Small Business Administration (SBA) loan requirements determine your eligibility to qualify for funding and are focused on the characteristics of you and your business. Borrowers need to have excellent credit and strong financials that demonstrate their ability to repay the loan. Other SBA loan qualifications include having adequate collateral and providing a personal guarantee.
If you are looking to complete an SBA loan application in anticipation of the Paycheck Protection Program, Lendio is currently accepting online applications. For more information on requirements for Paycheck Protection Program Loans, read our guide.
What SBA Loans Are
SBA loans are business loans offered, or guaranteed, by the SBA. SBA-approved lenders originate most types of SBA loans. For certain types of loans, the SBA guarantees up to 85% of the amount borrowed. SBA loans have terms extending up to 25 years, with loan amounts up to $5 million or more.
Who SBA Loans Are Right For
SBA loans work well for most business financing needs. Whether your business needs working capital, real estate, or equipment, an SBA loan can provide the financing you need. One caveat to SBA loans is that you must not be able to obtain financing through other conventional lending sources.
Businesses that may benefit from an SBA loan include:
- Businesses unable to obtain credit elsewhere: Your lender is required to certify to the SBA that you cannot get some or all of the funds you’ve requested from other nongovernment sources under reasonable terms without assistance from the SBA
- Those needing working capital: SBA loans can be used to finance the working capital needs of small businesses
- Businesses making a commercial real estate purchase: SBA 7(a) and SBA 504 loans can be used to finance owner-occupied commercial real estate
- Small businesses needing equipment financing: For businesses in need of equipment, an SBA loan can be an affordable means of financing
While SBA loan funds can be used in a variety of ways, qualifying for an SBA loan is a challenge, especially for startup businesses. Prior to initiating the daunting SBA loan application process, we advise reviewing the SBA loan qualifications to determine if your business is eligible.
SBA Loan Qualifications & Requirements
Small United States-based for-profit businesses can qualify for SBA loans. The most popular type of SBA loan is the SBA 7(a) loan, and most SBA loan requirements are based on the requirements for this program. In general, to qualify for an SBA loan, you will need to have good credit, an established business or management experience in the industry, and be able to demonstrate your business’s ability to repay the loan. You’ll provide collateral and a personal guarantee.
Operating a For-profit Business
One of the primary SBA loan qualifications is that your business must operate on a for-profit basis—nonprofit businesses are ineligible—and be US-based. However, not all for-profit businesses are eligible.
Ineligible for-profit businesses include:
- Lending businesses
- Gambling businesses
- Most passive income businesses like apartment buildings and shopping centers
- Multilevel marketing businesses
- Life insurance businesses
The SBA does deem certain passive income businesses to be eligible, such as hotels and motels, marinas, licensed nursing homes, and assisted-living facilities. In general, the passive income businesses that are ineligible for SBA financing are those that may be considered investment properties. If you are uncertain as to whether or not your passive business may be eligible, you can inquire with your lender.
Business Size
To be eligible for SBA financing, your business must meet the specific SBA business size requirements for your industry. While there is variance in the definition of a small business based on industry type, in general, a business with less than 500 employees will meet this qualification requirement.
The SBA also allows for a business to be classified as small based on annual revenues. This definition also varies by industry and can mean businesses having less than $750,000 to $38.5 million in annual revenue.
Credit Score & Credit History
SBA loan qualifications require that borrowers have acceptable credit, but the SBA does not set a minimum credit score requirement. Individual lenders set credit score requirements at which they are comfortable lending. In general, lenders require that all primary business owners have a personal credit score of at least 680 (check your score for free).
In addition to having an acceptable credit score, you must also have a clear credit history with regard to government debt. This includes not having any delinquencies or defaults on debt obligations to the US government, including student loans.
Time in Business
The SBA does not set a minimum time in business requirement. However, lenders are generally more inclined to lend to established businesses. Most lenders require at least two years of business operations and management experience in the industry. Additional SBA loan requirements apply to startup businesses and require that the business owners be able to demonstrate managerial experience within the industry.
