This article is part of a larger series on Business Financing.
There are six steps to applying for a Small Business Administration (SBA) loan, including determining your eligibility, selecting an SBA loan type, gathering your loan documents, finding a lender, and completing the SBA loan application and forms. Approval for an SBA loan can take around three months with traditional lenders and potentially less time using an SBA loan broker.
For a fast, streamlined SBA loan process, consider SmartBiz. SmartBiz offers SBA working capital loans up to $350,000 and commercial real estate loans up to $5 million. Loans have terms of 10 or 25 years with competitive interest rates. Its online application can have you prequalified in a few minutes and funded in as soon as 30 days.
Step 1: Review SBA Loan Eligibility
The first step in applying for an SBA loan is determining if you and your business qualify. Typically, you’ll need to meet both general SBA loan qualifications and SBA 7(a) loan requirements unless you’re applying for another type of SBA loan.
SBA Loan Qualifications
When applying for an SBA loan, it’s important to consider the specific SBA loan requirements. SBA loans are available to both startups and established businesses. However, qualifying as a startup can be more difficult unless you have extensive experience in your industry. The primary SBA loan requirements are:
- Credit score: A credit score of at least 680 is needed for all primary business owners.
- Down payment: You’ll need at least 10%, but up to 30% if you’re using the loan proceeds to purchase a business or commercial real estate.
- Collateral: SBA loans don’t need to be 100% collateralized, but the more business and/or personal collateral you can offer, the easier it’ll be to get your loan approved.
- Repayment ability: You need to have sufficient cash flow to cover all your loans with a cushion. A business debt service coverage ratio (DSCR) of 1.25x is typically sufficient.
- Time in business: You need to be in business for at least two years. Startups can get SBA 7(a) loans, but it’s more difficult. When considering how to qualify for an SBA loan as a startup business, you need to have sufficient management and industry experience.
- Owner-occupied: Commercial real estate loans must be at least 51% owner-occupied.
- Other requirements: No delinquencies or defaults on debt obligations to the United States government, including student loans. Additionally, your business will need to be profitable.
SBA 7(a) Loan Requirements
In addition to the SBA’s standard qualifications for financing, the SBA 7(a) loan program has additional eligibility criteria:
- Business size: As defined by the SBA, this generally means under 500 employees or less than $7.5 million in annual sales.
- Business type: A small business needs to be engaged in an industry that’s eligible, such as food service, retail, or hospitality. Nonprofits, lenders, gambling businesses, and businesses engaged in illegal activity are ineligible.
- Business location: Your business must be located in, or planning to do business in, the United States or its possessions.
- Business purpose and impact: You should be able to show a sound business purpose that demonstrates a need for the loan. Additionally, the SBA wants to see jobs created or retained and that lending to your business helps meet the SBA’s public policy goals.
Step 2: Choose the Right SBA Loan Program
There are six primary types of SBA loans available and each program is designed to meet different borrower needs. Selecting the SBA loan program in advance that best suits your business needs will make the rest of the steps go more smoothly. The primary SBA loan programs are:
- SBA 7(a) loan: This program is ideal for borrowers who need access to long-term capital for refinancing debt, buying a business, real estate, or equipment. This loan is the SBA’s most common.
- CDC/SBA 504 loan: Businesses looking to purchase equipment or owner-occupied commercial real estate should consider this loan.
- SBA CAPLines: Borrowers who need access to working capital for seasonal needs or to meet the needs of a particular contract or project can use this program.
- SBA Export loan: This loan helps small businesses fund new exporting operations so they can offer more flexible terms to their international customers.
- SBA Microloans: Smaller businesses can utilize these loans, which are issued through nonprofit, community-based organizations in amounts up to $50,000.
- SBA Disaster loan: Disaster relief funding is available to businesses in declared disaster areas and those who suffered property damage or economic losses. This loan is funded directly by the SBA, unlike the other SBA loans available.
Once you have an idea of which loan program to apply for, you’ll need to find a lender to complete the process.
Step 3: Find an SBA Loan Provider
Assuming you meet the SBA’s eligibility requirements, the next step is to find an SBA loan provider. Finding the right lender depends on your current banking relationship, how much you’re looking to borrow, how fast you need funds, and your planned use for the funds. As you consider how to get an SBA loan, let’s take a look at each loan provider option in greater detail.
