The SBA Loan Option for Small Business Start-ups

Mark PondWay back in February of this year, I wrote an article outlining the various options for funding a new business venture. If you want to explore, that article can be found here:

As I glanced over that article, I realized that I really glossed over the Small Business Administration (SBA) backed loan option, and that it might be helpful to take a deeper dive into that universe. 

If you’ve ever heard of an SBA loan, it can be a little confusing as to where the money actually comes from. As it turns out, the SBA doesn’t loan money. The SBA’s role is to work alongside the bank making the loan, and then guaranteeing up to 85% of the loan. That means that if a business fails and isn’t able to repay their loan, the SBA steps in and protects the lending institution from absorbing large losses.

You might wonder, “Why does the SBA need to use federal dollars to protect banks?” That’s a fair question to ask. While there’s probably a whole range of answers to that question, the one that I find most compelling is that SBA-backed loans allow lending institutions to take some risks on companies that wouldn’t otherwise qualify for a commercial loan. The end result is that we all have more robust and resilient local economies with more competition, more choices for consumers, and more employment.

With a default rate of just over 1% for SBA’s most popular loan program in Fiscal Year 2021 (, taxpayers should take some comfort in knowing that SBA lenders are still quite judicious and cautious when it comes to approving loans. 

So that’s the broad overview of the rationale for SBA loans. If you’re a business owner and are considering taking the SBA path for funding, what does that process look like? Well, it’s a long enough process that we don’t have the space to cover every detail in this space but the following site is the best jumping off point:

The takeaway here is that you’ll need to bare your soul in order to apply for an SBA loan. Be prepared to show multiple years of personal as well as business tax returns, financial statements, business licenses, articles of incorporation, lease agreements, and so on. And so on.

If those hurdles don’t sound insurmountable, it’s still worth working through some of the pros and cons of the SBA lending world.

First, the upsides:

Lower Interest Rates: SBA loans typically offer lower interest rates compared to conventional business loans, making them more affordable over the long term.

Longer Repayment Terms: SBA loans often come with longer repayment periods, which can lower monthly payments, leaving you with more cash on hand at the end of every month.

Accessible for Small Businesses: Designed specifically to support small businesses, SBA loans can be easier to qualify for than conventional loans, particularly for businesses that might not have strong credit histories.

Lower Down Payments: SBA loans usually require lower down payments compared to traditional loans, making them more accessible for small business owners.

Assistance and Support: Borrowers can benefit from SBA’s advisory services, including business counseling and training, which can help in managing and growing your business.

Flexible Use of Funds: Depending on the type of SBA loan, funds can be used for various purposes such as working capital, equipment purchases, real estate, and even refinancing existing debt.

If that all sounds too good to be true, here are some downsides to consider:

Lengthy Approval Process: The application and approval process for SBA loans can be lengthy and complex, requiring extensive documentation and time for review.

Strict Eligibility Requirements: SBA loans have strict eligibility criteria, requiring detailed financial statements, credit history, and business plans, which can be challenging for some to meet.

Collateral Requirements: Most SBA loans require collateral, which can be a barrier for businesses that don’t have sufficient assets to pledge.

Fees: SBA loans come with various fees, such as guaranty fees, packaging fees, and servicing fees, which can add to the overall cost of the loan.

Personal Guarantees: Business owners are often required to provide personal guarantees, putting their personal assets at risk in case the business defaults on the loan.

Limitations on Loan Amounts: SBA loans have maximum limits, which might not be sufficient for businesses requiring large amounts of capital.

Assuming that an SBA loan [ital]still[end ital] sounds plausible, a good first step would be to get connected with an SBA lender, as not all banks fall into that category. For that bit of sleuthing, the SBA Seattle District Office (which serves all of Eastern Washington and Northern Idaho) has a list of SBA lenders that can be found here: 

While sometimes difficult to navigate, SBA loans can be a valuable financial tool for small businesses. It takes some perseverance, work, and focus, but the rewards can be significant.

By Mark Pond, MILS

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