Types of SBA Loans: A Complete Guide to SBA 7(a), 504, and Microloans

Understanding SBA Loans: Your Complete Guide

Small Business Administration (SBA loans) remain the gold standard for financing, but they are often misunderstood. These government-backed options provide better terms than almost any private lender can match.

We specialize in helping Dallas business owners secure this capital.

Capital markets have tightened recently, yet SBA programs continue to offer lower down payments and longer repayment horizons.

In this guide, we break down the major loan types and the specific requirements you need to know.

What Are SBA Loans?

SBA loans are not direct loans from the federal government. The agency partners with approved lenders—such as banks, credit unions, and non-bank lenders—to guarantee a significant portion of the debt.

This guarantee functions as an insurance policy for the bank.

If a business defaults, the SBA reimburses the lender for the guaranteed percentage. This protection allows banks to approve deals they would otherwise reject due to collateral shortfalls or industry risk.

The “Credit Elsewhere” Requirement

You must meet the “Credit Elsewhere” test to qualify. This federal mandate requires lenders to verify that you cannot obtain similar financing on reasonable terms from non-government sources without the SBA guarantee.

SBA Loan Advantages

• Extended Amortization: Real estate loans can go up to 25 years.
• Capital Preservation: Down payments are often as low as 10%, compared to 20-30% for conventional loans.
• Capped Interest Rates: The SBA limits the maximum spread lenders can charge over the Prime rate.
• Broad Eligibility: Most for-profit businesses in the U.S. are eligible.

Understanding the Guarantee Fee

We always remind clients that this government backing comes with a cost. The SBA charges a guarantee fee, which can range from 0% for small loans up to roughly 3.75% for loans over $1 million. Most lenders allow you to roll this fee into the total loan amount so you do not have to pay it out of pocket.

SBA 7(a) Loans: The Most Popular Option

The SBA 7(a) program is the primary vehicle for providing financial assistance to small businesses. It is incredibly versatile and covers the widest range of business needs.

SBA 7(a) Overview

Eligible Uses for 7(a) Loans

• Operational Expenses: Covers payroll, inventory, and accounts payable.
• Expansion: Funding for new locations or renovations.
• Business Acquisitions: Buying out a partner or acquiring a competitor.
• Debt Refinancing: Consolidating high-interest merchant cash advances or other qualifying debt.
• Equipment: Purchasing machinery, vehicles, or furniture.

Key Insider Tip: The FICO SBSS Score

Many applicants focus solely on their personal credit score.

We have seen excellent applications stall because the business owner ignored their FICO SBSS score.

This “Liquid Credit” score ranges from 0 to 300 and is used to pre-screen 7(a) applications. Most lenders look for a minimum score of 155 to 160. Checking this score before you apply can save you weeks of frustration.

SBA 7(a) Variations

Standard 7(a): This is the full documentation path for loans up to $5 million. Turnaround times typically range from 60 to 90 days.

7(a) Small Loan: These loans cap at $500,000. Lenders use a credit-score-based model rather than cash-flow analysis to speed up approval.

SBA Express: The SBA responds to these applications within 36 hours. The tradeoff is a lower guarantee (50%) and a maximum loan amount of $500,000.

Export Express: Streamlined financing up to $500,000 for businesses expanding into international markets.

CAPLines: These are lines of credit used to finance seasonal cycles or specific contracts.

SBA 504 Loans: For Major Fixed Assets

The SBA 504 program is strictly for economic development through asset acquisition. It is the best tool available for buying owner-occupied commercial real estate or massive heavy equipment.

SBA 504 Overview

How 504 Loans Are Structured

We explain this structure as a three-layer cake.

1. The Senior Lien (50%): A bank or credit union lends half the project cost in first lien position.
2. The Junior Lien (40%): A Certified Development Company (CDC) lends 40% backed by an SBA debenture.
3. Equity Injection (10%): You provide the final 10% as a down payment.

The 40% CDC portion is sold as a bond to investors. This mechanism allows you to lock in a below-market fixed interest rate for 20 or 25 years on that portion of the debt.

Strategic Use: The Green Energy Refinance

You can bypass the standard $5 million limit if you go green. Projects that reduce energy consumption by 10% or generate renewable energy can qualify for up to $5.5 million per project. You can technically have up to three of these loans outstanding at once, totaling $16.5 million.

Eligible Uses for 504 Loans

• Buying land or existing buildings.
• Ground-up construction.
• Long-life machinery (10+ year useful life).
• Streetscaping and parking lot improvements.

What 504 Loans Cannot Be Used For

• Working capital.
• Inventory.
• Refinancing debt (unless it is an eligible expansion refinance).

