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A Guide to SBA Loans: Would Your Small Business Benefit from SBA Lending?

Bryce Taylor

By Bryce Taylor

Bryce Taylor is Vice President and Relationship Banking Officer at First Bank. A team member since 2017 and banker since 2008, Bryce's expertise and knowledge of SBA and agricultural lending is helping to make great things happen for businesses and farmers in Southeastern Illinois and Southwestern Indiana.

Whether you’re opening, operating or expanding a small business, it’s likely that you’ll need funding. Illinois and Indiana small business loans are available to help you achieve these business goals. The U.S. Small Business Administration offers lending options for small businesses, including the popular 7(a) and 504 loans.

If you’re unsure which type of SBA loan is best for your situation, this article addresses frequently asked questions, including how to get started with an SBA loan, the lending process and differences between two common SBA loans.

How is an SBA Loan different from conventional business loans?

An SBA loan is a special loan product that allows businesses who may still be building their credit history to qualify for commercial loans. First Bank is proud to be an SBA lender in Illinois and Indiana helping new businesses get the funding they need to grow.

Community banks such as First Bank can offer business loans to new businesses thanks to the SBA. The Small Business Administration reduces local lenders’ risk by guaranteeing to reimburse banks if the borrowing business defaults on their commercial loan. To make this guarantee, each SBA loan comes with the SBA guarantee fee which funds the program’s ability to cover its loans. By reducing the amount of risk lenders must assume, the SBA makes it possible for banks to require lower down payments, provide flexible requirements and offer competitive interest rates. 

Other benefits of SBA Loans include:

What types of SBA Loans are available?

504 loans

SBA 504 loans start at $50,000. These loans are funded in combination by the Small Business Administration, Certified Development Company and your local bank. For a 504 loan, the amount of the loan is usually capped at $5 million. If your venture requires a larger loan amount, you can speak with a First Bank SBA expert to see if you qualify.

504 loans can be used to pay for real estate purchases, construction, property improvements, equipment financing and debt refinancing. 504 loans will not be approved for use as working capital or to purchase inventory and supplies. If using a 504 loan for a real estate purchase, 51% of the commercial building must be used for your personal business. If funding new construction, 60% of the new building must be occupied by your business. The remainder of the commercial space can be leased out to other businesses.

To qualify for an SBA 504 loan, you’ll need a minimum 10% down payment. The interest rate on the loan is characteristically low compared to traditional loans. The interest rate is fixed and won’t change during the life of your loan. 504 loans are issued with repayment schedules that span 10, 20 or 25 years. You can expect to incur loan fees when you accept your SBA 504 loan. 504 fees include the SBA guarantee fee, CDC fees and bank fees.

7(a) Loans

SBA 7(a) loans are offered at amounts between $5,000-$5 million. Unlike the 504 loan, a 7(a) loan can be used to pay for working capital, supplies and inventory. A 7(a) loan is also a practical way to afford new equipment, fixtures and furniture for your business. Of course, you can also use an SBA 7(a) loan for debt refinancing and purchasing, constructing or renovating commercial property.

To qualify for a 7(a) loan, a down payment of 10-20% is needed. The interest rate on the loan is tied to the prime rate and depends on the loan amount and duration of repayment. The interest rate on an SBA 7(a) loan is variable and may change over the life of your loan. The repayment time frame for a 7(a) loan is capped at 10 years when you finance working capital and equipment and 25 years when financing real estate. You should expect to pay the SBA guarantee fee and bank fees when you open a 7(a) loan.

Do SBA Loans require collateral?

SBA loans require collateral to help secure the loan. The amount of collateral needed depends on the type of SBA loan you are requesting. For 504 loans, the assets being financed typically serve as collateral for the loan. For 7(a) loans greater than $25,000, collateral is required for loan approval and may include the business owner’s personal residence. Both 504 and 7(a) loans require a personal guarantee by the borrower to repay the loan. A personal guarantee means that the business owner assumes personal responsibility for the debt should the business fail to repay the loan balance.

Is my business eligible for an SBA Loan?

To qualify for an SBA loan, your business must operate for profit in the United States and not engage in speculative business. Your business must show owner-invested equity, be unable to attain other funding sources, show an ability to repay on time and meet the SBA’s definition of a small business. Beyond the basic eligibility requirements, recipients of a 504 loan must also meet these additional requirements:

  • Average net income is less than $5 million
  • Business net worth is less than $15 million
  • Meet job creation and retention goals or public policy goals

How do I choose a bank for my business?

When you need a loan, you need the best bank for small business. Learn more about how First Bank can help you navigate the SBA Loan process. Whether you have more questions or are ready to apply for an SBA loan in Illinois or Indiana, our local lending team is here to help you get the small business loan you need.

Should I bank locally for small business lending needs?

Partnering with businesses to make great things happen is the most significant way we give back to our communities. The First Bank team is helping businesses and families thrive in Carmi, Grayville, Lawrenceville and Mount Carmel in Illinois, and Evansville, Haubstadt, Mount Vernon, Poseyville, Princeton and Vincennes in Indiana. To get started, tell us about your business, email Brycegive him a call or stop by one of our convenient locations in Illinois and Indiana. Your small business will achieve great things by partnering with First Bank, the best bank for small business in Illinois and Indiana.

Your security and privacy matters at First Bank. Before you send us an email, please be sure that you are not sending confidential or personal information – like your account number or social security number. If you need to share this type of information with us, please call us at 1-800-538-3979.

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