How To Get an SBA Loan in 4 Steps
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Andrew has over a decade of experience in finance and mortgage lending. He shares his expertise in Fit Small Business’s financing content.
This article is part of a larger series on Business Financing.
Applying for a Small Business Administration (SBA) loan involves four main steps. You’ll need to understand the different loan types, review your eligibility, find a lender, and apply for the SBA loan. In total, it can take between one and two months before you receive the loan proceeds. There may also be a significant amount of paperwork required depending on the details of your business.
To help simplify the process of how to get an SBA loan, you can follow our guide below. We also recommend SBG Funding as a provider that can help walk you through getting an SBA loan. It offers an online application that can be completed in minutes, with no impact to your credit score.
Step 1: Understand Your SBA Loan Options
There are six main types of SBA loans. The best one for you’ll depend on your business needs and whether you meet the qualification requirements:
- SBA 7(a) loans: This is the most common type of SBA financing. You can get up to $5 million in funds that can be used for working capital, purchasing furniture, and even refinancing current business debt.
- SBA CDC/504 loans: Offered through Certified Development Companies (CDCs), 504 loans provide up to $5 million in long-term, fixed-rate financing for major fixed assets that promote job creation and business growth. Some examples include buildings, land, machinery, and equipment.
- SBA CAPLines: This type of loan is a good choice for businesses that operate on a seasonal basis or have cyclical needs for working capital throughout the year. It can be structured as a revolving loan giving you the flexibility to draw funds when needed.
- SBA export loans: This type of loan is geared toward businesses that need capital to support overseas and international sales.
- SBA microloans: Microloans provide funding up to $50,000 and are a good fit for businesses that may not need a large amount of financing. According to the SBA, the average microloan is $13,000.
- SBA disaster loans: If your business is located in a declared disaster area, you can use an SBA disaster loan to get cash to cover operating expenses that would have been met if the disaster hadn’t occurred.
Step 2: Review Your SBA Loan Eligibility
Once you’ve identified the type of loan that best suits your needs, you’ll want to ensure you can meet the SBA loan requirements. Qualification requirements come in three main categories. These requirements include general requirements for all SBA loans and specific eligibility criteria for certain types of SBA loans. Individual lenders can also have additional requirements.
Regardless of which type of SBA loan you are applying for, you’ll need to meet the following criteria to be eligible for financing:
- Operate as a for-profit business: Non-profit organizations are not eligible. You must also meet SBA size standards, and operate in an eligible industry.
- Conduct business in the US: Your business must physically be located and conduct business in the US.
- Have invested equity to the business: As the business owner, you must show that you have invested your own time and money into the company.
- Have been unable to obtain financing from other lenders: You must have demonstrated an inability to obtain financing from other banks or lenders, along with reasoning for why you need the funds.
Additional qualification requirements may apply depending on the type of SBA loan you are applying for:
- SBA 7(a) loans: Certain businesses are not eligible for financing. A full list is on the SBA website, and includes companies engaged in illegal activities, speculation, gambling, lending, and more.
- SBA CDC/504 loans: For a CDC/504 loan, your business must have a tangible net worth of less than $15 million. Your average net income for the past two years must be less than $5 million after federal income taxes have been considered, and you must demonstrate qualified industry expertise and a feasible business plan.
- SBA Disaster loans: Four different types of disaster loans are offered by the SBA. These include physical damage loans, mitigation assistance, economic injury disaster loans, and military reservist loans. These loans may require collateral or proof that you are unable to cover daily operating expenses as a result of a declared disaster.
The SBA does not have formal requirements for certain items such as credit score or time in business. A lender will often apply its own additional requirements. As a result, you’ll find that the criteria can vary among providers:
- Personal credit score: A credit score of 680 or higher will give you a good chance of being approved by most SBA lenders. Keep in mind that this requirement can be different depending on the provider you choose.
- Business credit score: The FICO Small Business Scoring Service (SBSS) may be used to evaluate your business credit. Scores range from 0 to 300, and while the SBA has a minimum of 155 for some of its loans, lenders may have more strict requirements. A score of 160 or higher here will greatly improve your chances of an approval.
- Debt service coverage ratio (DSCR): This measures your company’s ability to repay its debts and is calculated by taking your company’s net operating income and dividing it by your current year’s obligations. You’ll generally need a DSCR of 1.25x or higher to qualify for financing from most SBA providers.
- Down payment: There is a 10% minimum down payment for many SBA loans such as 7(a) loans, CDC/504 loans, and microloans. Depending on your business qualification and loan details, the down payment requirement could be as high as 30%.
- Collateral & personal guarantee: Depending on the type of loan you get, a collateral or personal guarantee may be required by the lender. Microloans are an example of one type of SBA loan that often requires both.
- Time in business: You can get an SBA loan as a startup business, although it may involve more paperwork. The approval process should be much simpler once you have more than 24 months time in business.
Step 3: Find an SBA Loan Provider
To find an SBA provider, you can look at online lenders, banks, credit unions, and SBA brokers. You can also use our list of the best SBA lenders as a starting point.
