Understanding the Basics of Small Business Loans

Many small business owners find themselves in need of additional funding at some point. There are many ways to raise money, from bootstrapping methods to investors to traditional loans. While there are pros and cons for each option, many small business owners find that an SBA loan fits their needs.


The Small Business Administration does not directly grant loans. However, it focuses on helping entrepreneurs get loans from other lending institutions. To accomplish that, the SBA provides a guarantee for a percentage of the loan to lenders. This helps mitigate some of the risk associated with lending money to small businesses. Because of the guarantee, many entrepreneurs are able to qualify for SBA loans.

Types of Loans

The most common type of SBA loan is the 7(a) loan. It is popular because of the flexibility it grants to business owners. Entrepreneurs can use these loans to fund a variety of purposes, such as equipment or real estate purchases, refinancing debt or creating long-term or short-term working capital. They can also use the funds to renovate or construct a building.

If the money will be used specifically for equipment or real estate purchases, then entrepreneurs may want to consider a 504 loan. This type of loan should be considered if the entrepreneur is certain that money is only needed for specific projects that meet the guidelines. If extra money is required for things outside the terms of the loan, entrepreneurs will need to find a different means of raising funds.

Approval Process

The application process for SBA loans can be difficult for entrepreneurs to navigate, especially if they have never done it before. The process contains several stages, so business owners should be prepared to follow the required steps.

The first step is to provide the required documentation, fill out an application and submit it for consideration. The lender will then investigate and underwrite the loan. During that time, they may request more information and question any discrepancies. The lender will then deny or approve the loan. Once approved, the lender will close on the loan and send the funds.

Getting an SBA loan can be a great way for entrepreneurs to obtain funds to grow their businesses or maintain operations during slow periods. To increase their chances of approval, business owners should ensure that all the paperwork is in order and that the company’s credit score and business plan are both in good shape.