SBA Loan Requirements: Does Your Business Qualify?
The SBA loan program, run by the federal government agency the U.S. Small Business Administration (SBA), is one of the most popular sources of funding for companies across the country. In order to be able to qualify for one of their loan packages, you need to meet the relevant SBA loan requirements.
In this article, you’ll find out about the SBA’s eligibility requirements, as well as how to increase your chances of being approved for the business financing you need.
Who Qualifies for an SBA Loan?
To qualify for an SBA loan, your company must meet the following five SBA loan requirements.
1. Business Profile
You must run a for-profit business based in the United States.
The SBA doesn’t specify that you need to have been in business for a minimum length of time. However, loans are offered in partnership with private lenders, and they may have their own restrictions with regard to how long you’ve been in operation.
Not all businesses are eligible for an SBA loan. This includes but isn't limited to life insurance companies, lending, pyramid sales, and private clubs.
2. Business Size Standards
One key SBA loan requirement concerns the size of the business you run, since these loans are only for small businesses.
The SBA’s definition of what counts as a small business varies based on the type of company. Depending on your industry, the SBA will look at your number of employees or your annual revenue.
For example, a roofing contractor will meet the SBA’s size requirements if its revenues don’t exceed $19 million, while a winery is considered a small business if it employs fewer than 1,000 people.
3. Credit History
Your personal credit score and business credit score, along with your business history, will be considered in the application process.
On the SBA 7(a) loan program, the SBA checks your company against the FICO Small Business Scoring Service so it can evaluate how well your business handles money. It may also use this to screen your initial application prior to making a full application. It'll look for a minimum score of around 155 on small loans.
You’ll also need to have a good personal credit history. Most lenders will look for a minimum score of 650.
4. Collateral
Collateral is something of value that you pledge to secure a loan. It could include assets like accounts receivable, inventory, real estate, or machinery and equipment.
If you default on your SBA loan, your lender may seize your collateral and sell it in an attempt to repay your outstanding balance.
Collateral is required on most types of SBA loans but not on microloans or SBA 7(a) Express loans for $50,000 or less.
5. Personal Guarantee
On some types of SBA loans, you may need to provide the lender with a personal guarantee in addition to collateral.
With a personal guarantee, if you default on your loan and the sale of your collateral doesn't cover the outstanding balance, you’ll be personally responsible for all or a portion of the rest.
Depending on the type of loan you apply for, you may need to include one or both of the following to meet SBA loan requirements.
If you own more than 20% of a small business, you must provide an unlimited personal guarantee when taking out a facility.
Documentation You’ll Need When Applying for an SBA Loan
Depending on the type of loan you apply for, you may need to include one or both of the following to meet SBA loan requirements.
Business Plan
Your application may require a detailed business plan. It should explain why you’re borrowing the money and what opportunities it'll unlock for your company.
Supporting Documentation
You may need to provide supporting information to the lender. This is so they can verify that you comply with SBA loan requirements and aren’t a high-risk borrower.
The types of documentation you can expect to be asked for include:
Commercial real estate appraisals: If you intend to purchase commercial real estate with your SBA loan and the value of the funding you’re applying for is more than $500,000, a state-licensed or certified appraiser needs to carry out an appraisal to the Uniform Standards of Professional Appraisal Practice standard. For amounts below that, your lender may still require an appraisal to evaluate your creditworthiness or they may require an “appropriate evaluation” instead.
Business financial statements: Remember to include a profit and loss statement, balance sheets, and a report on your accounts receivables and payables to demonstrate your business's financial health.
Existing business debt schedule: If applicable, provide a schedule of your current business debts.
Personal financial statements: The SBA will want you to complete a Form 413 detailing your sources of income, your liabilities, and the assets you own. This can include bank account statements, income tax returns, and ID documents.
Schedule of collateral: This details which assets you are offering as collateral to secure the loan like equipment, inventory, personal and commercial property, accounts receivables, and more.
To ensure your application is processed as quickly as possible, check with your preferred lender about which documentation they require so you can have it ready when you apply.
Individual SBA Loan Requirements for Popular Loan Types
In addition to the general SBA qualifications, each type of SBA loan has individual requirements you need to be aware of.
1. SBA 7(a) Loan Requirements
The SBA 7(a) loan program offers a variety of loan types to borrowers. But in general, you will need to show that your loan is going to be used for one or more of the following purposes:
Buying, refinancing, or making improvements to buildings or real estate: You can use the loan to purchase property, refinance an existing mortgage, or make significant improvements to your facilities.
Working capital: You can approach an SBA lender to obtain funds to cover day-to-day operational expenses and ensure smooth business operations.
Debt refinancing: This is a popular financing option for companies looking to switch to a term loan or line of credit with more competitive interest rates and better terms.
Machinery and equipment, furniture, or supply purchases: Many firms use a small business loan from the SBA to invest in essential equipment and supplies to increase their efficiency or capacity.
Mergers and acquisitions: Small business owners can use their SBA loan to buy another business.
In addition to these general requirements, each SBA 7(a) loan type may have additional requirements. Let’s look at a few of the common 7(a) loan types.
Standard SBA 7(a) Loans
For a Standard SBA 7(a) loan, your collateral will be any assets covered by the loan and any fixed assets you have as a borrower, up to the value of the loan you’re taking out.
As for a down payment, the SBA requires a 10% down payment if the loan amount is for more than $500,000. Otherwise, the lender can set their own down payment, as long as the lender follows the same requirements as they do for any non-SBA loans they offer.
