SBA loans are for businesses that do not have access to credit on reasonable terms elsewhere. The federal Small Business Administration partially guarantees the loans to reduce lenders’ financial risk. The type of SBA loan you need depends on what you’re using the funds for and how much you want to borrow. Generally speaking, SBA loans come with interest rates that are significantly lower than credit card rates.
Here are some types of SBA loans:
504 loan. Borrowers can use these loans to buy real estate and equipment, and they can qualify for up to $5.5 million, depending on their industry. These loans are provided by a certified development company, a nonprofit corporation that aims to encourage its community’s economic development.
7(a) loan. This is the most popular type of SBA loan and is available in amounts of up to $5 million.
Community Advantage. This loan program, a pilot within the 7(a) loan program, serves small businesses in underserved markets. Borrowers can qualify for loan amounts of $50,000 to $250,000.
Microloan. This program is for loans of less than $50,000. Dianna Seaborn, director of the Office of Financial Assistance for the SBA, says that the average microloan is for about $14,000.
Disaster loan. Through this program, borrowers can access low-interest loans of up to $2 million directly from the SBA to repair or replace real estate or other assets damaged or destroyed in a declared disaster. There is also a special disaster loan program for businesses affected when an essential employee who is a reservist is called to active duty.
Normally, the lender will first determine whether the borrower is eligible for reasonable credit terms without the SBA’s backing, says Debbie Fernandez, retired SBA office branch manager and current volunteer with the nonprofit business mentoring group Score.
If the applicant doesn’t qualify for a conventional business loan, then the lender can seek the SBA loan guarantee to help reduce the risk. A borrower cannot apply for an SBA loan guarantee directly. Rather, the borrower applies with the lender, and the lender applies for the SBA guarantee.
SBA loans are available to borrowers who meet these requirements:
- Location: The business must be physically located and operate in the U.S.
- Business type: The business must be for-profit and in an eligible industry. If you’re not sure whether your industry qualifies, check the short list of ineligible industries on page 2 of this SBA eligibility questionnaire.
- Investment: The borrower must have invested equity in the business.
- Size: Only small businesses qualify. Size requirements depend on the industry and either the number of employees or average annual receipts.
- Loan application history: The borrower cannot get the same capital on reasonable terms elsewhere.
Information Required for an SBA Loan
When you apply for a small business loan, you will need to gather documentation that shows that your business is viable and stable and has a record of paying its bills. Furthermore, each lender sets its own rules for lending, and any lender can impose documentation requirements that are more stringent than the SBA’s.
Applicants may have to provide documents like:
- A well-developed business plan
- Resumes of key personnel
- Articles of incorporation and bylaws
- A business certificate or license
- A business credit report
- Business tax returns
- A current business profit and loss statement
- Projected financial statements
- A current business debt schedule
- A business lease agreement
- Personal tax returns
- Personal financial statements for those who own 20 percent or more of the business
- A written valuation for any asset used as collateral to secure the loan
The lender will also look for red flags like a business bankruptcy, tax liens or too many UCC filings. A UCC filling is a legal document that says a lender may have an interest in the borrower’s personal or business property.
And lenders may require a personal and a business credit score. Of the many different business credit scores, the SBA typically uses the FICO Small Business Scoring Service score. Detweiler says if you don’t have a FICO SBSS score or it’s low, “that doesn’t mean you can’t get a loan, but it means your application will be manually reviewed and possibly more challenging to approve.”
She also notes that many small business owners have not established credit in their business’s name or don’t know whether they have a business credit file at all. “If you haven’t established credit for your business, the credit bureaus have no way to evaluate how the business handles its debts,” which can slow the application process.
If possible, work to establish credit in the name of your business before you start shopping for a loan. If you have a business credit report, get a copy and review it for accuracy. “Check your credit ahead of time so you don’t run into a hurdle during the application process,” says Detweiler.
SBA Loan Approval Criteria
The lender will use your documentation to determine the strength of your application. According to Bill Manger, associate administrator for the Office of Capital Access at the SBA, here are some criteria you should expect the lender and SBA to use to assess your loan application:
- Reputation and credit history of the applicant, the business (if applicable), its associates and guarantors
- Management experience
- Strength of the business
- Past earnings, projected cash flow and future prospects
- Ability to repay the loan with earnings from the business
- Sufficient invested equity to operate on a sound financial basis
- Potential for long-term success
- Nature and value of collateral, although inadequate collateral will not be the sole reason for denial of a loan request
- The effect any affiliates may have on the ultimate repayment ability of the applicant
Where to Start for an SBA Loan
For a successful loan application, preparation is key. Unpreparedness can hold up an application or lead to rejection. “Not having good financial information and a plan that is well-thought-out and supportable is a typical reason for an application to stall,” says Seaborn, “especially for younger, less experienced business owners.”
Fernandez agrees that the business plan is the cornerstone of your application. “Without a business plan, you’ve got no good road map to communicate your business model to the lender or investors – your product, service, your problem to solve. They need to know.” She also points out that the business owner should complete all the sections in the business plan. If the market analysis or financial projection, for example, is missing, the lender may reject the application.
Fortunately, the SBA and its resource partners provide resources to help you prepare your business plan. Any small business owner can access free help through the SBA’s Small Business Development Centers, Women’s Business Centers, Veteran’s Business Outreach Centers or Score. “These partners and mentors can help you put your business plan together,” Manger says, and that’s the first step.
Once you’re ready to apply, you can approach a lender directly or use the SBA’s online lender match tool. A local SBA-approved lender will generally contact you within 48 hours after you submit your information via the lender match tool.