What are the Steps to Get Approved for an SBA Loan?
Learn how to move smoothly through the application process.
SBA loan requirements for borrowers are more stringent than for almost any other small business loan. However, it’s worth the trouble if you can qualify for one. SBA loans are considered the gold standard for small business financing. Because they’re government-backed up to a certain percentage, they typically come with low down payments, favorable repayment terms, and reasonable interest rates.
SBA loan requirements vary depending on the type of loan you apply for and the lender. Getting through the application process can be challenging for most small business owners.
This comprehensive guide will provide all the information about SBA loans needed to speed up the application process and increase your chances of getting approved for one.
SBA loans: Types of businesses that qualify
This government-backed program is intended to support small businesses in the United States and help them grow. So, the first qualification for being approved for an SBA loan is to be a U.S.-based business. Foreign companies do not qualify even if they have operations in the U.S.
A business needs to be correctly registered and operating legally and in compliance with all regulations that govern them. Nonprofits aren’t eligible for most SBA loans, although certain not-for-profit childcare centers may be able to get an SBA microloan.
Businesses in the following industries are not able to receive SBA loans:
- Life insurance
- Politics and lobbying
- Speculative businesses such as pharmaceutical or medical research companies and property development
- Passive income businesses like flea markets and shopping centers.
If you want to find out for sure whether your industry qualifies, check out the SBA’s eligibility questionnaire.
Be aware: Some lenders may have their own list of eligible and ineligible industries. Check with a lender before applying if you’re not sure if your business qualifies. It could save you a lot of wasted time and effort.
SBA loans: The credit conundrum
The unusual twist to SBA loans is that the Small Business Administration won’t guarantee a loan if a regular loan with reasonable terms is available.
The good news is that you aren’t required to apply for other loans and prove you’ve been denied.
Instead, an SBA-approved lender must provide documentation to the SBA that other financing options are not available to you. That could be because of your credit history, time in business, or another reason.
Another unique aspect of SBA loans is that business owners must prove they’ve invested their own time or money into the business.
You will need to provide information about:
- How much you’ve invested in your business
- The percentage of the business you own
- Time you spend each week working at your company.
SBA Loans: Small business defined
The Small Business Administration measures business size in three ways:
- Number of employees based on industry. Depending on the type of business, a small one could have fewer than 100 employees up to just under 1,500 workers.
- Business revenue based on industry: Businesses can qualify for an SBA loan based on their industry and the revenue earned. Depending on your industry, it could be anything from $750,000 to just under $38.5 million.
- Net worth of business: The SBA considers companies small if they don’t exceed $5 million in net annual income or $15 million in net worth.
According to current SBA rules, a business can qualify as small under any of these definitions. Just be aware that the SBA often changes its definition of a small business. If you want to determine whether your business is considered small by the Small Business Administration, start with its size standards interactive tool.
SBA loans: Lender underwriting criteria
SBA loan eligibility requirements vary by lender. However, most are likely to look into the following things. You will likely have to document them on your borrower information form.
Personal background and character
When you apply for an SBA loan, you’ll need to provide information about your personal background, including:
- Current and previous home addresses
- Citizenship status (only U.S. citizens and permanent residents qualify for SBA financing)
- Criminal record.
A criminal record doesn’t automatically prevent you from qualifying for SBA financing. (The only times you’ll be automatically disqualified is if the crime involved violence or dishonesty). However, the SBA lender will evaluate your application more carefully if you have an allowable critical history. What’s critical is that you honestly disclose your record.
For SBA 7(a) loans, microloans, and CAPLines, you’ll provide this information on SBA form 1919 or SBA form 912. Lenders usually supply their own forms for 504 loans.
Time in Business
Except for some of the SBA CAPLines (which require a one-year minimum time in business), the SBA doesn’t have a defined time-in-business requirement.
That said, the longer your business has been in operation, the more likely you are to get approved for an SBA loan. Most new business loan applications won’t be approved.
Even though the SBA doesn’t have a time requirement, most lenders will require you to be in business for at least two to three years. That may not be the case if you’re applying for an SBA microloan or in you have excellent credit and finances. Check with a lender to find out for sure.
Personal credit report
Your personal credit score is a critical part of determining SBA loan eligibility. It demonstrates to lenders how you handle your personal finances. Solid personal credit reassures lenders that you’ll be trustworthy with your business’s finances and pay back a loan.
