How Do SBA Loans Work?

Small Business Administration (SBA) loans are a valuable financing option for small businesses that may not qualify for traditional commercial loans. Backed by the federal government and offered through approved lenders, SBA loans are designed to expand access to capital while maintaining responsible lending standards.

Understanding how SBA loans work—including requirements, terms, and the application process—can help you decide whether this type of financing is the right match for your business’s growth goals.

Key Components of SBA Loans

SBA loans differ from conventional business loans in several important ways. These features work together to reduce lender risk while offering borrowers competitive rates, longer repayment terms, and greater flexibility.

How the SBA Loan Guarantee Works

The SBA does not lend money directly to businesses. Instead, it guarantees a portion of each loan issued by SBA-approved lenders—typically 75% to 85% of the loan amount. This government guarantee helps protect lenders in the event of default, encouraging them to approve loans for qualified small businesses that may not meet traditional lending criteria.

For borrowers, this results in several benefits:

• Competitive interest rates

• Longer repayment terms

• More flexible qualification requirements

SBA Loan Approvals Are Lender-Driven

While the SBA provides a guarantee on the loan, the lender manages the entire loan process—from application and underwriting to approval and servicing.

SBA-approved banks like Hancock Whitney review your credit history, business financials, and repayment ability to determine eligibility. Once approved, your lender continues to service the loan, handling payments and account support. You work directly with your bank—not a government agency—throughout the life of the loan.

Personal Guarantees for SBA Loans

SBA loans require a personal guarantee from all business owners with 20% or more equity in the business. This means those owners are personally responsible for repayment if the business is unable to meet its obligations toward paying back the loan. It’s also important to note that in the event of a default on the loan, the personal guarantee applies before the government guarantee would trigger.

While this requirement is a significant responsibility for the business owners, it demonstrates commitment and aligns the interests of borrowers and lenders—an important component of SBA lending decisions.

SBA Loan Requirements and Eligibility

SBA loans follow specific eligibility guidelines designed to protect both lenders and taxpayers. To qualify, a business must:

• Operate for profit within the United States

• Meet SBA size standards for its industry

• Demonstrate the ability to repay the loan

• Show that other financing options have been explored

Certain industries and uses of funds are restricted, and business owners are expected to invest their own time and resources before seeking SBA financing. An experienced lender can help determine eligibility early in the process.

SBA Loan Terms and Repayment Options

Despite strict qualification requirements, SBA loans offer remarkably flexible repayment terms compared to conventional financing. The exact repayment period offered will depend on the loan type and its purpose:

• Real Estate Purchases: Up to 25 years

• Equipment Financing: Up to 10 years

• Working Capital: From 7 to 10 years

These extended loan terms reduce monthly payments and support healthy cash flow for growing businesses. Interest rates on SBA loans are generally lower than conventional business loans and are often tied to the prime rate, with allowable margins set by the SBA.

What Can SBA Loans Be Used For?

SBA loans can support a wide range of business needs, including:

• Purchasing or renovating commercial real estate

• Buying equipment or machinery

• Funding working capital

• Expanding operations or opening new locations

• Refinancing eligible existing business debt

However, SBA loans cannot be used for speculative activities, owner reimbursement, delinquent taxes, or certain restricted industries. Your lender can explain eligible and ineligible uses in detail.

How to Apply for an SBA Loan

Applying for an SBA loan requires preparation, documentation, and a clear understanding of your business goals. Knowing what to expect can streamline the process.

1. Identify Why You Need an SBA Loan—Clarify Your Needs

Before beginning your application, clearly define why you need the loan and how much capital is required. A strong business plan should outline:

• How the funds will be used

• How the investment supports growth

• How the loan will be repaid

It’s important to both calculate your capital needs carefully and avoid borrowing more money than necessary. Lenders look for borrowers who have a realistic, well-considered plan and understand how financing fits into their long-term business strategy.

2. Choose an SBA-Approved Lender

Not all financial institutions offer SBA loans, so working with an SBA-approved lender is an important first step. While you can apply through any approved lender, choosing an SBA Preferred Lender can offer meaningful advantages.

SBA Preferred Lenders have demonstrated experience with SBA lending and are authorized to make loan decisions without waiting for separate SBA approval. This delegated authority often streamlines the process and can significantly reduce turnaround times.

In addition, Preferred Lenders bring deep knowledge of SBA requirements and can guide you through documentation and underwriting more efficiently. Their familiarity with SBA guidelines helps ensure applications are clearly structured and move through the process smoothly.

3. Prepare Required Documentation

SBA loan applications require detailed documentation of both your business and personal finances. Having these materials ready early can keep the application process moving.

Most SBA loan applications require:

• Business and personal tax returns (typically for the past three years)

• Balance sheets and income statements

• Personal financial statements for all principal owners

• A current business debt schedule

• Business licenses and legal documents, such as articles of incorporation or organization and commercial leases

Depending on your business and the loan type, additional documentation—such as a business plan with financial projections or collateral information—may be required. An experienced lender can guide you through these requirements and provide a complete checklist to ensure nothing is overlooked.

Types of SBA Loans Available

The SBA offers several loan programs designed for different business needs:

• SBA 7(a) Loans: The most common and versatile SBA loan program, offering up to $5 million for working capital, equipment purchases, real estate, and refinancing. These loans feature competitive interest rates and flexible repayment terms up to 25 years.

• SBA 504 Loans: Designed specifically for financing fixed assets such as real estate or heavy equipment. These loans offer fixed interest rates and financing up to $5.5 million, using a structured partnership between a lender, a certified development company, and the borrower to support lower down payment requirements.

• SBA Express Loans: Offering faster processing for loans up to $500,000, with response times as short as 36 hours. While the SBA guarantee is lower at 50%, the speed and streamlined application make this attractive for time-sensitive needs.

• SBA Economic Injury Disaster Loans (EIDL): Available to businesses affected by declared disasters, these loans provide up to $2 million to help businesses recover from economic injury caused by disasters. Terms are favorable, with long repayment periods and low interest rates to support recovery efforts.

• SBA Microloans: Smaller loans of up to $50,000 designed for startups and small businesses with modest financing needs. These loans are administered through nonprofit, community-based organizations and often include business training and support in addition to funding.

Work with Hancock Whitney, an SBA Preferred Lender

Navigating the SBA loan process becomes significantly easier with an experienced partner. As an SBA Preferred Lender, Hancock Whitney has the expertise and authority to make timely credit decisions while ensuring your loan is structured to support your long-term business goals.

Whether you’re purchasing equipment, expanding operations, or managing working capital, our SBA lending team is ready to guide you through every step of the process.

Contact Hancock Whitney today to learn more about your loan options and discover how our preferred lender status can help move your business forward.