Small businesses often need additional funds to grow, stabilize cash flow, or invest in new opportunities. One common financing option is an SBA loan, designed to support small businesses by providing favorable terms. This guide will walk you through the basics of SBA loans, how they work, who they’re for, and the differences between the U.S. and Canadian loan landscapes.

Looking for funding options to grow your small business? Boundless can help you secure an SBA loan or guide you to the best solution based on your needs.

What is an SBA Loan?

An SBA (Small Business Administration) loan is a U.S. government-backed loan designed to help small businesses obtain funding that might be difficult to secure otherwise. While the SBA doesn’t lend directly, it partners with approved lenders (e.g., banks and credit unions) to provide loans with favorable terms. In the U.S., the SBA guarantees up to 85% of the loan amount, allowing businesses to access funding with lower rates and longer repayment terms.

Key Points of SBA Loans in the U.S.:

• Loans are partially guaranteed by the U.S. government, reducing lender risk.
• Longer repayment terms and lower interest rates than typical bank loans.
• Eligibility is based on business size, credit history, and intended use of funds.
• Access to various SBA programs like the 7(a) Loan Program for general expenses and the 504 Loan Program for fixed assets.

For Canadian small businesses, the Canada Small Business Financing Program (CSBFP) serves a similar role, though it focuses on funding tangible assets. To learn about various business financing options in Canada and the U.S., check out this Boundless blog post on different business financing options.

Types of SBA Loans and How They Work

The SBA offers several loan programs, each tailored to specific business needs. Below are some of the most popular options.

1. SBA 7(a) Loan

The SBA 7(a) loan program is the most versatile, covering various business purposes:

• Working capital: Manage cash flow and operational expenses.
• Equipment financing: Purchase necessary machinery or tools.
• Debt refinancing: Consolidate and reduce existing debt.
• Business acquisition: Buy another business to expand.

What are the eligibility requirements for a SBA 7(a) loan?

• Operate as a U.S.-based, for-profit business.
• Meet SBA’s small business size standards.
• Have creditworthiness and reasonable business finances.

• The business cannot fall under ineligible categories, such as:
  - Non-profit organizations
  - Life insurance companies
  - Businesses based outside the U.S.
  - Financial companies focused on lending

Canadian businesses can look into the Canada Small Business Financing Program guidelines for a similar solution. We will talk more about it further in the blog post. 

2. SBA 504 Loan

The SBA 504 loan provides long-term, fixed-rate financing to support business growth through real estate and large equipment purchases. This loan is ideal for businesses looking to expand with significant assets.

• Eligible uses include: Purchase of land, buildings, and equipment.
• Ineligible uses include: Inventory, working capital, refinancing debt, or real estate investment.

What are the eligibility requirements for a SBA 504 Loan?

• Must be a U.S.-based, for-profit company.
• Tangible net worth below $15 million.
• Average net income of less than $5 million after taxes for the past two years.

3. SBA Microloan Program

The SBA Microloan Program offers smaller loans (up to $50,000) to help small businesses and certain non-profit childcare centers with startup and expansion needs. Unlike other SBA loans, microloans are provided through non-profit lenders, which offer additional support and training.

• Eligible uses include: Working capital, inventory, fixtures, machinery, and equipment.
• Ineligible uses include: Debt refinancing and real estate purchases.

What are the eligibility requirements for a SBA Microloan Program?

• Collateral and personal guarantees from business owners are typically required.

Who is eligible for an SBA Loan?

Eligibility for an SBA loan varies based on several factors:

• Business size: Must meet SBA's small business standards.
• Location: SBA loans are primarily available for U.S.-based businesses, while Canada’s CSBFP serves Canadian businesses.
• Credit score and financial history: A solid credit history improves approval chances.
• Industry type: Certain industries may have restrictions.

In Canada, the CSBFP has similar requirements but focuses on tangible assets, like equipment or real estate, rather than operational costs.

Benefits and Drawbacks of SBA Loans

For a quick overview, here’s a table of the benefits and drawbacks of SBA loans:

Benefits of SBA Loans

• Lower interest rates due to government backing.
• Longer repayment terms of up to 25 years for some assets.
• Access to capital for businesses with limited options.

Drawbacks of SBA Loans

• Lengthy application process with documentation. Approval can take several weeks to months.
• Collateral requirements for larger loan amounts.
• High qualification standards may exclude certain businesses, especially newer ones with limited credit history.

Comparing SBA Loans to Canada’s Small Business Financing Program (CSBFP)

While the SBA offers loan guarantees in the U.S., Canada’s Small Business Financing Program (CSBFP) is similar for Canadian businesses:

• Loan guarantees: Both programs partially guarantee loans to reduce lender risk.
• Loan purpose: CSBFP loans focus on tangible assets, while SBA loans offer flexibility, including working capital.
• Application process: Both require detailed documentation, but eligibility standards differ between the U.S. and Canada.

How to Apply for an SBA Loan or CSBFP Loan

If you think an SBA or CSBFP loan is the right choice, follow these steps:

• Determine eligibility: Review your business size, industry, and credit score.
• Gather documentation: Be ready with tax returns, financial statements, and a business plan.
• Choose a lender:  You can find an SBA-approved lender in the U.S. or a CSBFP-participating lender in Canada—or let the Capital Concierge team at Boundless help you find the perfect lender for your business.
• Submit application: Submit your completed application to the lender, who will coordinate with the SBA or CSBFP.
• Review terms: Carefully review loan terms before accepting.

Unsure if an SBA loan is the right choice for your business? Get in touch with Boundless today and our Capital Concierge team will be happy to help. 

How Boundless Can Help Small Business Owners

Navigating loan options can be complex, but Boundless is here to help small businesses assess their alternative financing needs and match them with lenders best suited to their business goals. 

Get in touch with Boundless today and check out our other resources on everything related to business financing.