SBA Microloans: For Smaller Needs

The Microloan program targets the gap where traditional banks often cannot lend. These loans are ideal for startups or businesses with lower capital requirements.

SBA Microloan Overview

How Microloans Work

The SBA provides funds to designated non-profit community lenders. These intermediaries then lend to local businesses.

We advise clients that these lenders often require you to participate in training.

This “technical assistance” might include classes on marketing, bookkeeping, or business planning. It is a mandatory part of the process designed to ensure your success.

Eligible Uses for Microloans

• Buying inventory or supplies.
• Working capital.
• Furniture or fixtures.
• Machinery under $50,000.

Who Benefits Most?

• Startups with limited credit history.
• Veterans and women-owned businesses.
• Owners who need mentorship alongside capital.

Other SBA Loan Programs

SBA Disaster Loans

These are direct loans from the government triggered by declared emergencies.

Physical Disaster Loans: Cover uninsured physical damage to property.

EIDL (Economic Injury): Provides working capital to survive a crisis.

SBA Community Advantage

This pilot program targets underserved markets. It allows mission-based lenders to offer 7(a) loans up to $350,000 with slightly more flexible credit requirements.

Comparing SBA Loan Programs

Choosing the right program depends on how you plan to use the funds.

The SBA Loan Application Process

Applying for an SBA loan is a rigorous process that requires preparation.

Step 1: Determine Eligibility

You must meet specific size standards based on your NAICS code.

We check these codes early to confirm the business falls within the tangible net worth and income limits.

Step 2: Gather Documentation

The paperwork volume is significant. You will need:

• IRS Form 4506-C: This authorizes the lender to pull your tax transcripts directly from the IRS.
• SBA Form 1919: The borrower information form asking about citizenship and criminal history.
• 3 Years of Tax Returns: Both personal and business.
• Personal Financial Statement (Form 413): Lists all your personal assets and liabilities.

Step 3: Find an SBA-Approved Lender

Not all banks have the same authority.

We recommend seeking out a “Preferred Lender” (PLP).

PLP lenders have delegated authority from the SBA to make final credit decisions in-house. This can shave weeks off the approval timeline compared to standard processing.

Step 4: Submit Application & Underwriting

Your lender will analyze your “Debt Service Coverage Ratio” (DSCR). They want to see that your business generates roughly $1.15 to $1.25 in cash flow for every $1.00 of debt payment.

Step 5: Closing and Funding

Once approved, you will sign the final note. Be prepared for closing costs, which include the guarantee fee, third-party appraisals, and legal fees.

SBA Loan Interest Rates

SBA rates are composed of a base rate (usually Prime) plus a lender spread. The SBA caps how much the lender can add to the base rate.

7(a) Maximum Spreads (Variable)

• Loans < $50,000: Prime + 6.5%
• Loans $50,000 - $350,000: Prime + 4.5% (approximate)
• Loans > $350,000: Prime + 2.75% to 3.00%

504 Loan Rates

The 504 rate is unique because it is pegged to U.S. Treasury bonds.

We track these rates monthly as they fluctuate with the bond market.

The resulting rate is fixed for the life of the loan, providing long-term stability that variable 7(a) loans cannot offer.

Tips for SBA Loan Success

1. Monitor Your Liquidity

Lenders want to see post-closing liquidity. You should have enough cash remaining in the bank after the down payment to cover 3-6 months of operating expenses.

2. Clean Up Your Books

Messy financials are the number one reason for delays. Ensure your Profit & Loss statements match your tax returns exactly.

3. Disclose Everything Early

Background checks are thorough.

We tell clients to disclose any past legal issues or credit blemishes on Form 1919 immediately.

The SBA may waive certain minor issues if disclosed, but hiding them is an automatic disqualification.

4. Understand Personal Guarantees

Anyone owning 20% or more of the business must sign a full personal guarantee. This puts your personal assets at risk if the business fails.

5. Leverage Resource Partners

You do not have to do this alone. Organizations like SCORE and Small Business Development Centers (SBDCs) offer free consulting to help you prepare your loan package.

SBA Loans for Dallas Businesses

The Dallas-Fort Worth metroplex is a hub for entrepreneurial growth, supported by an active SBA district office.

At Equipment Financing Dallas Pros, we help local businesses identify the right funding strategy.

Whether you need a 504 loan for a new warehouse in Plano or a 7(a) loan for a restaurant in Deep Ellum, the right guidance matters.

Considering an SBA loan? Contact us to review your eligibility and find the program that aligns with your growth goals.