SBA 7(a) Small Loans
With an SBA 7(a) Small loan, collateral isn’t required if the loan amount is less than $50,000. For amounts larger than that, the lender will follow the same collateral policies it has set for non-SBA loans of a comparable size.
Similarly, your lender will have its own down payment requirements.
SBA Express Loans
The collateral and down payment requirements for SBA Express loans are the same as for SBA 7(a) Small loans. No collateral is required if the loan amount is less than $50,000. For amounts above $50,000, the lender will require the same collateral as if you’d approached them directly not using the SBA loan program.
Any down payment requirements are determined by the lender’s standard policies.
SBA CAPLines
SBA CAPLines are short-term loans and lines of credit that companies can use to manage working capital and cash flow requirements.
There are four types of CAPLines offered:
Working CAPLines: Businesses convert short-term assets into cash in the form of a line of credit.
Seasonal CAPLines: These are designed to fund inventory purchases and extra labor costs caused by seasonality.
Builders CAPLines: Contractors and constructors can access a CAPLine to fund the building or renovation of residential or commercial property that they intend to sell once the project is complete.
Contract CAPLines: These are intended to help entrepreneurs finance costs associated with the fulfillment of one or more contracts.
Down payment requirements for CAPLines are similar to those for standard SBA 7(a) loans.
2. SBA 504 Loan Requirements
To start, you must meet the following 504 loan requirements:
You need to be a U.S.-based for-profit business.
Your tangible net worth should be no more than $15 million.
Your average net income should be less than $5 million after paying federal taxes over the previous two years.
Next, the SBA 504 loan program is restricted by what the financing can be used for. The following uses are permitted:
Purchasing land on which you will renovate an existing building or construct a new building
Improving the area on the land and around the building, including landscaping, parking, and utility connections
Paying for long-term equipment and machinery for use in your business
If the business purpose for your loan application is working capital, inventory purchasing, real estate investment or speculation, or debt refinancing, you won’t qualify for an SBA 504 loan.
After the completion of your project, your business must occupy at least 51% of a renovated building or 61% of a new building. Any purchased equipment should have an operating life of at least 10 years.
In addition, your loan must, in some way, promote job creation, job retention, or local economic prospects. For every $90,000 you borrow, you must retain or create a job. For manufacturers, that figure is $140,000.
Finally, borrowers are required to contribute at least a 10% down payment for a 504 loan and secure the loan with collateral, which may include both business and personal assets.
3. SBA Microloan Requirements
Unlike other types of SBA loans, nonprofits, and community organizations can apply for funding via an SBA microloan. The maximum you can borrow is $50,000, and there is no down payment.
Microloans can be used for equipment and machinery, fixtures and fittings, inventory, supplies, and working capital. You can’t use an SBA microloan to settle existing debts or to buy real estate.
If you run a startup, a microloan is your best chance to get your business needs funded through the SBA program.
To apply for an SBA microloan, contact a locally approved intermediary. These partner lenders will set their own loan requirements and will usually require collateral and a personal guarantee. There is no down payment requirement on an SBA microloan.
4. SBA Disaster Loans
SBA disaster loans offer funding for businesses in distress at low interest rates.
You can borrow money for the following purposes:
Repair damage or replace your business’s physical assets
Improve your business property and assets to protect against future disasters
For working capital to survive a disaster until you’re able to resume normal operations
If a key member of staff has been called to active duty, as they are a military reservist
The maximum loan amount, collateral needed, and repayment terms vary depending on the reason you wish to take out the loan. An SBA disaster loan does not require a down payment.
Tips to Increase Your SBA Loan Approval Chances
Securing an SBA loan can be competitive, but following these tips can significantly enhance your chances of approval:
Improve your personal and business credit profiles: Pay your bills on time and reduce your existing debts to improve your personal and business credit scores. While it’s true that the SBA guarantees to repay a portion of your loan to a private lender if you default, lenders will be less inclined to approve loan requests from applicants with a poor credit history.
Prepare a detailed and realistic business plan: Outline everything from your business model and market analysis to your financial projects and employee profiles. A comprehensive business plan shows lenders that you have a clear plan for developing your company.
Collate accurate, up-to-date financials: The key to persuading your lender that you will be responsible with the money they provide to you is a robust set of financial statements so that they can see you’re on top of your finances.
Show how you’ll repay: When you take out a loan, your fixed costs go up. Both your business plan and your financials need to show how you’ll repay the loan from your current and future sources of revenue while still retaining a healthy cash reserve.
Offer valuable collateral: You’ll need to be prepared to provide valuable assets as collateral to secure the loan. For example, on all SBA 7(a) loans of $50,000 or more, the total value of your collateral needs to match the size of the loan you’re taking out.
Work with an experienced SBA lender: Apply through a lender that’s familiar with SBA loans. One way to find them is to initially approach a Certified Development Company (CDC) via the SBA’s Lender Match program at sba.gov.
Choose an Alternative to SBA Loans
You’re more likely to be approved by private lenders when you apply through the SBA loan program, thanks to the backing and guarantees provided by the Small Business Administration. There is a wide suite of options for company owners to choose from, whether they wish to buy equipment, machinery, or real estate to expand their businesses abroad.
With the exception of the SBA Express loans, it can take a few weeks to receive the money, and the SBA loan requirements can be extensive. Maybe you need funding faster, or possibly it's unlikely that your company will meet those loan requirements.
Backd can support businesses that struggle to meet SBA loan criteria with two accessible and flexible financing solutions:
A business line of credit offering up to $750,000
A working capital advance offering up to $2 million
Apply in just three minutes today to get the financing you need in as little as 24 hours.