Direct SBA Lenders
Your best option is finding a direct lender that regularly works with SBA loans. These providers are more likely to approve your loan application and typically know how to deal with unique circumstances you may have because of their experience. Direct lenders include traditional banks, credit unions, online banks, or other traditional lending institutions. Make sure the lender is part of the SBA Preferred Lender Program (an SBA PLP lender). PLP lenders have sufficient experience and such a strong track record that the SBA gives them more leeway to process loans faster.
We recommend asking potential lenders the following questions:
- What’s your total SBA loan volume?
- What’s your average SBA loan size?
- Are you an SBA preferred lender?
- How familiar are you with the SBA 7(a) borrowing and lending processes?
- How long does it take to get preapproved?
- How long will it take to get funded?
- Is there one person who will be my point of contact throughout the loan application process in case I have any questions?
- What are your internal policies on collateral for a loan like mine?
- Will I need a down payment? If so, how much?
- What are the approximate interest rates I might qualify for on an SBA loan?
One direct SBA lender to consider is South End Capital. South End Capital will provide SBA 7(a) financing up to $5 million with a credit score as low as 650. Getting in touch with South End takes just a few pieces of information, and they’ll quickly contact you to start the SBA loan process.
SBA Loan Brokers
SBA loan brokers can provide a valuable service to small business owners by leveraging their expertise. Brokers have a keen understanding of which lenders will be most likely to approve your loan for your type of business. They also know how to present your business’ loan request so it has a better chance of approval. SBA loan brokers can also save you a lot of time and headache by coordinating all the lender’s document requests and other communications.
However, not all small business loan brokers are created equal. As you think about how to get an SBA loan, asking several questions for your potential loan broker is an important step:
- How many lenders do you work with directly?
- How do you get paid? How much? When?
- How many loans have you closed?
- Have you previously worked with a business of my size or in my industry?
- How familiar are you with the SBA 7(a) loan process?
- What are the approximate interest rates I might qualify for with an SBA loan?
- How long does it take to get preapproved?
- How long will it take to get funded?
- How much of the process do you handle for me?
Using a broker to manage your SBA loan process will cost you a little extra money due to associated broker fees, but the right broker can make the process a lot smoother. Their ability to shop your loan proposal with multiple SBA loan providers may also improve your chances of approval.
When you find a lender, you should try to find out as much information about their interest rates and fees as possible. The SBA sets a cap on interest rates, but exact rates may vary by lender and SBA loan rates can change frequently. Once you’re preapproved, you can estimate your monthly payments using an SBA loan calculator.
SmartBiz is an SBA loan broker that’s experienced at getting borrowers through the application process quickly. Their experience makes the process of applying for an SBA loan much easier. Funding for qualified borrowers can occur in as soon as 30 days. You can prequalify by filling out their online application.
Step 4: Gather Required SBA Loan Documents
Once you have selected an SBA lender or loan broker, the next step is to gather all of the required documents for your application. These documents include personal and business tax returns, projected business financials, resumes, leases, and information about your loan request.
Required SBA Loan Documentation
The main documents required by a direct lender or SBA loan broker include:
- Loan request amount and detailed allocation of funds
- SBA business plan
- Projected financials (at least three years)
- Year-to-date profit and loss (P&L) statement
- Year-to-date balance sheet
- Proof of ownership
- Business certificate and/or licenses
- Business lease, if applicable
- Loan application history
- Business and personal tax returns for the last three years
- Personal financial statements
Required SBA Loan Documentation for Acquiring a Business
If you’re getting an SBA business acquisition loan, you’ll also need:
- Year-to-date balance sheet and profit and loss statement for the business you’re acquiring
- Last three years of business tax returns for the business you’re acquiring
- Purchase agreement, which should include asking price with a schedule of inventory, machinery and equipment, furniture and fixtures, accounts receivable, and intangible assets
- Business valuation from a certified business appraiser
Required SBA Loan Documentation for Commercial Real Estate
Both SBA 504/CDC loans and SBA 7(a) loans can be used for commercial real estate. Regardless of which loan you choose, the eligibility requirements, forms, and required documentation are almost identical to what’s required with working capital SBA 7(a) loans. However, there are additional requirements involved with getting real estate through the SBA:
- Rent rolls for all tenants: Commercial real estate typically has at least one tenant that pays rent, even if the only tenant is your business. You’ll need to provide rent rolls for all tenants involved with the property being purchased or used as collateral.
