What are SBA Loans?
SBA Loans refer to various small business loan packages within the SBA Loan Program. The Small Business Administration (SBA) oversees the program, provides guidelines for lenders, and sets caps on interest rates and fees.
The 7(a) loan program is the SBA’s primary program for providing long-term financing, covering a wide range of business needs, including small loans. The 7(a) program offers options for working capital, export activities, and other specific use cases, with eligibility often determined by a business’s credit history and the SBSS scoring system for small loans of $350,000 or less.
The most significant contribution from the SBA is that the government agency partially guarantees the loans (up to 90% in some cases). With backing from the SBA, lenders can offer higher borrowing amounts, lower interest rates, and longer repayment terms. These SBA programs are typically guaranteed by the SBA, helping small businesses access funding through approved lenders.
Loan packages in SBA lending include the following SBA programs, most of which are SBA guaranteed:
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SBA Export Express Loans
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SBA 504 Loans (aka SBA CDC/504 Loans)
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SBA Export Loans
In addition to standard SBA loans, there are specialized SBA loan products such as the Contract CAPLine and Builders CAPLine. The Contract CAPLine is designed for businesses needing short-term or seasonal working capital for contract or project-based work. At the same time, the Builders CAPLine is specifically tailored for the construction or building industry’s needs. Both have unique collateral and documentation requirements specific to their use of proceeds and eligibility criteria.
How does the SBA Loan Program work?
While the SBA administers the program, small business owners still must apply to a third-party, private lender. There are three types of lending institutions that an SBA applicant can apply to: commercial banks, credit unions, or alternative loan facilitators, like United Capital Source. For most SBA loan programs, you should seek out an SBA-approved lender, as these lenders participate in the SBA program and can help match you to the appropriate loan type.
The first step in the process is to find a lender. You should find a lender with experience servicing the type of loan you need and experience funding businesses in your industry. You can review our guide on the best SBA lenders for more tips and tools for finding the right lender. For SBA microloans, note that these are often facilitated by intermediary lenders, which are nonprofit community organizations that set more flexible eligibility criteria and provide smaller loan amounts.
Note: for SBA CDC/504 loans, you first need to find a Certified Development Company (CDC) that you can partner with on the loan.
Once you apply, the lender sends it to the SBA, which determines if it will guarantee a portion of the loan. When working with a preferred SBA lender, the lender can approve the loan without requiring authorization from the SBA. Credit approval is subject to both lender and SBA guidelines, as well as borrower qualifications and program restrictions.
Once the SBA signs off on guaranteeing the loan, the lender finalizes the underwriting process and closes the loan. Depending on the type of loan and the lender, it can take anywhere from 10 business days to several months to complete an SBA loan and get your funds.
What are the SBA’s Requirements for a Loan?
When considering SBA loan programs, it’s essential to understand the eligibility criteria and the documentation required to qualify. Each SBA loan program has minimum requirements that applicants must meet, and restrictions apply to both eligibility and the use of funds.
SBA eligibility is determined by meeting certain minimum requirements, which may include factors such as credit scores, time in business, and annual revenue. The Small Business Administration does not set specific requirements regarding credit scores, time in business, or annual revenue. However, the SBA does set some basic eligibility and business owner requirements and restricts certain industries. A sound business purpose is required for all SBA loans. An existing business with sufficient operating history is generally preferred, though some programs allow startups.
Basic Eligibility Requirements
To be eligible:
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The business must be a for-profit business, officially registered, and operating legally.
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Operate and be physically located in the U.S. or its territories.
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The business must be 100% owned by U.S. citizens, U.S. nationals, or unconditional lawful permanent residents.
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Meet the small business size standards as defined by the SBA.
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Have the cash flow to handle loan repayments.
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Not be eligible for or receive loan funds elsewhere.
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Applicants must complete the appropriate SBA form(s), such as SBA Form 1919, SBA Form 912, or SBA Form 148, as part of the application process.
Business Owner Requirements
Small business owners must meet the following requirements:
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Have invested time and money (equity) into the business.
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Possess a commitment to success and relevant management experience.
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Provide a personal statement attesting to having good character.
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Cannot be incarcerated, on parole, or on probation.
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Cannot be currently under indictment or other forms of criminal charges.
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Cannot have previously defaulted federal loans, such as student loans.
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Must own at least 20% of the company.
Restricted Industries
The SBA also prohibits the following industries from the program:
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Real estate investment firms.
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Businesses engaged in speculation.
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Multi-level marketing (pyramid scheme) businesses.
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Gambling businesses (casinos, racetracks, etc.)
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Nonprofits, religious organizations, and charities.
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Rare coin or stamp dealers.
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Any company engaged in illegal activities.
There are exceptions, such as when a business receives less than one-third of its income from state-approved lottery sales, in which case it may be exempt from the gambling business rule. Another exception is that a for-profit subsidiary of a nonprofit organization can still qualify.
