How Does the SBA Loan Work

how does the sba loan work

Many entrepreneurs refrain from applying for an SBA loan merely because they don’t have knowledge of what it entails. In order to encourage the growth of small business in the U.S., the federal government supports new startups by backing loans through Small Business Administration (SBA). This is an unsecured business loan, partially guaranteed by the SBA and minimizes risk for the lending institution and banks. The guarantee offered by SBA acts as the collateral. The SBA does not directly lend to businesses. It only supports small businesses by agreeing to pay back a certain percentage of the loan amount proffered by approved lenders and banks. So, exactly how does the SBA loan work?


Is an SBA Loan Appropriate for You?

The process of seeking details about an SBA approved loan begins at the local SBA district office. This will give you an idea about available loan programs and assess your eligibility.

Start the application process by searching for an SBA certified lender in your area.

Once you have found a bank or financial institution, seek suggestions on whether you should opt for SBA backing or do without it.


Determine the Best SBA loan for Your Needs

Of the different options available, choose the loan that best suits your business profile, financing needs, and growth plan.

In order to arrive at the right kind of loan, use the SBA’s online grants and loans search tool. It asks for some details related to your business and based on your answers, will suggest the best financial program that you are eligible for.

The chances of securing an SBA loan increase if you have at least two years of business history, a personal credit score of 640 plus, and annual revenue of over $ 100,000.


Meet With SBA Approved Lenders

While trying to figure out how does the SBA loan work, keep in mind that many parameters will be considered by the lenders before they proceed with an approval. Criteria that influence your eligibility are:

  • Credit factors such as making timely debt payments
  • Cash flow projections and debt to worth ratio
  • Collateral and working capital
  • Good standing with state treasury and IRS to show that all taxes are paid in a timely manner
  • Sound business plan with three years of financial projections including the plan of utilizing the loan, industry and target market knowledge


Keep Ready All Required Documentation

All the necessary information about background details and forms to be submitted can be accessed from the SBA loan application checklist available online.

That said, the guarantee procedure and eligibility criteria for SBA loans can change if the government modifies its fiscal policies and priorities according to prevalent economic conditions.


If you have figured out how does the SBA loan work, but find that you do not currently qualify for one, it does not mean that you will not be eligible for one in future. By enhancing your personal credit, building up a solid business history, and boosting business revenues, you can improve your chances next time around.


About Sreeram Sreenivasan

Sreeram Sreenivasan is the Founder of Ubiq, a business dashboard & reporting platform for small & medium businesses. Ubiq makes it easy to build business dashboards & reports for your business. Try it for free today!