Opinions expressed by Entrepreneur contributors are their own.
When you don't have the personal or investment capital necessary to start a business that requires a good chunk of it, the logical answer is to look into a business loan. And although just about any loan involves receiving a lump sum of cash and paying it back over a period of time, not every loan program is created equal. Out of all the business loan programs out there, many entrepreneurs tend to enjoy the accessibility and simplicity of SBA loans.
But how do you qualify for an SBA loan? The current economy is volatile, and following the financial losses caused by many coronavirus-related closures, more and more businesses are competing for precious capital. Here's how to get in on what's available.
Related: I Went to Prison for SBA Loan Fraud: 7 Things to Know When Taking COVID-19 Relief Money
Ensure your business meets the basic requirements
The SBA doesn't actually give out loans; instead, it works with individual lenders to distribute loans to small businesses by setting guidelines set by its partnering lenders and community development organizations. As such, it's crucial that your small business meets these "hard guidelines" in order to even be in the running for an SBA loan. The SBA requires that businesses are for-profit, based in the United States, and "small" (per its size standards) to start. Founders need to have invested time and money into the business, exhausted other lending options, and established the ability to repay the loan over a reasonable period of time. The SBA's lending partners do not consider businesses that don't meet these criteria, so if your business is technically an enterprise or you're legally a nonprofit, you may be out of luck. (Other less common characteristics can disqualify a business as well, such as being faith-based, gambling- or marijuana-focused, or discriminatory, like any business that focuses its resources on clients of a certain gender or race.)
Iron out your credit
Like with any other loan, the SBA will examine a founder's credit score and history to determine their likelihood and ability to pay back the loan amount. As such, SBA loans aren't available to business owners whose credit scores are under 670, or whose credit histories recently show delinquent payments. Try retrieving a copy of your credit report prior to applying for an SBA loan, and if your credit score is on the lower end, take steps to improve the score over time.
Prepare everything on the loan submission checklist
Applying for a loan is a lot more complicated than just asking for it. The SBA requires that any business looking for a loan completes an extensive loan application, a credit memo, a cash projection document and more. Some of these items are dependent on the amount of the desired loan, the age of the business or the number of borrowers on the loan application. Although less common, 504 loans (which are used for major fixed assets that frequently involve construction or long-term machinery) require different application items, so make sure to look out for the appropriate checklist for your desired loan.
Related: 5 Best and Fast Small-Business Loans (Some of Which You've Never Heard of)
Offer collateral
The SBA generally requires that business owners offer up some type of collateral to secure a loan. This is required of anyone who owns 20 percent or more of the business. Collateral can include assets such as real estate or office equipment, and can also cover things like accounts receivable, inventory and an owner's second mortgage on their home. In the SBA's own words, this is a founder's way of proving that they have "skin in the game."
Similar to any financial decision, taking on an SBA loan also comes with its risks. Offering up collateral can result in personal consequences if you can't make your payments. SBA loans often have relatively high interest rates as well, which means more money paid back over the long-term (even though those interest rates do have a cap). And just like mortgages, SBA loans often come with origination and appraisal fees that tack onto the down payment before you can receive the actual cash you've applied for. All of these factors are important to consider before biting the bullet.
If you do ever take out an SBA loan, remember that they can be put to use in a variety of different ways, including recovering from the impact of Covid-19, hiring new staff, investing in new technologies and even purchasing another business. As your business continues to grow, it is worth considering how this type of loan might best benefit your business.
Related: His Criminal Record Disqualified Him From Receiving PPP. So He Pushed Back, and Got the Rules Changed.
FAQs
In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding.
What 4 things make you eligible for an SBA loan? ›
Eligibility requirements
- Be an operating business.
- Operate for profit.
- Be located in the U.S.
- Be small under SBA size requirements.
- Not be a type of ineligible business.
- Not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources.
The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender. The five Cs of credit are character, capacity, capital, collateral, and conditions.