What are the Lender Requirements for an SBA Loan?
Lender requirements for SBA loans are where things get tricky. Since the SBA doesn’t set minimums, most private lenders set their own cutoffs. Lenders will review your business credit history and existing debt obligations as part of the evaluation process. While each lender might have a different minimum, these are the factors most lenders examine when making a credit decision. Demonstrating the ability to repay the loan is a key factor in approval, and lenders will assess your capacity to repay based on financial documents and debt obligations.
Credit Score
Most business owners need a good to excellent personal credit score to qualify for an SBA loan. The general credit score range is 650-700. A personal credit score of at least 690 is generally needed to qualify for an SBA loan.
In addition, the SBA uses the FICO® Small Business Scoring Service™ (SBSS) to analyze a company’s credit. The SBSS aggregates the personal credit scores of up to five business owners (each with a minimum of 20%), the business credit score of the company, and financial data provided on Forms 1919 and 1920. SBSS scores range from 0-300, and most businesses need a score of 155 to qualify. The SBSS scoring system is especially important for small loans of $350,000 or less.
Time in Business
Most lenders require a certain operating history, typically at least two years in business, but some exceptions exist. For example, the SBA microloan is the most commonly used loan for startups, and most lenders offering it don’t require the same level of time in business.
Annual Revenue
Not every lender sets an annual revenue requirement; however, it is best to have an annual revenue of at least $250,000. Again, though, the specific loan you’re applying for might have a different revenue requirement. For loans greater than $500,000, lenders may require a higher debt service coverage ratio (DSCR) and more robust financial documentation to ensure the business can support larger loan amounts.
Just as important as revenue is cash flow. The SBA requires lenders to examine an applicant’s business’s cash flow to determine if it can handle the repayment structure. If a lender’s due diligence discovers a cash flow issue that could impact repayment, it must deny the loan application.
What are the Collateral Requirements for an SBA Loan?
Again, the SBA does not establish exact collateral requirements; instead, each lender sets its own. Although the SBA guarantees a percentage of the loan, the lender still takes a risk with the non-guaranteed portion of the loan.
Lenders will often set collateral requirements based on that risk. However, the SBA stipulates that a lender cannot deny a loan request solely based on a lack of collateral, provided it meets all other requirements.
Lenders will also base collateral requirements on the size of the loan. For example, SBA 7(a) loans, which are the most common, establish collateral as follows:
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Loans up to $25,000: no collateral requirement.
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Loans between $25K and $350K: Follows the lender’s collateral requirements for non-SBA loans.
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Loans over $350: Collateralized to the maximum extent possible.
With SBA CDC/504 loans, the funds must be used to purchase a fixed asset, which becomes the collateral for the loan. This is known as a self-collateralized loan.
When evaluating collateral, lenders typically require comprehensive financial documentation, including balance sheets and other relevant financial statements. Balance sheets are essential for providing a clear picture of your business’s financial health and are a key part of the assessment process for SBA loan approval.
How can I become eligible for an SBA Loan?
While there’s no foolproof formula to achieve eligibility, the following steps could help increase your chances.
Develop a Business Plan
Not every SBA loan requires a business plan, but many do. Even if the particular loan you’re seeking doesn’t need one, it can help showcase the business’s viability to the lender and the SBA.
Acquire & Document Collateral
As we stated, collateral is often required or at least strongly encouraged. Documenting the assets your business owns and is willing to use as collateral demonstrates to lenders your willingness to share the risk associated with the loan.
Improve Credit
Business owners applying for an SBA loan should have a minimum credit score between 650 and 700. As is the case with essentially all loans, the better your credit score, the more likely you’ll get approved, and you’ll get a better interest rate.
Prepare Your Documents
SBA loan applications often require exhaustive documentation. Preparing the required documents ahead of time can help expedite the application process and enable you to identify areas of your business that need improvement. Providing accurate financial statements is essential to support your application and demonstrate your business’s financial health.
Examples of documents to prepare include personal and business tax returns, titles, deeds, or leases in the business’s name, bank statements, accounts receivable and accounts payable reports, income statements, inventory reports, and other relevant documents.
How to Apply for an SBA Loan:
United Capital Source can help you apply to an SBA-approved lender following these steps.
Step 1: Ensure You Qualify
You’ll need a credit score between 650 and 700 and a healthy, consistent cash flow. How you intend to use the money also plays a significant role. You’ll need a detailed plan of how the funds will help you invest in and grow the business.
Step 2: Gather Your Documents
Be prepared to provide:
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Driver’s License.
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Business license or certificate.
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Voided Business Check (for business bank account information).
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Bank Statements.
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Credit Report/Statement of Personal Credit History.
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Business Tax Returns.
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Credit Card Processing Statements.
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Personal Tax Returns – 3 Years.