- Property appraisals: This will be ordered by the loan provider after your application is initially approved. You’ll typically pay for this appraisal. The amount your property appraises for may change how much you pay down or your maximum borrowing limit.
- Environmental studies: During the initial application, you’ll complete an environmental survey regarding your property. Based on this survey, an environmental study may be ordered by your loan provider after preliminary approval. The environmental study’s purpose is to reveal any potential issues with your property. If any red flags show up, then a more in-depth study may be necessary before the loan is approved.
- List of ongoing maintenance expenses: You’ll need to provide a breakdown of ongoing costs needed to upkeep the property.
- Current leases: The SBA requires that the property must be at least 51% owner-occupied. If you’re renting any portion of the property, then the loan provider will want to see all existing leases, along with the terms that you and your tenants have agreed to.
- Report on the condition of property: Most lenders will require a report on the condition of your property to see what deferred maintenance items are coming up in the near future. The loan provider will typically want to be comfortable that you have the cash to make any standard facility upgrades or overdue maintenance.
Other SBA Loan Documentation Requirements
If you have a 20% or more stake in any other business or own rental properties, you’ll also need to provide documentation such as financials and the appropriate operating agreements for those businesses. These are used to verify your ability to repay the loan. The overall goal is to show a lender that your company is well managed and has an attainable plan for profitability. Prepare a thorough business plan that includes projections of how you expect the business to perform in the next three to five years.
Much of the speed of your application process will depend on your ability to provide timely and accurate documentation to your lender. We’ve developed an SBA loan document checklist to help you get all the information you need to streamline your loan process.
Step 5: Complete SBA Loan Paperwork
After gathering all the necessary documents for your loan, you’ll need to fill out some additional SBA forms to submit with your application. The specific required forms will be determined based on the specific SBA loan type you’re applying for, the intended use of loan proceeds, and your business type. Check with your potential lender, as they may have their own version of these forms that you can use.
Here are comprehensive guides on the most-used SBA forms and how to complete them:
- SBA Form 1919 Guide (Borrower Information Form): Used for all 7(a) loans, this form is where you note down basic borrower information.
- SBA Form 912 Guide (Statement of Personal History): This form is used to evaluate your character.
- SBA Form 413 Guide (Personal Financial Statement): This form is used to assess the personal financial standing of you, your spouse (if applicable), and anyone who’s a proprietor of the business.
- SBA Form 159 Guide (Fee Disclosure Form and Compensation Agreement): This form is only necessary if you hire someone to help you with your SBA loan application. It details how much you paid them and the services they provided.
Once you’ve completed all of the forms and assembled your supporting paperwork, contact your bank to finalize your loan application.
Step 6: Submit Your Application
SBA loan applications vary by lender but typically will request basic information about you, your business, and the purpose of your loan request. This information helps the SBA get a better understanding of your business and how you intend to use and ultimately repay the funds you borrow:
The information required by the SBA to complete your loan includes:
- Executive summary
- Business profile
- Ownership breakdown
- Management experience
- Breakdown of how funds will be used
- Statement of how loan will be repaid
Most SBA lenders will have different paperwork that you’ll be required to fill out in addition to the SBA’s paperwork. Your application will vary in length, but this basic information about your small business will be required, regardless of which lender or program you choose. This application will be combined with the other supporting documents you have gathered, as well as the SBA forms you prepared, to make up your loan application package. To expedite the application process and to avoid delays, make sure you submit everything in one complete package.
Startups Applying for an SBA Loan
Many startups find SBA loans to be an attractive alternative to taking on high-interest rate debt, like using their credit cards. In FY 2021, 30% of SBA 7(a) loan dollars and 35% of SBA 7(a) loan units went to businesses in operation for two years or less. The SBA’s current strategic plan adds additional emphasis on providing small business loan opportunities to new and emerging businesses, as well as those in rural and urban areas with difficulty accessing loan funds.
The application process for a startup is mostly the same as it’s for an experienced business. However, there are some additional requirements to help show your commitment to your business or to demonstrate your knowledge of the industry and your business management experience:
- You may need to pledge additional personal collateral to get approved for your loan.
