If you’re like many small business owners, you’ve thought about applying for an SBA loan at least once. Unfortunately, there are a lot of myths and misconceptions about SBA financing. This guide can help you find the answers you need about SBA loans, the application process and the things you can do with the funds.

Where Do You Apply for SBA Loans?

Small business loans are provided by banks. To get one, you need to apply with a local lender of your choice, preferably one that works extensively with small business financing. Some business owners may ask, “Don’t SBA loans come from the Small Business Administration?”

The Small Business Administration is connected to SBA financing, but it doesn’t provide or approve loans. Instead, the SBA backs, or guarantees, most of the value of the loans. With a loan worth $100,000, the SBA generally backs about 80%, or $80,000. That means that if the business defaults on the loan and can’t pay it back, the bank will still receive at least $80,000 from the government.

Why Do Small Business Loans Have Such Low Interest Rates?

The fact that lenders can count on financing from the government helps to reduce their risk. In the previous example, instead of having to worry about losing $100,000, a bank would only need to worry about losing $20,000. That’s a big difference.

This reduced risk means many lenders are willing to provide much better interest rates and repayment terms than with traditional business loans. Many banks are also willing to work with companies that may have a lower credit score than normal. In simple terms, small businesses can qualify for loan terms that they wouldn’t normally be able to obtain.

What Are the Differences Between SBA 7(a) Loans and 504 Loans?

Two of the most common SBA loans are the 7(a) and 504 programs. Both of these programs have different terms, interest rates and requirements.

The 504 loan focuses primarily on real estate needs and equipment. If you want to get financing for construction, real estate purchases, and renovation, expansion or improvements of existing properties, SBA 504 loans are generally the way to go. These loans can also help with heavy machinery and other large-ticket, long-term purchases.

On the other hand, 7(a) loans are more general in nature. This flexible program can provide working capital funding, money for smaller equipment purchases and inventory, financing for business acquisitions and even lines of credit for emergency needs.