Sufficient Equity
Typically a maximum debt-to-equity ratio of three times for new businesses or four times for established businesses is acceptable; in other words, you need to have $1 in cash invested in your company for every $3 to $4 in loan funds
Ability to Repay
Your cash flow must be sufficient to cover all of your loans and other obligations with a cushion. A debt service coverage ratio (DSCR) on your business of 1.25 times—or better—is generally considered sufficient to demonstrate your ability to repay your debt obligations
Collateral
While SBA loans do not necessarily need to be fully collateralized, it is easier to obtain financing with more collateral—both personal and business. In general, you can expect that you will be required to provide a down payment of 10% to 20% of the loan amount in addition to pledging collateral to back the loan.
Personal Guarantee
The SBA requires that a personal guarantee be provided from all owners who own 20% or more of the company. This personal guarantee allows the lender and the SBA to hold you personally liable for the debt in the event the business fails. This means that in addition to the collateral used to secure the loan, the lender can also collect from your personal assets.
Does this sound like you? We recommend SmartBiz for the quickest and most streamlined SBA loan process. SmartBiz offers SBA working capital loans up to $350,000 and commercial real estate loans up to $5 million with repayment terms of 10 to 25 years. The SmartBiz online loan application can have you prequalified in minutes and funded in weeks.
SBA Loan Requirements for the Use of Loan Proceeds
SBA loan requirements specify how businesses can use loan proceeds, which vary by SBA loan type. Your loan documentation will explain the allowable uses of the loan proceeds. In general, businesses can only use SBA loan proceeds for legitimate and reasonable business purposes.
Eligible Use of Loan Proceeds: SBA 504, SBA Microloan & SBA 7(a) Loan Requirements
Use of SBA Loan Proceeds | SBA 504 Loan | SBA 7(a) Loan | SBA Microloan |
|---|---|---|---|
Land Acquisition (Purchase or Lease) | ✔ | ✔ | ✔ |
Land Site Improvements1 | ✔ | ✔ | ✔ |
Existing Building(s) Purchase2 | ✔ | ✔ | ✔ |
Existing Building(s) Renovation or Rehabilitation2 | ✔ | ✔ | ✔ |
New Building(s) Construction3 | ✔ | ✔ | ✔ |
Fixed Asset Purchase & Installation4 | ✔ | ✔ | ✔ |
Inventory | N/A | ✔ | ✔ |
Supplies | N/A | ✔ | ✔ |
Raw Materials | N/A | ✔ | ✔ |
Working Capital | N/A | ✔ | ✔ |
Refinance Existing Debt5 | N/A | ✔ | N/A |
Further detail on the use of SBA loan proceeds for some items footnoted in the table are:
- Land site improvements: Examples of site improvements include site preparation like grading, parking lots, and landscaping.
- Existing building purchase, renovation, or rehabilitation: The borrower’s business must permanently use and occupy at least 51% of the property’s square footage.
- New building construction: Your business must permanently use and occupy at least 60% of the space.
- Fixed asset purchase & installation: For SBA 504 loans, fixed assets must be in a permanent location, with a useful life of at least 10 years. On a case-by-case basis, the SBA will provide short-term 504 fixed asset financing for the purchase of furniture, fixtures, and equipment if it is an essential component of the overall project and small relative to the project size.
- Refinance existing debt: Loan proceeds cannot be used for refinancing of unsecured or undersecured loans, where the risk of loss is shifted to the SBA. Additionally, loan proceeds cannot be used to refinance debt that would have originally been ineligible for SBA financing.
SBA Loan Types
The SBA loan requirements on maximum loan terms vary by SBA loan type. However, the SBA 7(a) loan requirements provide the baseline for most of the types of loans. In general, the maximum SBA loan amount cannot exceed $5 million in aggregate across all loans to a single borrower and its affiliates. SBA 504 loans are an exception, given the lender or Certified Development Company (CDC) partnership.
The maximum repayment terms under the SBA loan requirements are based on collateral type. While the repayment terms vary by loan type, the maximum repayment terms generally are 10 years for working capital and 25 years for commercial real estate. Maximum SBA loan rates set by the SBA and are typically tied to a set percentage over the prime rate.
