SBA Loan Requirements
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
Small Business Administration (SBA) loan requirements determine your eligibility to qualify for funding and are focused on your characteristics and those of 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.
SBA-approved lenders originate most types of SBA loans and, 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. If you’re considering an SBA loan, a great place to start is with SmartBiz. SmartBiz streamlines the application and lending process by partnering with top SBA lenders. You can prequalify online for an SBA loan up to $350,000 within minutes.
SBA Loan Qualifications & Requirements
The most popular type of SBA loan is the SBA 7(a) loan, and most SBA loan requirements are based on those for this program. In general, to qualify for an SBA loan, you will need to have good credit and an established business or management experience in the industry. You must also be able to demonstrate your business’s ability to repay the loan, and you will need to provide collateral and a personal guarantee.
Business Size and Type of Business
Eligibility based on business size is classified by either employee count or revenue. While there is variance in the definition of a small business based on industry type, most businesses with less than 500 employees will meet the employee size requirement. The SBA also classifies a business 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.
The vast majority of American-based for-profit small businesses can qualify for SBA loans. Ineligible for-profit businesses include:
- Lending businesses
- Gambling businesses
- Some passive income businesses
- Multilevel marketing businesses
- Life insurance businesses
The SBA deems several passive income businesses to be eligible, such as hotels and motels, marinas, licensed nursing homes, and assisted living facilities. The passive income businesses that are ineligible for SBA financing are shopping centers, apartment complexes, or 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.
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. Most lenders require that all primary business owners have a personal FICO credit score of at least 680.
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 United States 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. Therefore, 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 at least 1.25 times is generally considered sufficient to demonstrate your ability to repay your debt obligations.
Collateral
While SBA loans do not necessarily need to be collateralized fully, it’s easier to obtain financing with more personal or business collateral. 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.
Requirements for Use of Loan Proceeds
SBA loan requirements specify how businesses can use loan proceeds, which vary by loan program. Businesses typically can only use SBA loan proceeds for legitimate and reasonable business purposes. Your loan documentation will explain those allowable uses in detail.
Eligible Use of SBA Loan Proceeds
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 | ✔ | ✔ | |
Supplies | ✔ | ✔ | |
Raw Materials | ✔ | ✔ | |
Working Capital | ✔ | ✔ | |
Refinance Existing Debt5 | ✔ |
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 and installation: For SBA 504 loans, fixed assets must have a remaining useful life of at least 10 years and must be in a permanent location. 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 loan amount and repayment terms vary by loan type. However, the SBA 7(a) loan requirements provide the baseline for most SBA loan programs. 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 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 are set by the SBA. Interest rates with SBA 7(a) loans are tied to a set percentage over the prime rate, while the rates on the SBA 504 loan are partly tied to long-term bonds and partly tied to bank interest rates.
SBA Loan Type Comparison
Types of Loans | Maximum Loan Amount | Maximum Repayment Terms |
|---|---|---|
SBA 7(a) | $5 million | Inventory or working capital: 10 years Equipment: 10 years or remaining useful life Commercial real estate: 25 years |
SBA 504 Loan | $14 million | Commercial real estate: 10 to 25 years |
SBA CAPLine | $5 million | Builder lines of credit: 5 years All other lines of credit: 10 years |
SBA Microloan | $50,000 | Up to 6 years |
Who SBA Loans Are Right For
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.
- Companies in need of 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.
Where to Find an SBA Loan
Outside of disaster loans, which are issued by the SBA, SBA loans are issued by banks, credit unions, community development organizations, nonprofit institutions, and online lenders. The SBA provides a guarantee on the loan that protects the lender from loss in the event that you default on repayment. 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.
Lendio is an online lending platform that connects you to more than 70 lenders, offering SBA 7(a), 504, and SBA Express loans with an online application. It will help you source the best possible loan offers with its online portal.
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.
Potential alternative funding sources if you don’t meet the SBA loan requirements are:
- Business line of credit: A small business line of credit is a great alternative to an SBA loan if you require capital to prepare for unexpected expenses or want a line of credit to draw against to cover recurring working capital expenses.
- 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. 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.
Bottom Line
The SBA sets loan requirements around eligibility for SBA financing based on business size, credit, and ability to repay debt. 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.