For the best experience, we recommend working with SBA-preferred lenders since they have the authority to make a final credit decision on behalf of the SBA. If you work with a regular lender, your loan will have to be reviewed separately by the SBA, which can add several weeks to the process.
Other Factors to Consider
Before choosing a lender, you should also consider the following:
- Is it an SBA-preferred lender?
- How many SBA loans does the provider fund each year?
- How familiar is the lender with SBA loan requirements and processes?
- What rates and fees can you expect to receive?
- Has the lender worked with a company in my industry?
- How long will it take to get approved?
- Does the lender have high customer reviews?
- Does the lender conduct business primarily online?
- Does the lender have physical branch locations?
- What are the company’s hours of operation?
Step 4: Submit Your Application & Provide Required Documents
Once you’ve found a lender you want to work with, you’ll need to complete its loan application in addition to providing all supporting documentation. The type of loan you’re applying for will determine what documents the SBA will require. A lender may also have its own requirements.
Most SBA loans will require you to provide the following:
- Borrower information SBA form 1919: Provides the lender with general information about your business, details of the loan request, and any current or prior government financing.
- Personal financial statement SBA Form 413: Used by the SBA to assess your financial situation, repayment ability, and creditworthiness.
- Statement of personal history SBA form 912: This form is used to determine the character of a business owner based on things like criminal history and involvement with legal proceedings.
- Fee disclosure and compensation agreement SBA form 159: If you pay a third-party to assist you in getting an SBA loan, fees paid must be disclosed on this form.
- Financial statements: Be prepared to provide documents such as business and personal tax returns for the past three years, profit and loss statements, and revenue projections.
- Proof of business ownership: Depending on your company, you may be able to provide stock certificates or tax forms as proof of your percentage ownership.
- Business plan: A document stating your company’s goals and how it plans on achieving them. It should also detail items such as the qualifications of your company’s leadership team, potential challenges, competitors, revenue and income projections, and any subsidiaries your company is connected with.
- Business license and relevant certifications: You should provide a copy of your business license and any required professional certifications for your industry.
In addition to the items listed above, if you are purchasing a business, you will also need information on its finances, which may include:
- Current balance sheet and profit and loss statements
- Federal tax returns for the prior three years
- Purchase agreement for the sale of the company
- Business agreements, licensing agreements, and all contracts signed with third-party companies
- Business valuation from a certified appraiser
- Proof of equity injection
If you are using your SBA loan for real estate, there are a few additional documentation requirements:
- Property appraisal: This is used to establish the value of the property and serves as one indicator of any existing health or safety hazards.
- Environmental site assessment: A site assessment is often required to check for the presence of hazardous substances or contamination that could be considered a health or safety issue.
- Lease agreements: The SBA requires that real estate be at least 51% owner occupied. Providing lease agreements from all tenants is required as part of the verification process.
- Rent rolls: This documentation shows the income stream from rents received, cash flow, and profitability. It will contain information about individual tenants and the terms of their leases.
- Maintenance costs: You’ll need to provide a breakdown of expected ongoing costs to maintain the property. This is another item used in determining the potential profitability of a real estate project.
The items listed above are not meant to be an all-inclusive list. This is because the documents required can vary based on your specific business circumstances and the SBA lender you are working with. Some examples of additional items you may need to provide can include:
- SBA form 1368 if applying for an SBA economic injury disaster loan (EIDL)
- Explanations for significant increases/decreases in income
- Bank statements
- Documents to explain unusual bank deposits
- Tax returns and financial statements for other businesses you have ownership interest of 20% or more
What To Expect After Applying
From the time you submit your application, it generally takes between one and two months before you receive cash proceeds. This is because the lender needs time to review your application and prepare closing documents to be signed. Here’s what you can expect after completing a loan application.
After you submit your application along with the required documents, the lender will perform a preliminary review to determine if your business is eligible for the type of loan being requested. If approved, you will be issued a letter of intent outlining the terms of the loan. You’ll be able to see your loan amount, interest rate, any required down payment or deposit, and loan fees which may also include an SBA guarantee fee.
After accepting the terms on the letter of intent, your loan will be moved to underwriting. During this step, your credit, income, and financials will be reviewed in greater detail. It is common for the lender to ask you questions or request more documents to clarify anything unusual. This can include explanations for items on your credit report, large deposits in your bank accounts, or fluctuations in income or expenses.
If the lender issues a loan approval, it will issue you a commitment letter. This letter outlines the terms of your loan as well as any outstanding items or steps that you must take. If you still wish to proceed, you will need to sign and accept the conditions on the commitment letter to continue moving forward with the process.
After accepting your commitment letter, final loan documents and disclosures will be prepared and sent to you to be signed. This process can vary based on the complexity of the transaction, and can take anywhere from several days to two weeks to be completed. Upon signing your final loan documents, your loan will be funded.
Bottom Line
When you decide to get a small business loan, you can save time and money by preparing the necessary documents ahead of time. This is especially true for SBA loans as it can be a complex process that involves a lot of paperwork. You can also improve your overall experience and increase your chances of getting approved more quickly by choosing the right SBA provider.
