Whether you’re just starting your small business or have been in operation for a while, obtaining financing is likely one of the biggest challenges you’ll face as an entrepreneur.
Securing an SBA loan can provide the capital needed to get your business up and running, fuel expansion plans, or address cash flow issues. However, with increased demand has come more stringent qualification requirements from the SBA.
The SBA loan program promotes small business growth and job creation. The program does this by providing access to funding options with lower interest rates and longer terms than traditional loans.
However, the SBA acts mainly as a guarantor for loans made by private sector lenders and wants to ensure a reasonable repayment assurance. As such, they evaluate numerous criteria to determine an applicant’s eligibility and creditworthiness before approving loans.
This article outlines the primary SBA loan qualifications so borrowers know exactly what to expect and can strengthen their application competitiveness.
1. Business Eligibility Requirements
A primary criterion the SBA evaluates in SBA loan qualifications is whether a business can apply for an SBA loan. To be considered, the business must qualify as small according to the SBA’s size standards. These standards define maximum employee headcounts and average annual receipts allowed for a business to be classified as small.
The size standards ensure SBA loans only go to businesses needing capital assistance. The permitted sizes vary significantly by industry for example, manufacturers can be larger than wholesalers. Business owners need to verify they don’t exceed the size restrictions for their NAICS code.
Additionally, the SBA only works with for-profit enterprises in the U.S. or its territories. Non-profit and foreign companies are ineligible. Finally, the SBA looks for indications the business has potential for ongoing success. They want a solid business plan and strategy to achieve financial viability before approving a loan.
2. Credit History and Score Requirements
The SBA will review both your personal and business credit history and scores. While exact score cutoffs vary, you’ll generally need minimum scores in the 620-680 range to be competitive.
Any late payments, collections, bankruptcies, or other derogatory items on your reports can significantly hurt your application. It’s a good idea to check your credit reports beforehand and correct any errors affecting your scores.
3. Collateral Requirements
Most SBA loans are secured rather than unsecured. You’ll need to pledge collateral that could be repossessed if you default on payments. Common collateral includes equipment, inventory, real estate, and commercial vehicles. The collateral value must be equal to or greater than the loan amount. You may also be asked to provide personal guarantees or assets as additional security.
4. Use of Loan Proceeds Requirements
The SBA requires that loan funds only be used for approved business purposes. This typically includes working capital, supplies, inventory, equipment, furniture and fixtures, leasehold improvements, and debt refinancing under certain conditions.
Personal use of funds is strictly prohibited. You’ll need to provide documentation showing how loan proceeds will be allocated.
5. Ownership and Management Experience Requirements
The SBA wants your management team to have the experience and expertise to operate a successful business.
At a minimum, the primary owners should have direct experience in your industry. A history of business ownership or management is preferred but only sometimes required. You may need to provide resumes highlighting relevant backgrounds.
6. Personal Credit History Requirements
The SBA will thoroughly review an applicant’s personal credit history and score when evaluating them for an SBA loan. They will obtain copies of the credit reports from all three major credit bureaus; Equifax, Experian, and TransUnion.
Any late payments, collections, bankruptcies, liens, or other derogatory items reported on personal credit reports can significantly hurt an application and make approval much less likely. Even past-due medical bills or utility payments reported to the credit bureaus may raise red flags for lenders.
The SBA prefers minimum credit scores in the mid-600s range, but scores under 600 will automatically be denied. Applicants must address any errors on their reports that may lower their scores.
7. Documentation Requirements
A complete SBA loan application involves submitting documentation like tax returns, financial statements, business plans, resumes, and personal financial statements. You must provide multiple years of tax returns to verify income and cash flow. Current individual and business financial statements are also required. The SBA prefers to see 12-24 months of financial data but may accept less for newer businesses.
8. Loan Amount and Term Limits
The maximum SBA loan amount you can qualify for depends on the specific program. 7(a) loans total $5 million, while 504 loans max at $5.5 million. Terms range from 7-25 years, depending on whether funds are used for equipment, real estate, or other long-term assets. The longer the term, the higher your monthly payments will be.
9. Fees and Interest Rates
While SBA loans come with competitive interest rates, various fees are also involved. These may include origination fees of up to 3% of the loan amount, annual servicing fees of 0.55% on outstanding balances, and other closing costs. Interest rates on 7(a) and 504 loans are negotiable between you and the lender but are typically pegged to the Wall Street Journal prime rate plus a spread.
10. Application Process Overview
The SBA loan application process usually takes 3-6 months. It begins with the business owner filling out a lengthy application that requests information such as the business’s financial history, type of loan needed, intended use of funds, management experience, and personal financial details.
Along with the application, the business must provide some eligible documentation. These documentation include tax returns for the previous 3 years, current personal and business financial statements, an entire business plan, resumes of owners and managers, and other relevant documents.
Once submitted, the application and supporting materials go through an extensive underwriting review by the participating SBA lender. The lender will carefully analyze the business’s creditworthiness, repayment ability, management qualifications, industry and market, collateral offered, loan terms requested, and use of funds. During this process, they may follow up with additional questions or requests for more documentation. If approved by the lender, the complete loan package is sent to the SBA for final eligibility approval.
The SBA will do its review, including checking business ownership and size requirements. A site visit by SBA staff to inspect collateral like equipment or property may also be involved. Assuming all criteria are satisfied, the SBA issues an approval letter. After addressing any final closing conditions, loan documents are drawn up, and funds are disbursed. The process entails thorough due diligence of both the business and personal financial profiles to assess the ability to repay the loan.
Paying careful attention to SBA loan qualifications can help optimize your chances of securing necessary funding.
While the criteria may seem daunting, taking proactive steps like credit repair and financial documentation preparation puts you in the best position for approval. Contact an SBA lender early to discuss your business situation and how to structure a competitive application.