SBA Loans Explained: 7(a) vs 504 vs Microloans and Which Fits Your Business

SBA loans are business loans made by banks and other lenders but partly guaranteed by the US Small Business Administration, which makes lenders more willing to say yes, often on longer terms than a normal bank loan. The three main programmes are the 7(a) loan, the all-purpose workhorse of up to $5 million; the 504 loan, for buying property and major equipment; and the microloan, for smaller amounts of up to $50,000. This guide explains how each works, what it costs, who qualifies after the 2026 rule changes and how to apply.

How Do SBA Loans Work?

The SBA does not usually lend money directly to small businesses. Instead, it guarantees a portion of loans made by approved lenders. If the borrower defaults, the SBA covers part of the lender’s loss. That guarantee reduces the risk for lenders, which in turn lets them offer finance to businesses that might not qualify for a conventional loan, with lower down payments and longer repayment periods.

In return, SBA loans come with paperwork, fees and conditions. Owners with 20% or more of the business normally have to give a personal guarantee, and the SBA expects lenders to take available collateral.

What Is an SBA 7(a) Loan?

The 7(a) programme is the SBA’s most popular. According to the SBA, the maximum loan amount is $5 million, and the money can be used for a wide range of purposes:

• Working capital and buying inventory
• Buying equipment, furniture and fixtures
• Buying, building or renovating real estate
• Refinancing existing business debt
• Buying an existing business or a partner’s share

The SBA guarantees up to 85% of loans of $150,000 or less and up to 75% of larger loans. Repayment terms can run up to 10 years for working capital and equipment and up to 25 years for real estate. Interest rates are negotiated with the lender but capped by the SBA at a margin over a base rate, usually the prime rate. The cap is higher for smaller loans, which cost more to administer. Rates can be fixed or variable.

A faster variant, SBA Express, offers loans of up to $500,000 with a quicker decision from the lender but a smaller SBA guarantee of 50%.

What Is an SBA 504 Loan?

The 504 programme provides long-term, fixed-rate finance for major fixed assets that promote business growth and job creation, such as buying a building, constructing new premises or buying heavy machinery. It cannot be used for working capital or inventory.

A typical 504 project is split three ways:

• About 50% from a bank or other private lender, with a first lien on the asset
• Up to 40% from a Certified Development Company (CDC), a non-profit partner of the SBA, backed by an SBA-guaranteed debenture
• At least 10% from the business owner as a down payment, sometimes more for start-ups or special-purpose properties

According to the SBA, the maximum 504 debenture is generally $5 million, rising to $5.5 million for some manufacturing and energy projects, with terms of 10, 20 or 25 years. Because the CDC portion carries a fixed rate pegged to US Treasury yields, 504 loans are popular with owners who want predictable payments on property they plan to keep for decades.

What Is an SBA Microloan?

Microloans are for smaller needs and newer businesses. The SBA lends money to non-profit intermediary lenders, often community organisations, which then lend up to $50,000 to small businesses and some non-profit childcare centres. According to the SBA, the average microloan is about $13,000, and the maximum repayment term is seven years.

Microloans can be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment, but not for buying real estate or paying off existing debt. Many intermediaries combine the loan with free business training, which makes the programme a good fit for first-time founders. If you are still at the very early stage, our guide to starting a business with no money covers other low-cost options.

How Do 7(a), 504 and Microloans Compare?

• 7(a): up to $5 million; almost any business purpose; terms up to 10 years (25 for real estate); variable or fixed rate
• 504: up to $5 million in SBA-backed funding (more for some projects) within a larger package; real estate and major equipment only; 10 to 25-year fixed rate; usually 10% down
• Microloan: up to $50,000; working capital and equipment; up to seven years; rates set by the intermediary

What Do SBA Loans Cost?

Beyond interest, the main extra cost on 7(a) loans is the upfront guarantee fee, which lenders usually pass to the borrower. For the 2026 federal fiscal year, according to SBA guidance, the fee is generally 2% of the guaranteed portion on loans of $150,000 or less, 3% on loans of $150,001 to $700,000 and 3.5% on larger loans, with 3.75% on the part of the guaranteed amount above $1 million. Fees are reviewed every year, so ask your lender for the current figure. Lenders may also charge packaging and closing costs, and 504 loans have their own CDC and debenture fees.

Who Qualifies for an SBA Loan?

The SBA’s general requirements are that a business must:

• Operate for profit and be located in the United States
• Meet the SBA’s size standards for its industry, which most small businesses do
• Show that the owners have invested their own time or money
• Be unable to get the same credit on reasonable terms elsewhere without the SBA guarantee
• Have a sound business purpose and the ability to repay, judged on cash flow, credit history and often collateral

The SBA also tightened its ownership rules in 2026. Under guidance that took effect on 1 March 2026, businesses applying for 7(a) loans must be wholly owned by US citizens or US nationals whose main residence is in the US; lawful permanent residents and foreign nationals can no longer hold any ownership interest. The SBA has issued further procedural notices since, so confirm the current rules with your lender before applying.

How Do You Apply for an SBA Loan?

• Prepare your documents: a business plan, two to three years of business and personal tax returns (if available), financial statements, projections, a debt schedule and legal documents such as your LLC or corporation paperwork
• Check your credit: both business and personal scores matter
• Find a lender: the SBA’s free Lender Match tool connects you with participating lenders, usually within two days
• Compare offers: look at the rate, fees, term and any prepayment penalties
• Expect checks: the lender underwrites the loan and, depending on its delegated authority, may submit it to the SBA for approval

Approval can take anything from a few days for SBA Express to several weeks or more for larger 7(a) and 504 loans. Free advice is available from Small Business Development Centers and SCORE mentors, who can help you prepare.

What Are the Alternatives to SBA Loans?

If an SBA loan is too slow or you do not qualify, alternatives include conventional bank loans and lines of credit, equipment finance, community development financial institutions (CDFIs), revenue-based finance and, for high-growth start-ups, equity investment; our guide to angel investors vs venture capital explains how that differs from debt.

Key Takeaways

SBA loans are government-guaranteed loans from private lenders. Choose a 7(a) loan for flexible funding of up to $5 million, a 504 loan for buying property or major equipment on a long-term fixed rate, and a microloan for amounts up to $50,000. Expect personal guarantees, an upfront fee on 7(a) loans and stricter ownership rules from 2026. Prepare thoroughly, compare several lenders and use the SBA’s free advice network before you sign.

Featured image: Bankhead Street in New Albany, Mississippi’s downtown business and historic district 04, by Timberwolf62 / Wikimedia Commons, CC BY-SA 4.0. Cropped, colour-graded and combined with MediaPavilion branding.

Sources

• US Small Business Administration — 7(a) loans (accessed 28 October 2026).
• US Small Business Administration — 504 loans (accessed 28 October 2026).
• US Small Business Administration — Microloans (accessed 28 October 2026).
• US Small Business Administration — Terms, conditions, and eligibility (accessed 28 October 2026).
• US Small Business Administration — Policy Notice 5000-876441: Update to SOP 50 10 8, citizenship and residency requirements (February 2026).
• US Small Business Administration — Loans (accessed 28 October 2026).