Which SBA loan is easiest to get approved for? ›
What is the easiest SBA loan to get approved for? Loans under the 7(a) program have a higher acceptance rate. And since most 7(a) loans are for $50,000 or less, it may be easier to get approved for a small amount with an Express loan. But you will still need to meet the minimum criteria to qualify and be approved.
How hard is it to qualify for an SBA loan? ›
The business owners personal credit history and personal credit score are very important in the businesses credit worthiness in the eyes of the SBA. It's important to have excellent credit history and a good personal credit score, with a standard minimum credit score of at least 680 to have the best chance of approval.
What is the easiest loan to get approved for? ›
Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. Before you apply for an emergency loan to obtain funds quickly, make sure you read the fine print so you know exactly what your costs will be.
What credit score do you need for a SBA loan? ›
While there's no official required SBA loan minimum credit score from the Small Business Administration, lenders will often set minimum credit score requirements for both personal and business. An SBSS of 140 to 160+ or a personal score of 620 to 640+ are commonly needed to qualify.
What percentage of SBA loans get approved? ›
Many statistics say that large banks approve SBA loans at rates as low as 20-30%, while smaller banks approve SBA loans at around 40% or less. All this to say: SBA loan approval rates hover at half or below all loan applications that are submitted.
What are the 5 Cs of credit SBA? ›
Lenders just want assurance that potential business borrowers are a safe and smart place to “invest” their loan dollars. One way to look at this is by becoming familiar with the “Five C's of Credit” (character, capacity, capital, conditions, and collateral.)
What is the debt to income ratio for SBA loan? ›
In general, you are more likely to qualify for an SBA loan if your DTI is below 50% and your DSCR is 1.25 or higher. The higher your DTI, the less likely you are to qualify for a loan as a general rule of thumb.
Common reasons for loan denial
- Too much debt.
- Bad credit history.
- You don't meet the lender's eligibility requirements.
- Not enough collateral.
- Not enough free capital or cash flow.
- Don't have a business checking account.
- High-risk industry.
- Don't have a business plan.
On average, most SBA loans take 30 to 90 days from applying to funding. 7(a) loan subtypes are backed directly by the SBA. The SBA's turnaround time is 2 to 10 business days, but approval from your chosen lender can take 30 to 60 days. Microloans are loans for smaller amounts of $50,000 or less.
What is the most common SBA loan? ›
The 7(a) Loan Program, SBA's primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. 7(a) loans can be used for: Acquiring, refinancing, or improving real estate and buildings. Short- and long-term working capital.
What will disqualify you from an SBA loan? ›
The most common reasons SBA loans are denied are poor credit, too much existing debt, or insufficient collateral. Other reasons include: Prior bankruptcy. Negative taxable income.
Why are SBA loans so hard to get? ›
Low credit scores are a common reason why it's difficult to get an SBA loan. Banks are risk-averse, and usually, require borrowers to have a FICO score above 650.
How much cash do you need to get a SBA loan? ›
Do SBA loans require a down payment? Yes, the minimum SBA loan down payment requirement is 10% for 7(a) and 504 loans, although this amount can vary based on a business's cash flow and collateral.
What are the 5 SBA requirements of a small business? ›
In addition to meeting the numerical standards for small, your business must:
- Be a for-profit business of any legal structure.
- Be independently owned and operated.
- Not be nationally dominant in its field.
- Be physically located and operate in the U.S. or its territories.
Exemption 4: The court relates that at issue are "the interim payment status of individual PPP loans (along with additional data that would reveal that status) under Exemption 4." Previously, "[t]he Court concluded that SBA had not canvassed the actual lenders, and so it instructed the agency to come back with data ...
What are the four primary areas of assistance the SBA offers? ›
The SBA assists small businesses in four main areas: financing, education and training, government contracting, and providing a voice in policy matters.
Can you get denied for an SBA? ›
So while there are many benefits to SBA loans, it's not rare to be rejected after applying. Even so, there are three things to do after your application for an SBA loan is rejected to determine your next steps.
