One of the most popular options for small business loans is the SBA loan. Why? They tend to offer low interest rates and a variety of loan programs that suit different business needs.
Because the Small Business Administration guarantees these loans for SBA-qualified lenders, banks and online lenders may be more inclined to approve these loans to qualified applicants.
That being said, SBA lending does require certain qualifications, and the loan process can be complicated. Each SBA loan has a slightly different set of rules and requirements, which we’ll cover in this article.
SBA Loan Requirements
We’ll soon look at specifics for different types of SBA loans, but all of them have some overarching requirements:
- Acceptable personal and business credit
- For-profit business status
- U.S.-based location and operations
- Owner-supported and funded
- Exhausted other funding options
- Meet SBA size standards
- Be in an SBA-acceptable industry
- Owned by an eligible person
Keep reading to get details on each of these requirements, as well as an overview of more specifics for different programs.
How to Qualify for an SBA Loan
To set yourself up for the greatest chance of being approved for a SBA loan, take the following steps:
Step 1: Build Your Credit
If personal or business credit scores have room for improvement, spend time building them up. For example, you may want to open a couple of business credit cards, then pay your balance every month to start building a credit history that will serve you well in applying for a loan later. Take time to review your business credit reports and address any mistakes or problems.
Step 2: Know the Lender’s Qualifications and Requirements
This article is a great place to start in terms of understanding what an SBA-preferred lender looks for, but make sure you talk specifics with your lender. Lenders often prefer to lend to certain types of businesses. As long as they meet the minimum SBA requirements and don’t discriminate, they can add their own requirements.
Step 3: Gather Financial and Legal Documents
Your lender may want to see your profit and loss statement, tax returns (business and personal for the last 2-3 years), and other financial records, so plan ahead by gathering them.
Step 4: Develop a Strong Business Plan
Another thing SBA lenders look for is a business plan that shows you have a goal and direction for your business, as well as a plan for generating enough revenue to pay back the loan. If you don’t have one, get free business plan help at your local SBDC.
Step 5: Document Collateral
You can’t be turned down for an SBA loan just because you don’t have collateral. But most SBA loans require you pledge collateral, such as real estate or equipment, if available. Know ahead of time what assets you have that can be used as collateral against the loan and research the market value.
The sooner you start working on these tasks, the better-prepared you’ll be once you apply. For example, building your credit isn’t an overnight feat, so start to build or strengthen your credit profile before you urgently need funding.
General SBA Loan Requirements
While the Small Business Administration offers a handful of different loan products, most share the same general requirements for anyone looking to borrow. These have generally not changed much over time, and you can expect to have to meet these qualifications before being considered a serious candidate for SBA loans. Know that the following aren’t black and white; if, for example, you don’t have a solid business credit history but have a decent personal credit score, you may still qualify.
Personal Credit Score
You might be surprised to learn that your personal credit history matters when applying for an SBA loan. Most applications ask for your Social Security number and request permission to run a credit check for each owner with ownership of 20% or more of the business. Expect your score to be a factor in your approval. The SBA does not set a minimum credit score requirement but many lenders will require a personal credit score of at least 640. (Not sure that they’ll like what they see? Avoid surprises and ensure that your FICO or other credit score shows a Good or Excellent rating. Get your free credit score before you apply.)
Business Credit History
While your personal score matters for SBA loans, your business credit is often a factor as well. Hopefully, you’ve been working to build strong business credit scores over the years with on-time payments to your vendors, suppliers, and creditors. But if you’ve never checked your business credit reports, or are unsure as to if you even have them, the best time to get it is before you apply for an SBA loan so that you have time to address any challenges or negative notations in your report, as discussed before.
For-Profit Business Status
The SBA only gives loans to companies that are considered “for profit.” Charities and nonprofits are not usually eligible for such funds. If you aren’t a for-profit business, consider looking into other government grants or loans available at Grants.gov.
A notable exception to this rule is COVID-19 relief loans including EIDL and PPP.
Only businesses that are both owned and operated in the U.S. qualify for SBA loans. You must have a physical location and mailing address in the United States.
Demonstrating that you have put in time, money, and energy into building your business shows SBA lenders that you are invested in its success. You may be asked if you have used your own savings or funds to get your business up and running. Your own time is considered to be an investment, as well. The SBA wants to confirm that you have some skin in the game—owner’s equity matters here.
Limited Funding Options
SBA loans are designed to help small businesses that would have trouble getting similar funding elsewhere. This is referred to as the “credit elsewhere test.” You don’t necessarily have to provide rejection letters to prove this, though. Typically your SBA lender will document this.
