Small businesses account for 99.9 percent of all companies in the United States, according to the Small Business Administration (SBA), and represent more than 46.4 percent of private sector employees in the U.S. In 2023, small businesses created 17.3 million net new jobs, accounting for 62.7% of net jobs created since 1995.

But for small businesses to succeed, entrepreneurs need capital, which can often take the form of a loan. Without outside funding, it can be difficult for founders to plant their feet and become successful.

There are a number of options for business owners to choose from when it comes to financing or expanding their business. Some reach out to venture capitalists, others apply for micro loans, and some tap into personal savings to fund the cash necessary to start their own company.

SBA small business loans are an option, too, and one that can be beneficial to borrowers and banks alike.

Here is a quick lesson on what SBA loans are and how you can apply for one.

What Are SBA Loans?

The Small Business Administration (SBA) is a federal agency that helps propel entrepreneurs, small businesses and the U.S. economy. Through SBA loans, the agency guarantees lending institutions, such as banks, that it will pay back a certain percentage of the loan if it defaults.

It should be noted that the SBA is not extending the loan to the borrower. It’s the bank, rather, that acts as the lender, servicing the loan according to the SBA’s requirements. Because of this guarantee from the SBA, banks are more willing to provide loans to small businesses that may not otherwise fit into their lending guidelines.

“Using the SBA loan program, the bank can extend credit to borrowers that otherwise wouldn’t meet the bank’s credit policy. Examples could be loans with collateral shortfalls – loans that need longer repayment terms – or loans to a startup business that relies on projections rather than historical financials,” says Bee Moua, Vice President, Director of SBA Loans at Sunrise Banks. “The biggest advantage of using the SBA loan program is access to capital that may otherwise not be available conventionally.”

Different Types of SBA Loans

The SBA offers a handful of different loan options.

One is the SBA 7(a) loan, which helps small businesses with startup costs and other financial needs. The SBA offers these loans for up to $5 million and provides a maximum guarantee of up to 85 percent.

Another option is the 7(a) Express Loan program, which can provide up to $500,000to borrowers. This program is primarily used for lines of credit for working capital.

SBA loan products also include export, international trade, and disaster recovery loans.

How Do I Get an SBA Small Business Loan?

Visit the SBA’s website to see what is required for the specific loan you would like to apply for. The SBA spells out some general eligibility requirements online, such as the requirements that the business must “operate for profit” and be in the in the U.S. Lending banks will be more willing to approve funds for a business if it is equitable and has a proven track record of success.

“Oftentimes, a great SBA borrower would be someone who is looking for funding to grow or expand,” says Bee. “They could be purchasing an existing business, purchasing equipment, or maybe starting up a business.”

Bee also notes that borrowers should work with a bank that has SBA small business loan experience in their area.

“Look for a good lender to work with,” says Bee. “Someone who understands your business, the loan products, and can get the deal done.”

The Minnesota District Office for SBA is a great resource if you’re looking for a lender.

Beneficial to Both Parties

SBA lending is an effective and viable option for many new or existing businesses. It can help companies expand their purchasing power or provide the initial funding necessary to start a new business.

The SBA’s guarantee to lenders also makes loan approval more likely. And, as Moua points out, it’s not just the borrowers who benefit from the SBA’s lending process.

“SBA loans are often made to new customers of the bank. This lets us broaden our customer base and build loyalty, which in turn allows us to grow our portfolio,” he says.

Visit our Sunrise Banks website to learn more about our SBA lending options.

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This article was originally published in May 2022.