What Is an SBA LOAN? A Loan Officer Explains in Simple Terms

Wednesday, February 12, 2025

Primary Blog/What Is an SBA LOAN? A Loan Officer Explains in Simple Terms

What Is an SBA LOAN? A Loan Officer Explains in Simple Terms

Hi! It's me, Dan.

If you're on the path to securing a loan for your business, chances are you've come across the term "SBA loan." But what exactly is it? To help clarify, I spoke with my friend Josh, a former business loan officer turned CFO of a construction company. Here's what he had to say about SBA loans and how they work.

What is an SBA Loan?

At its core, an SBA loan is a guarantee—not to you as the borrower, but to the bank. When you apply for an SBA loan, you’re not getting the loan directly from the Small Business Administration (SBA). Instead, you’re working with a lender—typically a bank—that collaborates with the SBA behind the scenes. If your loan qualifies for SBA backing, the SBA promises to cover a percentage of the loan if you stop making payments.

In other words, the SBA gives the bank a safety net. If your business goes under and you can't pay back the loan, the bank won’t be left holding the entire bag. The SBA steps in and pays a significant portion of the outstanding balance.

Why Do Banks Need That Guarantee?

Lending money to businesses, especially small or new ones, is risky. Banks have strict regulations, and they typically need at least two to three years of solid financial history before approving a loan. This historical data gives banks confidence that your business generates enough cash flow to handle loan repayments.

But what if you’re a startup without this kind of history? That’s where the SBA loan guarantee becomes crucial. It allows banks to lend to higher-risk businesses—like startups or companies launching new products or divisions—based on projections of future revenue rather than historical performance.

What Makes a Business Eligible for an SBA Loan?

So, what are the situations where the SBA steps in to help? Here are some examples of higher-risk scenarios that might require SBA backing:

Startups: If you’re starting a new business, you likely don’t have any historical financial data to show a bank. An SBA loan can help you secure the funds needed to get off the ground.

Expanding Business Divisions: Maybe your business is doing well, but you’re adding a new division or product line. The bank doesn’t have the financial history for that new venture, making an SBA loan a good option.

Riskier Business Models: Certain industries, like service-based businesses or small retailers, often qualify for SBA loans. However, businesses with unconventional models or newer technologies may have a harder time securing SBA funding.

Who Might Struggle to Get an SBA Loan?

While the SBA is incredibly helpful for many types of businesses, not every business model fits. Josh explained that tech startups or companies with unconventional models often struggle to get SBA loans. These businesses usually turn to angel investors or venture capital to raise funds instead.

How to Start the SBA Loan Process

If you're interested in applying for an SBA loan, the first step is to get yourself prepared. Here's what Josh recommends:

Understand the Purpose of Your Loan: Are you starting a new business? Expanding an existing one? You need to clearly understand—and be able to explain—why you need the loan.

Recognize Your Risk: If you’re unsure whether you qualify for a conventional loan, have an honest conversation with a lender. Your relationship with the lender is key. The SBA doesn’t deal directly with borrowers—your bank is your main point of contact.

Prepare to Communicate Clearly: When you meet with a lender, you need to communicate your business plan clearly and concisely. The lender will need to convey your vision to their credit team, so make sure they fully understand your goals and how you plan to achieve them.

Write a Simple Business Plan: It doesn’t need to be fancy—just three to five pages outlining your business model, how you’ll spend the money, and how you plan to grow. The SBA's goal is to support economic growth, so your plan should highlight how your business will contribute to the local economy by creating jobs or generating revenue.

Key Points for Your Business Plan

Your business plan is a crucial part of the loan application process. Here’s what it should cover:

How You’ll Spend the Loan: Detail how the loan will help you grow your business.

How You’ll Make Money: Show how your business will generate revenue and profit, and how you’ll use that to repay the loan.

Costs to Consider: Be realistic about costs. Don’t forget things like payroll taxes and local sponsorships. These small expenses add up and can impact your bottom line.

Scaling Plans: If you expect rapid growth, make sure to include how you’ll handle that scale. For example, if you expect to triple your revenue in three years, what’s the real cost of doing that?

The Importance of Preparation

Ultimately, the more thought and preparation you put into your loan application, the better your chances of success. By having a clear, detailed business plan and understanding how your loan fits into the bigger picture, you’ll help put the lender at ease—and improve your odds of securing that SBA loan.

So, if you’re ready to grow your business with the help of an SBA loan, start building those lender relationships and get your business plan in order. You’ve got this!

Dan Domino

Founder & Managing Director
Jaystreet Group, LLC

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