Finally, not all businesses are eligible for SBA funds because of the industry they’re in. There are several industries where the SBA will not guarantee a loan. These include businesses that:
- Are primarily engaged in lending
- Earn a passive income from real estate rental income and don’t provide additional services
- Provide life insurance services
- Offer pyramid sale distributions or compensations
- Get over one-third of their annual revenue from gambling services
- Enforce restrictive membership rules
- Primarily offer religious services
- Are government-owned (Native American tribal affiliations may still be eligible)
- Sell live adult entertainment services
- Lobby or engage primarily in political activities
- Package SBA loans
- Are speculators (oil wild-catting or research and development)
An owner is anyone with 20% or more ownership of the company. Each owner should expect to meet ownership requirements.
Those with certain criminal records may have trouble qualifying. The SBA prohibits loans to those who are Incarcerated, on probation, or on parole, (an individual with a deferred prosecution, conditional discharge, order of protection, or who is on a sex offender registry is treated as if the individual is on probation or parole); or who are currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.
Those who are delinquent or have defaulted on a federal loan or federal financing program may not be eligible, though there are exceptions. Note that may include federal student loans.
If you’re a veteran entrepreneur, explore SBA loans for veterans.
Additional SBA Loan Requirements
In addition to the specifications above, SBA lenders may have other criteria to help them determine whether you’re a good credit risk.
- Capital Requirements – How much money do you seek? Having a number in mind, along with your intended use for the cash, will help the bank see your vision for the future and their funding. It also demonstrates that you understand the requirements set by the SBA on how loan proceeds can be used. A cash flow report can help here.
- Financial future – Do you have your business forecasts for the next few months? How about the next year? Be ready to show the bank that you’ve budgeted for the future, including how you’ll pay back the loan.
- Collateral – If you don’t have business assets to secure a loan, many SBA business loans require you to put up your home, vehicle, property, or other personal assets as a loan guarantee against non-payment. Make a list of real or fixed assets. The lender may not require you to completely collateralize a loan, but they will require all the collateral that you have.
Time in Business
The SBA doesn’t set any specific timeframes for most loans, but the lenders can set their own requirements. Many lenders will want to see that you have been in business for at least two years but that may vary by lender.
Eligibility for Export Express is limited to businesses that that have been in operation, although not necessarily in exporting, for at least 12 full months. However, there are exceptions.
Check with the specific lender you plan to understand its requirements. Don’t overlook what each type of SBA requires, which we’ll dive into next.
Requirements by SBA Loan Type
Because the Small Business Administration offers a variety of loan programs, each may have its own set of requirements. The list for each program is very long and spelled out in Standard Operating Procedures.
But here’s a breakdown of each of the most popular SBA loan types and the unique qualifications for each, along with more detail on how the funding programs work.
SBA 504 Loans
Looking to buy owner-occupied commercial real estate? The SBA 504 loan requirements should be of special interest to you. This loan is also called the CDC loan and is popular with borrowers looking to invest in real estate, construction, or equipment. There is no cap on the loan amount for these loans but the maximum SBA debenture is $5 million.
You can then guess that the loan requirements are probably much higher than for loans of lesser amounts. You can expect to need a higher credit score (in the Very Good to Excellent range) and a good track record as well as solid financials.
These loans must be repaid in 10-20 years, depending on the loan offered, making them a suitable option for long-term financing. SBA lenders generally want to see a 10% down payment on the loan from the borrower. One final requirement for the loan is that any real estate purchased must be 51% owner-occupied.
SBA 7(a) Loans
SBA 7(a) loans are the ones most people are speaking of when they say they want to get SBA financing. These loans can be used for a variety of purposes such as working capital, buying equipment, purchasing a franchise, buying commercial real estate, inventory, refinancing debt in certain situations and even starting a business.
These 7(a) loans offer affordable rates and a low SBA guarantee fee for loans of $5 million or less. Repayment terms range from up to 10 years for short-term working capital to 25 years for commercial real estate.
Loan proceeds cannot be used for those industries restricted by the SBA. You also likely need a credit score that will fall into the Very Good or Excellent rating.
Do you have a very small business with even smaller financial needs? SBA microloans may be for you! If you seek less than $50,000 for your for-profit business, you might be eligible. These small loans are available to for-profit businesses, including home businesses. (The only non-profit organizations eligible are daycares.) These loans may be used for a brand-new business (subject to lender approval).
The SBA doesn’t make SBA microloans. Instead they are made by SBA intermediaries, which may include nonprofit lenders such as Community Development Financial Institutions (CDFIs).
