If you are looking for a way to start or expand your small business, you may have heard of SBA loans. SBA loans are loans that are guaranteed by the U.S. Small Business Administration, a federal agency that helps small businesses get access to capital, counseling, and contracting opportunities.
SBA loans are not issued by the SBA itself, but by SBA-approved lenders, such as banks, credit unions, and online platforms. The SBA sets guidelines for the loans and reduces the risk for the lenders, making it easier for small businesses to qualify for financing.
SBA loans can be used for various purposes, such as working capital, fixed assets, debt refinancing, export financing, and disaster recovery. They offer competitive terms, such as low-interest rates, long repayment periods, and flexible eligibility requirements.
However, getting an SBA loan is not a simple or quick process. You need to meet certain criteria from both the SBA and the lender, prepare a lot of documentation, and wait for approval. In this article, we will explain how SBA loan qualification works and what you need to do to get an SBA loan for your small business.
Table of Contents
What are the types of SBA loans?
The SBA offers several loan programs to suit different needs and situations of small businesses. Some of the most common ones are:
- 7(a) loans: These are the most popular and versatile SBA loans. They can be used for almost any business purpose, such as working capital, equipment, inventory, real estate, or debt refinancing. They have a maximum amount of $5 million and a maximum repayment term of 10 years (or 25 years for real estate).
- 504 loans: These are loans that are designed for purchasing or improving fixed assets, such as land, buildings, machinery, or equipment. They have a maximum amount of $5.5 million and a maximum repayment term of 10 or 20 years (depending on the asset). They involve two lenders: a certified development company (CDC) that provides 40% of the loan amount and a bank or other lender that provides 50%. The borrower has to contribute 10% as a down payment.
- Microloans: These are small loans that are meant for startups and micro-businesses that need less than $50,000 in financing. They can be used for working capital, inventory, supplies, equipment, or furniture. They have a maximum repayment term of six years and an average interest rate of 8% to 13%.
- Disaster loans: These are loans that are available for businesses and homeowners that have been affected by a declared disaster, such as a hurricane, flood, fire, or pandemic. They can be used to repair or replace damaged property, equipment, inventory, or personal belongings. They have a maximum amount of $2 million and a maximum repayment term of 30 years.
What are the benefits of SBA loans?
SBA loans have many advantages over other types of financing for small businesses. Some of the benefits are:
- Lower interest rates: SBA loans have interest rates that are typically lower than those of conventional loans or credit cards. The interest rates vary depending on the type of loan, the amount, the term, and the lender, but they are usually capped by the SBA at a certain percentage above the prime rate.
- Longer repayment terms: SBA loans have repayment terms that are longer than those of most other loans. This means lower monthly payments and more cash flow for your business.
- Higher approval rates: SBA loans have higher approval rates than conventional loans because the SBA guarantees up to 85% of the loan amount in case of default. This reduces the risk for the lenders and makes them more willing to lend to small businesses that may not qualify otherwise.
- Flexible eligibility requirements: SBA loans have flexible eligibility requirements that allow more types of businesses and industries to qualify. The SBA does not have strict criteria for credit scores, collateral, revenue, or profitability, but rather considers each application on a case-by-case basis.
- Counseling and education: Some SBA loans come with continued support from the SBA or its partners, such as SBDCs, Women’s Business Centers, or SCORE mentors. These resources can help you start, grow, manage, or recover your business.
What are the general SBA loan requirements?
To qualify for an SBA loan, you need to meet some basic criteria from both the SBA and the lender. The exact requirements may vary depending on the type of loan you apply for and the lender you choose, but in general, you need to:
- Be a small business: You need to operate as a for-profit business in an eligible industry in the U.S. or its territories. You also need to meet the SBA’s size standards based on your industry’s average annual revenue or number of employees.
- Have invested equity: You need to show that you have invested your own time or money into your business and that you have some personal stake in its success.
- Have a need for financing: You need to demonstrate that you have a legitimate business purpose for using the loan funds and that you have tried other sources of financing before turning to an SBA loan.
- Have good credit: You need to have a good personal credit score (typically above 650) and a good business credit score (typically above 140). You also need to show that you have sufficient cash flow and repayment ability to service your debt.
- Have adequate collateral: You need to pledge some assets (such as real estate, equipment, inventory, or accounts receivable) as security for your loan. The value of your collateral should be at least equal to the amount of your loan.
- Have no delinquencies: You cannot be delinquent on any existing government debt obligations (such as taxes, and student loans) or have any history of bankruptcy, foreclosure, or default in the past three years.
What are some additional criteria for specific types of SBA loans?
Some types of SBA loans may have additional criteria that you need to meet in order to qualify. For example:
- 7(a) loans: You may need to provide additional information about your business history, management team, market opportunity, competitive analysis, etc.
- 504 loans: You may need to meet certain public policy goals, such as creating jobs, promoting minority-owned businesses, improving energy efficiency, etc.
- Microloans: You may need to participate in training or technical assistance programs offered by your microlender or its partners.
- Disaster loans: You may need to provide proof of physical damage or economic injury caused by the disaster, such as insurance claims, repair estimates, financial statements, etc.
How do you apply for an SBA loan?
The application process for an SBA loan can be lengthy and complex. It involves several steps and documents that you need to prepare and submit to both the SBA and the lender. Here is an overview of how it works:
- Find a lender: The first step is to find an SBA-approved lender that offers the type of loan you need. You can use the SBA’s Lender Match tool to find potential lenders based on your location and industry. You can also contact your local SBA district office or Small Business Development Center (SBDC) for referrals and guidance.
- Prepare your documents: The next step is to gather all the documents that you need to support your application. These may include:
- A business plan that outlines your business goals, strategies, market analysis, financial projections
- A personal resume that highlights your education, experience, skills, achievements
- A personal financial statement that shows your assets, liabilities, income, expenses
- A personal tax return for the past three years
- A business tax return for the past three years (if applicable)
- A business financial statement that shows your income statement, balance sheet, cash flow statement
- A business debt schedule that lists all your current business debts, including amount, interest rate, monthly payment, maturity date
- A list of collateral that you can offer as security for your loan
- A statement of purpose that explains how you plan to use the loan funds
- A copy of your business license, registration, permits, contracts, leases, etc.
- Submit your application: The third step is to submit your application package to your chosen lender. The lender will review your documents and perform a credit check and background check on you and your business. The lender will also appraise your collateral and verify your income and expenses.
- Get approved: The fourth step is to wait for approval from both the lender and the SBA. The approval time may vary depending on the type of loan you apply for and the volume of applications received by the lender and the SBA. It can take anywhere from a few weeks to several months.
- Receive your funds: The final step is to receive your funds once you sign all the closing documents and pay any fees associated with your loan (such as origination fee, guarantee fee, appraisal fee, etc.). You can then use your funds according to your stated purpose.
Final Words!
SBA loans are a great option for small businesses that need financing but may not qualify for conventional loans. They offer competitive terms, flexible eligibility requirements, and various types of loans to suit different needs.
However, getting an SBA loan is not easy or fast. You need to meet certain criteria from both the SBA and the lender, prepare a lot of documentation, and wait for approval.
If you need more information or assistance with your SBA loan application, feel free to contact us at Economic Development Collaborative. We are a nonprofit organization that provides free or low-cost business consulting, training, and access to capital for small businesses in Ventura, Santa Barbara, and Los Angeles counties. We can help you with your business plan, financial projections, market research, loan packaging, and more.
To get started, visit our website or call us at (805) 409-9159.
At Economic Development Collaborative, we provide resources and tools you can leverage to access funding for your small business. Contact us to learn more about fulfilling SBA loan requirements in California.
