As a small business owner, you’ve probably considered borrowing to cover working capital, purchase equipment, or make capital investments. SBA loans have low rates, long repayment terms, and flexible funding options, which is why business owners typically love them.
However, the application process can be scary, and the path to getting the funding your business needs may feel overwhelming – the number of documents required and the strict eligibility criteria may make even the most determined entrepreneur hesitate.
The good news is that with some preparation, you can untangle the SBA loan requirements and help prepare your business for growth.
What is a SBA loan?
An SBA loan is a small business loan that the U.S. Small Business Administration (SBA) partially guarantees. These loans are designed to help small businesses meet SBA loan eligibility criteria and secure financing they typically can’t get elsewhere. The SBA doesn’t lend money itself; it partners with approved lenders like credit unions and banks to lend to small businesses.
The SBA guarantee may reduce the risk for lenders so small businesses are able to get the funding they need to grow. With lower interest rates and longer terms than other loans, SBA loans are typically a great option for owners looking to invest in the future of their business. Choosing the right SBA lender is crucial as they guide applicants through the necessary steps to secure financing.
Understand the different types of SBA loans available
Before you apply for an SBA loan, make sure you know all the loan programs and which one is right for your business. You'll want to consider not only loan eligibility requirements but also monthly payments, desired credit, and repayment terms when comparing options. An SBA 7(a) loan is one option; others include microloans for businesses needing less than $50k, or CDC/504 loans that may help finance commercial real estate, equipment, or fixed assets. Knowing all these types of loans will help you find one that fits your needs and business goals. Learn more about how to choose the right business loan for your business.
SmartBiz® doesn’t offer SBA microloans or 504 loans, but our network of banks in the SmartBiz network fund SBA 7(a) loans, Bank Term Loans, and more.
SBA 7a loans
SBA 7(a) loans are typically the most popular and versatile SBA loans. They are great for working capital, equipment purchases, or debt refinancing. They are generally useful for growing businesses with a loan amount of up to $5 million and 25 years to repay. A good business plan and strong financials are required for this loan.
CDC 504 loans
CDC/504 loans are long-term, fixed-rate financing typically used for big-ticket items like real estate, large equipment, or even purchasing an existing business. A lender funds 50% of the project cost in these loans, with 40% provided by a Certified Development Company (CDC) backed by the SBA, and the borrower supplies the final 10%. Loan amounts may go up to $5.5 million, with up to 25-year terms. This generally makes it an excellent choice for businesses planning significant growth through infrastructure investment.
SBA microloans
SBA microloans are typically ideal for startups or small businesses needing less than $50,000 for working capital or small-scale investments. Offered through nonprofit intermediaries, these loans typically have shorter repayment terms, up to six years, and competitive interest rates making them accessible for emerging businesses.
SBA express loans
SBA Express Loans have a faster and easier application process with a 36-hour turnaround. These loans are generally for small businesses that need cash fast. The max loan amount is $500,000, and like other SBA loans, may be used for working capital, equipment purchases, and even real estate. One of the biggest benefits of the SBA Express Loan is the fast approval process which may make it a great option for businesses that need funding quickly. However, because of the speed of processing, the SBA guarantee is 50%, which may result in slightly higher interest rates than other SBA loans.
SBA loan requirements
Each SBA loan has its own set of requirements. For example, for an SBA 7(a) loan application, you’ll generally need to meet these common SBA loan eligibility criteria (in addition to others) for a loan from banks in the SmartBiz® network.
$50,000 to $500,000 SBA 7(a) Working Capital or Debt Refinance:
- 2+ years in business
- The business owner's personal credit score is 650+
- U.S.-based business owned by U.S. citizen or lawful permanent resident who is 21+ years old
- No outstanding tax liens
- No bankruptcies or foreclosures in the last 3 years
- No recent charge-offs or settlements
- Current on government loans
Find all the latest eligibility criteria for your loan type on the SBA’s website.
Who qualifies as a small business?
The SBA defines a small business by industry-specific standards that take into account the number of employees and annual revenue. Generally, a small business in manufacturing or mining employs fewer than 500 people, while non-manufacturing sectors usually generate under $7.5 million in annual revenue. However, these figures may vary considerably depending on the industry and the SBA’s size criteria. Business owners should check the SBA’s size standards to confirm their SBA loan eligibility. Qualifying as a small business opens up essential funding opportunities and resources through SBA loans and other government-backed programs.
SBA loan credit score requirements
One of the first steps to apply for an SBA loan is to have a good credit score. Your credit score is key to SBA loan approval and will determine if you can get the funding you need to grow. Banks will look at both your personal and business credit scores during the SBA application process, so make sure they are in order by paying your bills on time and reducing your debt-to-credit ratio. These tips may help.
SBA loan credit score requirements are typically lower than those for traditional bank loans, but it’s still important to have a good credit history. Review your credit reports for errors and fix them. If your credit scores need work, consider building a good credit history before you start to apply for an SBA loan.
Collect all necessary financial documents
To apply, there are a considerable amount of SBA loan documents needed, so gather all necessary financial documentation and business information ahead of time. This generally includes:
- Business tax returns
- Personal tax returns
- Financial statements
- Bank statements
- Business licenses
- Any other records that establish your business’s financial health
Preparing all required documents in advance may significantly speed up the application process. Neatly organizing your financial records will not only simplify your loan application, but also clearly illustrate your business’s financial stability to potential lenders.
Create a detailed business plan
The SBA typically requires a business plan with your loan application. Your plan should align with the specific requirements of the SBA loan program you are applying for. If you haven’t created one yet, you’ll need to do so before applying.
Your business plan should be detailed and well organized and show why your business is a good investment. Start with a description of your business, including mission, vision, and unique selling proposition. Conduct market research to find your target market, competition, and industry trends.
Create financial projections including sales forecast, cash flow projection, and a profit and loss statement. Show your management team’s qualifications and outline your marketing and operational strategy. Including these in your plan will show lenders you have a handle on your business and its potential.
Need more guidance? Refer to our guide on why you may want to create a business plan.
Get professional assistance
Consider getting a small business consultant to help you qualify for an SBA loan. They can guide you through the process, help you prepare and review your loan application and business plan, organize your financial documents, and offer insights and advice based on their experience with SBA loans. If you do, make sure to find reputable consultants or organizations that work with small businesses and SBA loans.
Get prepared and get going
Preparing for an SBA loan application and understanding the SBA loan eligibility requirements may take time, but with careful planning, you may confidently navigate the SBA loan application process and secure the funding your business needs.
Visit our Learning Center for more valuable tips on how to prepare. When you're ready, you can explore our current rates and check if you pre-qualify* in just five minutes, all without affecting your credit score.*