You’ll have up to six years to repay the loan. In addition to committing to being on-time with your SBA loan payment, you may also be required to engage in training or development programs that are available to your business as part of the microloan terms. The loan program is designed not just to give you money, but to also help you expand your business knowledge and grow your company in a way that positions your business more competitively in the marketplace.
Small businesses can use SBA microloan funds for working capital, inventory, supplies furniture, fixtures, machinery or equipment. You can’t use these microloans to repay debt or to buy real estate.
SBA Loan Rates and Credit Scores
With most types of small business loans, your credit scores not only determine whether you qualify but also affect the interest rate you pay. Most SBA loan rates are quite affordable to begin with, and are set by the SBA. However, some SBA loan rates may be determined in part by credit. For example, a portion of CDC 504 loans are made by a bank or financial institution which can set the rate for that portion of the loan.
A Word on CARES Act SBA Loans
In 2020, the CARES Act created two SBA loans to assist businesses hit hard by the COVID-19 pandemic: PPP loans and EIDL loans.
The Paycheck Protection Program loan was established to assist struggling businesses with payroll costs during the pandemic. Companies that were in business as of February 15, 2020, may qualify for full or partial forgiveness. The maximum loan amount is 2.5 times average monthly payroll, not to exceed $10 million.
The formula for full forgiveness is complicated but basically businesses may qualify if they spend the funds on certain expenses— at least 60% on payroll and the rest on rent, mortgage interest and/or utilities— and maintain employment levels.
If you’ve taken out a PPP loan, use the PPP Loan Forgiveness Calculator to get an idea of how much of your loan may be forgiven.
The other SBA loan under the CARES Act is the Economic Injury Disaster Loan, or EIDL. Loan proceeds (up to $2 million) can be used as working capital to pay debts, payroll, accounts payable, and other bills. There is a grant of $1,000 per employee, up to $10,000, that does not have to be repaid. Your business must have been in operation as of January 31, 2020, to apply.
SBA Loan Frequently Asked Questions
If you have questions beyond what you need to qualify for a Small Business Administration loan, here, you’ll find answers.
Are there separate SBA loan requirements for startup companies?
As mentioned before, most SBA loans don’t have a time in business requirement, but lenders who make these loans often do. As a result, the microloan program is considered the default when it comes to SBA loan for startups.
If you’re a startup that’s been in business long enough to have significant sales records and a demonstrated ability to repay, you may qualify for their other loan programs such as: the SBA 7(a), SBA Express, or SBA 504 loans.
What are the SBA 7(a) loan collateral requirements?
As stated above, lenders generally like to see that you have some collateral in the event that you default on the loan. However, the SBA does not permit a lender to reject an application simply because collateral is not available. How much a lender will require, however, depends on your creditworthiness, ability to repay, revenue, and the loan amount. Expect a smaller loan to have smaller collateral requirements; loans under $25,000 may not require any at all.
How much of a down payment is required for an SBA loan?
Certain SBA loans may require a “down payment” in the form of equity injection. A minimum of 10% is common. Depending on the requirements of the specific loan, this equity injection may come in the form of cash that isn’t borrowed, a personal loan that can be serviced without using funds from the business, assets other than cash (verified by an independent appraisal) and/or debt that is on full standby (no payments of principal or interest for the term of the SBA-guaranteed loan)
Are SBA loans hard to get?
Yes and no. Compared to some other business financing options, SBA loans usually have somewhat higher standards. They are often available to small businesses who are profitable, have Good to Excellent credit, and who can demonstrate the ability to pay the loan back.
SBA loans are generally not an option for someone who can’t manage his credit well or who has a business that is considered failing. An alternative lender might provide more suitable, short-term loans for various types of borrowers.
At the same time, these loans are designed to help businesses that can’t get similar credit elsewhere, so you may have more luck getting an SBA loan than a comparable traditional loan from a financial institution. But you have to be willing to put in the effort.
How long does it take to get approved for an SBA loan?
SBA loans aren’t known for their quick-turnaround approvals. If you’re seeking to get approved within days—and receive your cash within a week or less—these loans might not be for you. Expect to spend time preparing your documents, applying, and hearing back about the status of your SBA loan. Some SBA lenders may give you a reply within 3-10 business days, but getting the funds will take longer. SBA Express loans can sometimes get an approval within 24-48 hours. If you need money faster, again, alternative loans might be a better option.
Nav’s Final Word: SBA Loan Requirements
As a small business owner, you need to stay apprised of financing options so that, should the day come that you want to grow your business, you know the best financing solution for your needs.
Even if right now you don’t plan to apply for an SBA loan program, it’s still a wise idea to work on building your credit and organizing your finances so that, down the road, if you decide to apply, you are a shoo-in for a loan with a great rate.