SBA loan is a small business loan that is partially guaranteed by the government (the Small Business Administration), which eliminates some of the risk for the financial institution who is issuing the loan.

The SBA works with a network of approved financial institutions (typically, traditional banks) that lend money to small businesses more frequently and with better terms because the SBA partially guarantees the loans that these lenders extend to small businesses.

This means that they will back up a part of the loan that a small business receives, so if you’re unable to pay back your SBA loan, the lender know that the SBA will cover the portion that they guaranteed.

Without this partial guarantee—which can cover up to 85% of a loan’s amount, traditional banks will often consider lending to small businesses “too risky.” As such, small business who don’t secure loans guaranteed by the SBA often qualify for less-than-ideal terms, if they’re even able to qualify for a bank loan at all.

However, because SBA loans involve a government entity, their application process is notoriously thorough and often restrictive. If you’re hoping to apply for an SBA loan, you’ll need to prepare a lot of documentation and even more patience.

Pros

• Low interest rates
• Favorable repayment terms
• Low down payments
• Available for many uses
• Little or no collateral needed

Cons

• Smaller loan amounts on some loans
• Longer approval process than some lenders
• Good credit often required
• Variety of programs may be confusing
• Personal guarantee often required