Underwriting & credit
SBA Loan: Definition & Example
Also called: SBA 7(a) loan, SBA 504 loan
What Is an SBA Loan?
An SBA loan is a small business loan made by a bank or other lender and partly guaranteed by the U.S. Small Business Administration, which lowers the lender’s risk.
What does SBA loan mean?
The SBA does not usually lend directly. It guarantees part of a loan made by an approved lender, so the lender can offer longer terms and lower down payments than a conventional business loan. The two main programs are the 7(a) loan, used for working capital, equipment, real estate, and buying a business, and the 504 loan, used for real estate and major equipment.
Standard 7(a) loans go up to $5 million. Working capital is usually repaid over up to 10 years and real estate over up to 25 years. For variable-rate 7(a) loans, the SBA caps the rate at a base rate, usually prime, plus a spread that shrinks as the loan gets bigger. A 504 project is typically funded about 50% by a bank, 40% by a Certified Development Company, and 10% by the borrower.
SBA underwriting centers on cash flow. Lenders want the business to cover its debt payments with room to spare, often a debt service coverage ratio of at least 1.15, and they review business and personal tax returns, bank statements, credit, and collateral. Owners of 20% or more generally sign a personal guarantee.
SBA loan example
A buyer acquiring a $1.1 million landscaping company puts $110,000 down and finances $990,000 with a 7(a) loan at 10.5% over 10 years. The payment is about $13,360 a month, so the lender checks that the business’s cash flow covers that payment at least 1.15 times, or about $15,360 a month.
SBA Loan Calculator
Open the full sba loan calculator7(a) loans go up to $5 million
Optional: SBA guarantee fee plus lender fees from your quote
Amortization schedule
| Year | Principal | Interest | Balance |
|---|---|---|---|
| 1 | $14,159.54 | $28,019.09 | $235,840.46 |
| 2 | $15,876.52 | $26,302.12 | $219,963.94 |
| 3 | $17,801.69 | $24,376.94 | $202,162.25 |
| 4 | $19,960.31 | $22,218.32 | $182,201.94 |
| 5 | $22,380.69 | $19,797.95 | $159,821.25 |
| 6 | $25,094.55 | $17,084.08 | $134,726.70 |
| 7 | $28,137.50 | $14,041.13 | $106,589.20 |
| 8 | $31,549.44 | $10,629.20 | $75,039.76 |
| 9 | $35,375.10 | $6,803.53 | $39,664.66 |
| 10 | $39,664.66 | $2,513.97 | $0.00 |
Related terms
- Cash-Flow UnderwritingCash-flow underwriting is evaluating an applicant using income, spending, and balance patterns from their bank account data, often alongside or instead of a traditional credit report.
- Due DiligenceDue diligence is the investigation a buyer, investor, lender, or partner performs before a transaction to verify facts, uncover risks, and confirm what they are getting.
- Proof of FundsProof of funds is documentation showing that a person or business has enough money available for a purchase or investment, usually a recent bank or brokerage statement or a bank letter.
- CreditworthinessCreditworthiness is a lender’s judgment of how likely a person or business is to repay borrowed money on time, based on credit history, income, debts, and assets.
- Break-Even PointThe break-even point is the level of sales at which a business’s revenue exactly covers its costs, so it makes neither a profit nor a loss.
SBA loan FAQ
- Does the SBA lend money directly?
- Mostly no. Banks, credit unions, and other approved lenders make the loan, and the SBA guarantees part of it. The SBA lends directly mainly through disaster loans.
- What is the difference between an SBA 7(a) and 504 loan?
- A 7(a) loan is the general-purpose program and can fund working capital, equipment, real estate, or a business purchase. A 504 loan is for real estate and major equipment and splits the financing between a bank, a Certified Development Company, and the borrower.
- How much down payment does an SBA loan need?
- Often about 10% for business acquisitions, start-ups, and 504 projects, though lenders set their own requirements and some loans need more.