The minimum credit score to qualify for SBA financing is 700. Many lenders have more stringent credit score requirements. If your credit score is below 700, it probably makes sense to take some time to improve it before applying for SBA financing. Check with your preferred lender to find out if your personal credit is good enough to qualify for an SBA loan.
Business credit score
The Small Business Administration leverages the FICO Small Business Scoring Service(SBSS) to check your business credit score.
An SBSS score can range from zero to 300. The SBA uses the SBSS score to prescreen 7(a) loan applications. It will reject your application if your score is below 140. Most lenders set their minimums higher, typically at 160 or above.
SBA loans: Documentation requirements
The loan application process will require you to submit many documents for most SBA loan programs.
- Company management resumes. Resumes give lenders an idea of how experienced the people who lead your organization are in your industry. Resumes are particularly important if you are applying for an SBA startup loan. Make sure they’re professionally prepared.
- Business plan. Your business plan shows lenders how you plan to use their financing and that investing in your business is a smart decision. The SBA has business plan templates on its website. Using them will help ensure lenders have the information needed to approve your loan.
- Personal and business tax returns. More than a credit score, tax returns document how you manage your personal and business finances. Your tax returns also verify your personal income and business annual revenue. Most lenders will require you to submit three years of business and personal tax returns.
- Business financial statements. These documents show lenders how you manage your business finances. Lenders will likely ask for your balance sheet and profit and loss statement.
- Personal financial statements. Some lenders make require you to supply additional personal financial information to determine if you’re creditworthy and the loan amount you qualify for.
- Business debt schedule. A business debt schedule breaks down your debt by monthly payments and shows the interest and principal due each month. It helps lenders understand if you can afford to take on more debt, and if so, how much.
- Bank account statements. Most lenders will ask to see a year’s worth of personal and business bank statements as a part of your SBA loan application. The statements show how much of a cash cushion you have to repay the loan. They also document cash flow in and out of your business. They’re also another indicator of how you manage your finances. If you don’t have copies of your statements, you can get them from your financial institution, usually for a small fee.
- Legal documents. The legal documents you need to submit will vary from loan to loan. Here are some common ones:
- Business licenses and other paperwork showing you’re allowed to conduct business
- Articles of incorporation (for corporations) or articles of organization (for LLCs)
- Contracts with third parties (like clients or suppliers)
- Franchise agreements
- Leases for commercial real estate or business equipment.
The documentation requirements for SBA loans are daunting, but pulling it together will be worth it if you qualify for financing.
SBA loans: Collateral and guarantees
SBA collateral and personal guarantees differ by program. In general, the SBA requires lenders to obtain adequate collateral to secure financing.
Collateral can be anything of value that can be readily sold if you’re unable to repay the loan, including real estate, equipment, investments, vehicles, and other similar things.
Lenders evaluate collateral on a case-by-case basis. SBA lending guidelines mandate that anyone who owns 20 percent or more of the business must sign a personal guarantee.
SBA loans: Unique requirements for different SBA loan types
The SBA 7(a) loan program and most other SBA loans come with many of the requirements I’ve already covered. Some loan options have unique requirements. Here are a few of them.
SBA 504/CDC loans
In addition to everything I’ve already covered, SBA504/CDC loan applications will require you to submit:
- Environmental impact statement, if applicable
- Proof of meeting public policy and job creation goals
- Proof that any real estate you will purchase with the loan proceeds is at least 51 percent owner-occupied.
If you apply for a CAPLines line of credit, there are some additional SBA requirements:
- At least one year in business for a working capital line of credit
- Proof of being a builder to qualify for a builder’s line of credit
- Proof of successfully bidding on and completing contracts to qualify for contracts line of credit.
- Proof of a seasonal business pattern for a seasonal line of credit.
SBA Disaster Loans
Disaster loans typically come with a far less intensive application process than most other SBA funding options. The government wants to get recovery money out to small business owners as quickly as possible. If you are ever involved in a disaster scenario, check the SBA.gov website to learn about requirements.
SBA loans: The bottom line
SBA loan requirements can seem overwhelming. The application process is time-consuming and can become frustrating. Going through the process is definitely worth it. The requirements provide lenders with all the information needed to determine creditworthiness.
What’s important is to think like a lender when you answer questions like:
- What does your business do?
- How do you run it?
- Why are you applying for financing?
- How do you plan to use the loan money?
- Are your finances in order?
- Can you pay back a loan on time, with interest?
- What other business debts do you owe that can impact your ability to repay this loan?
Ultimately, answering these questions with your lender’s perspective in mind will help you qualify for SBA financing and get the best possible loan terms.