The SBA rarely offers loans above $350,000, so if you need more than that, then SBA loans may not be your best option.

And if you do apply for a larger loan, of say $25,000 or more, then you will have to put up some kind of collateral. And in the worst case scenario, if you put your family home as collateral, this can go up to 80% of your home’s value. Doesn’t sound so appetizing now hey?

But if none of that puts you off, please read on...

The SBA 7(a) Loan - What it’s for and how it’s repaid

An SBA 7(a) Loan is THE most popular SBA Loan. It can be used for any (or all) of the following:

  • Short- and long-term working capital 
  • Purchase furniture, fixtures, and supplies 
  • Refinance current business debt 

And this is certainly good news. It means you can use it for all sorts of things - to construct a building, to purchase new equipment or materials, renovate your offices, rent office space, and even cover payroll if you’re struggling for cash.

Or maybe you could apply for a large enough loan to cover several of these things. Now, sometimes loans and funding are for fixed amounts, but, you’ll be pleased to hear that you can borrow variable amounts, so you can request as much as you deem the business needs. 

This doesn’t necessarily mean that you will get the full amount you request, but the SBA has been known to offer loans exceeding $350,000 to small businesses.

Then there’s the excellent repayment terms to think about. It’s the SBA’s priority to support businesses, and if that means being flexible with regards to repayments, then so be it.

The SBA recognizes that repayment terms from other lenders can be tricky to meet, so it puts a little flexibility in place to help businesses.

Moreover the interest rates are very reasonable. Some companies like to charge the earth for their loans, trying to get as much money out of you as possible. 

But the SBA isn’t like that. As we’ve said their duty is to keep businesses in business, and that means setting an interest rate that can be easily repaid.

The loan repayment terms can vary from loan to loan and from lender to lender. You can opt for a fixed rate loan where the interest rate remains constant.

Or you can opt for a variable rate, which means that the lender can charge a different monthly interest rate as when the base interest rate changes.

SBA can guarantee up to 85% of a loan up to $150,000, and up to 75% of a loan greater than $150,000. There is a fee for this guarantee, and it can vary from 0.25% to 3.75% depending on the size of the loan.

The SBA 504 Loan - What it’s for and how it’s repaid

The purpose of the SBA 504 loan is somewhat more specific than it’s 7(a) counterpart. It is designed to be used for the purchase of fixed assets, and as such cannot be used to boost your working capital, or refinancing debt.

But it can be used for a number of other things, such as the purchase of land or buildings, the construction of new buildings or facilities, and the purchase or construction of machinery or equipment.

It can also be used for the modernization of your existing facilities, including any parking lots, utilities and such. When it comes to repayment of these loans, there are three maturity terms available, these are 10-year, 20-year, and 25-year.

The interest rate is pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues, but has a low total of just 3% of the debt, and you can finance this with the loan itself. 

SBA Disaster Loan - What it’s for and how it’s repaid

SBA disaster loans became particularly popular when business began to suffer thanks to the Coronavirus Pandemic. It is offered at a point of extreme need with the aim of helping small businesses stay open and retain their assets.

If you meet the eligibility criteria for this loan, the interest rate will never exceed 4%.

And exactly how does this compare to an average business loan rate?

The Annual Interest Rate (AIR) of an SBA loan ranges from 7.75% to 10.25%, which we would argue is very reasonable. It’s far more affordable than a merchant cash advance, which starts at 20% and can go up to as much as a whopping 250%.

It’s also more affordable than invoice financing, which starts at 13% and goes up to 60%. It’s also a better deal than most online loans. They start at 7% and go up to as much as 100%!

As for how they compare to a traditional bank loan, that’s a little harder to say. The average AIR for a traditional bank loan starts at 2%, which is significantly lower than the average AIR for an SBA loan. But it goes up to as much as 13%, which is notably higher than an SBA’s 10.25%.

So, if you are thinking of going down the route of a traditional bank loan, please be sure to do your homework first and gather a few quotes before making your final decision.


SBA loans are certainly a good deal, and that’s regardless of which type you go for. They offer excellent terms and conditions, and provide a better deal than you would get from many other types of lenders.

And while we’re not saying that you can’t get a better deal elsewhere, maybe you can, but you’re unlikely to find a more versatile loan than the SBA 7(a) loan, or one with a more reasonable annual interest rate.

The only real drawback to going for an SBA loan, as opposed to a more traditional bank loan, is the procedure that you have to follow in order to apply for it.

You could be waiting a considerable length of time for an answer, whereas if you have a really good credit rating and you apply for a business loan you could get an answer much sooner.

But in our book, you shouldn’t let that put you off. If you did need an injection of money quickly they won’t be your best option, but for anything else whether it’s to buy land, renovate your facilities or buy equipment, you could certainly do a lot worse than to apply for an SBA loan.