The following table provides an overview of loan terms for the most common SBA loan types:
SBA Loan Term Comparison
Types of Loans | Maximum Loan Amount | Maximum Repayment Terms | Maximum Interest Rates |
|---|---|---|---|
SBA 7(a) | $5 million | Inventory or working capital: 10 years Equipment: 10 years or useful life Commercial real estate: 25 years | Prime + 2.25% to 4.75% |
SBA 504 Loan | $14 million | Commercial real estate: 10 to 20 years | 4.85% to 5.08% |
SBA CAPLine | $5 million | Builder lines of credit: 5 years All other lines of credit: 10 years | Prime + 2.25% to 4.75% |
SBA Microloan | $50,000 | Up to 6 years | 8% to 13% |
Where to Find an SBA Loan
A common misconception is that the SBA issues loans. Instead, SBA loans are issued by traditional banks, credit unions, community development organizations, nonprofit institutions, and online lenders. The SBA provides a guarantee on the loan that protects the bank from loss if you default on your loan payments. Some lenders make the process of applying for an SBA loan easier than others, such as online lenders who will help you get your paperwork in order.
If you don’t know the SBA loan qualifications and necessary steps, qualifying for an SBA loan can be difficult. To make it easier, we’ve developed a comprehensive SBA loan document checklist to assist with the SBA application process.
SmartBiz offers a streamlined SBA loan process for SBA working capital loans up to $350,000 and commercial real estate loans up to $5 million, with loan terms of 10 to 25 years. SmartBiz can have you prequalified online in minutes and funded in weeks.
SBA Loan Alternatives
If your business doesn’t meet the minimum SBA loan qualifications, then you may want to consider an alternative. The financing option that’s right for you will depend on your circumstances, how much financing you need, and how quickly you need to receive the funds.
Business Line of Credit
A small business line of credit is a great alternative to an SBA loan if you need capital to prepare for unexpected expenses or want a line of credit to draw against. There is no need to go through the SBA loan requirements if this is your situation, and there are many options available.
Traditional Bank Loans
If you have good credit and cash flow, as well as plenty of collateral or liquidity, a traditional bank loan could be a viable alternative if you do not meet the SBA loan requirements. To obtain a traditional bank loan, contact your local bank or credit union to begin the application process.
Alternative Business Loans
If you need to receive funds quickly, you may be able to receive a quick decision from an alternative lender. These fast business loans often have more flexible credit terms, so you may be able to receive financing not otherwise available from either the SBA or a traditional bank.
Peer-to-Peer Loans
Another option if you don’t meet the SBA loan requirements is to obtain a peer-to-peer (P2P) business loan. P2P business loans are great for established businesses looking to borrow no more than $500,000 and needing a term of fewer than five years.
SBA Loan Requirements Frequently Asked Questions (FAQs)
This article has provided a lot of information about the SBA loan qualifications and SBA loan requirements. However, some questions are asked more frequently than others, which we’ve tried to address here.
Here are some of the most frequently asked questions about the SBA loan requirements.
Can I get an SBA loan if I am a Canadian citizen?
Financing options are available to non-US citizens living in the US legally. As a Canadian citizen, you may be eligible for SBA financing if you’re a nonimmigrant (documented) alien of the US and have received an eligible visa. You may also be eligible if you’ve received legal permanent resident status from the US.
Can I get an SBA loan if I operate an apartment complex?
The SBA loan requirements do not allow for financing of apartment complexes and other passive businesses. However, certain other eligible passive businesses are eligible for SBA financing. While an SBA loan isn’t an option, there are alternative types of multifamily housing loans you could consider to get the financing you need, including other government-backed loans.
Can I get an SBA loan if my business has international operations?
If your business has international operations, you are only authorized to use the loan proceeds for your domestic operations. Additionally, both your business and its employees must be subject to local and federal taxes. For more information, refer to the Business Located in the United States and Its Territories section of this article.
Bottom Line
The SBA loan requirements help identify small businesses eligible for SBA financing. While there are various types of loans offered, the SBA 7(a) loan requirements and those of the other SBA loan programs have similarities. Determining if you meet the SBA loan qualifications early in the process will save you time and eliminate potential frustration.
If you are ready to apply for an SBA loan, we recommend checking out SmartBiz. SmartBiz streamlines both the application and lending process by partnering with top SBA lenders. The online prequalification process for loans up to $350,000 is quick and simple, taking only minutes to complete.
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