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Business Tax Returns – 3 Years.
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Business Plan (Not in all cases).
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Personal Financial Statement.
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List of Real Estate Owned or Business Leases, if applicable.
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Debt Schedule/Loan/Rent/Lease Documentation
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Deeds/Title/Ownership documentation for any collateral/Security
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Current Profit & Loss Statements and Balance Sheet Year-to-Date
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A/R and A/P Reports
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United Capital Source 1 Page Application
Step 3: Fill Out the Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
SBA Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed, funds should appear in your bank account in a few business days.
What are the advantages of SBA Loans?
Support from the SBA provides the loan program with certain benefits that are not available in other small business loan structures. As a result, SBA loans are often considered the “gold standard” of small business lending. Let’s look at the reasons why.
SBA loans can provide massive funding amounts to small businesses. The standard SBA 7(a) loan (the most common) goes up to $5 million. The fixed asset financing in SBA CDC/504 loans goes up to $5.5 million per project, not to exceed $16.5 million.
Lenders take less risk since the SBA partially guarantees the loan. Additionally, the SBA sets caps on the amount of interest a lender can charge.
SBA loan interest rates are based on the prime rate + the lender’s spread. Review the costs of SBA loans for a comprehensive breakdown of maximum interest rates by loan type.
Borrowers can get loan terms of up to 25 years for commercial real estate loans and 10 years for most non-real estate loans. The extended repayment time helps businesses lower their monthly payments, making them more affordable.
Since there are numerous loan packages available within the SBA program, business owners can acquire funds to finance most of their business needs. Borrowers can use the loan proceeds for the following purposes:
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Working capital needs.
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Equipment and machinery purchases.
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Fixed asset purchases.
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Commercial real estate purchases and renovations.
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Construction costs.
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Export sales & growing export business.
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Refinance business debt.
SBA loans can also help streamline business payments and improve cash flow management, making it easier for companies to handle ongoing expenses and financial obligations.
What are the disadvantages of SBA Loans?
The biggest drawback is the challenge of qualifying. As we’ve discussed in this guide, the exact requirements are challenging to define. Business owners typically need good credit, multiple years of experience in business, and substantial revenue to qualify.
Most SBA loans require a down payment, referred to as an “equity injection,” of at least 10% of the loan amount. Small businesses can find it difficult to accumulate the funds for the down payment, especially when applying for a large loan.
All business owners with a 20% stake or greater must sign a personal guarantee. If the business defaults on the loans, the business owner’s personal assets are at risk.
The loan application process also requires a lot of patience and having enough runway to wait for approval. Aspiring applicants might wait weeks to get a determination on whether the SBA will guarantee the loan.
It’s not uncommon to meet with several different lenders and submit multiple applications. Some lenders may advise applicants to try again in a year once their finances have improved.
Pros & Cons
Pros:
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High borrowing amounts.
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Low interest rates and long repayment terms.
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The funds can be used for a variety of business purposes.
Cons:
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Long application and approval process.
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Large amounts of paperwork.
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It might require collateral.
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Almost always requires a personal guarantee & down payment.
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Requires good to excellent credit.
Frequently Asked Questions
Here are some of the most common questions about SBA loan requirements.
Can I get an SBA Loan with bad credit?
Unfortunately, SBA loans are not available to borrowers with bad credit. Most lenders require a credit score between 650 and 700, with 680 being the average minimum acceptable score.
If you need a business loan, consider a bad credit business loan. While the interest rates are higher for this type of financing, you could potentially use it as bridge financing while you repair or build your credit enough to qualify for an SBA loan.
Are all lender Requirements for SBA Loans the same?
No, each SBA lender sets its own requirements, which can vary significantly. The lack of standardized qualifications is one of the more challenging aspects of applying for an SBA loan. Before applying to any particular lender, verify that you meet their specific requirements.
At United Capital Source, most approved businesses we work with have the following minimums:
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A credit score of 650+.
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At least two years in business.
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At least $350K in annual revenue.
What are my options if I don’t meet the SBA Loan Requirements?
The world of small business financing has experienced rapid growth over the last two decades, driven by the emergence of fintech companies. Alternative online lenders and lending marketplaces can circumvent traditional loan requirements with technology tools that analyze a business’s financial health when making a credit decision.
As such, you have plenty of options outside the SBA loan programs (and commercial banks) when it comes to securing funding for your business. You could consider any of the following small business loans:
SBA Loan Requirements – Final Thoughts
SBA loans are the best business financing structures for eligible businesses, but many struggle to determine if they qualify. While there are no definitive qualifications, it’s generally accepted that you need a good credit score, strong revenue and cash flow, and at least one to two years in business.
Contact us if you need further guidance on your business’s eligibility and to apply for an SBA loan. Our loan executives can answer any questions you might have and help you find the right financing package for your business.