- The SBA likes to see that you have invested a portion of your liquid savings into the business. This can be as high as 30% of the project costs.
- You must have prior management experience in the industry to show that you can make the startup a success.
- Your approval chances increase if your business or industry is considered to be underserved.
Two SBA loan programs that are more startup-friendly are the Community Advantage Program and the Microloan Program. If you don’t think your business will qualify for an SBA loan, there are plenty of other startup loan options that might be available to you.
SBA Loan Application Timeline
The SBA loan timeline will depend on how familiar your lender is with the type of SBA loan you want and how prepared you’re with all the necessary paperwork. Funding times can range from as fast as 30 days if using an online broker to about three months with traditional lenders. Keep in mind that if you use a broker, you may pay additional fees for their services. You’ll typically go through these five stages when getting an SBA loan.
1. Prepare & Apply for an SBA Loan (Days or Weeks)
You should prepare by following the process (described above) on how to apply for a business loan from the SBA. By the end of the six steps, you’ve hopefully applied and have likely increased your chances of prequalifying for an SBA loan. Good preparation can help you accomplish this step in days versus weeks.
2. Review Letter of Intent (Up to 2 Weeks)
After submitting a full application, you can usually expect to hear back within two weeks. If your lender wants to move forward with the loan, they’ll provide you with an initial proposal or letter of intent (LOI). This will outline how much you qualify for and what you may expect as far as loan terms and rates. If you find the rates and terms agreeable, you’ll need to return a signed copy of the LOI to the lender pretty quickly. Most lenders will also require a small deposit, usually around $2,000, to move forward with underwriting the loan.
3. Loan Underwriting (2 to 3 Weeks)
After submitting a signed LOI and deposit, formal underwriting will take place. Underwriting for an SBA loan can typically take two to three weeks. During that time, the underwriting team may have further questions about your financials and your plans for the loan proceeds, or they may request other relevant documentation.
4. Receive Commitment Letter (Days to Weeks)
If underwriting is successful, your lender will give you a commitment letter outlining the terms of your loan and what steps remain before you can close. Accepting the commitment letter typically requires you to put down an additional deposit, usually $5,000 or 5% of the loan, to show the bank you’re ready to move towards closing. The timeline for this step depends on how quickly you respond. The deposit, minus any third-party expenses, is refundable if the loan isn’t funded.
5. SBA Loan Closing (Days or Weeks)
During closing, loan terms are finalized. The amount of time it takes to close the loan is determined by the complexity of your deal, your lender’s familiarity with SBA loans, and the length of third-party work such as appraisals and environmental reviews. Eventually, you’ll sign the loan agreement, all closing costs and SBA guarantee fees will be paid, and the loan proceeds will be disbursed.
Common Reasons Why SBA Loan Applications Get Denied
Applying for an SBA loan is time-consuming. Small business owners often wonder what will happen if they’re denied a loan. In the event your loan application is denied, you’ll receive a letter from your lender detailing the reason for the denial. Generally, loan denial is caused by one of five factors:
- Inadequate credit score: You can be denied financing if your credit score doesn’t meet the requirements of either the lender or the SBA. If your loan is rejected based on an inadequate credit score, there are steps you can take to improve your credit score.
- Negative personal history or credit history: If you have a criminal record, recent bankruptcy, foreclosure, or have defaulted on federal debt or student loans, your SBA loan application is likely to be denied.
- Insufficient collateral: While an SBA loan doesn’t need to be 100% backed by collateral, the lender is going to require a significant portion of the loan to be collateralized.
- Insufficient business revenues: Your business needs to be profitable to obtain an SBA loan. If your business isn’t generating enough to repay the debt, you may be denied financing.
- Insufficient supporting documentation: SBA loans require the business owner(s) to supply a lot of documentation, and lenders may want additional documentation as part of the review process. Failure to provide requested information can result in denial of the loan.
Applying for an SBA loan can be a complicated process, taking a significant amount of time away from running the day-to-day operations of your business. To speed up the process and make sure you apply correctly, partner with a loan provider that’s well-versed in SBA lending. Also, making sure you have all of your financial and business documents ready before applying will help improve the application process.