SBA Loan Requirements

To be eligible for an SBA loan, your business must be for-profit. Your company should have a focus on not only providing a product or service to consumers, but it must do so with the intention of making a profit.

Meanwhile, nonprofits typically are ineligible for SBA loans. Common examples of these organizations include charities, volunteer organizations, and clubs.

If you qualify as a for-profit organization, your business must be registered with any applicable state or federal organizations. It must also be physically located and operate in the US or the US territories.

SBA loans are designed for small businesses, and you’ll need to meet the SBA’s definition of what this is. This is determined primarily by your company’s employee count and revenue and the industry it operates in.

To help make this determination, you can use the SBA’s size standards tool. By answering a few questions about your business, you can get a preliminary determination on whether you might qualify.

For details on what criteria are used, you can view the full description in the online version of the Code of Federal Regulations. There, you’ll find a list of each industry along with the corresponding limits for revenue and employee count.

The SBA considers how your business earns revenue and the character of its leadership team. Businesses deemed to be conducting business in an unethical manner may be ineligible for an SBA loan. The SBA can also consider the legality of your company’s products or services at the state and federal level.

Similarly, the SBA can review actions by individuals on your leadership team. Some examples can include any history of criminal convictions or actions that resulted in the suspension or forfeiture or a professional license or certification.

SBA loans typically aren’t intended as a primary source of funding for businesses. To be eligible for financing, you’ll be expected to have attempted to get financing from other nongovernment lenders first. If you were unsuccessful or the specific type of financing you needed was unavailable, you can then consider applying for an SBA loan.

If you want to get an SBA 7(a) loan, you must not be delinquent on any federal debt. Some examples of federal debt can include student loans, other government loans, and judgments on real estate with amounts owed to the federal government.

You must also not be considered an ineligible business. The SBA has a list of ineligible businesses, and many include those engaged in illegal activities, speculation, gambling, and more. Some examples include:

• Real estate investment firms
• Dealers of rare coins or stamps
• Companies involved in lending money (such as banks, insurance, or leasing companies)
• Pyramid sales plans

For more details on eligibility criteria, rates, and terms, you can read our article covering SBA 7(a) loan requirements.

The SBA CAPLines program is offered in four different formats. You’ll need to meet the standard set of 7(a) criteria, along with an additional set of requirements depending on which CAPLines program you choose. We’ve summarized these programs below, and you can head over to the SBA website for more details on the CAPLines program:

1. Seasonal CAPLine: You must be in business for at least one year and demonstrate a pattern of seasonal activity. Proceeds must be used to finance increases in inventory and accounts receivables associated with seasonality.
2. Contract CAPLine: You must demonstrate a sufficient amount of expertise, experience, and financial ability to complete the contract in a timely manner. Proceeds must be used to finance the cost of expenses related to specific projects.
3. Builders CAPLine: This requires that your business has the experience and licenses to perform the necessary construction or renovation work on a project. You must also have a prior history of successfully bidding on and completing similar projects. Proceeds from a Builders CAPLine must be used for expenses related to the construction or renovation of a specific project.
4. Working CAPLine: This requires that your business generate accounts receivable or have inventory. Funds can be used for a variety of daily business expenses, working capital, and other operating needs.

SBA 504 loans are issued through Certified Development Companies (CDCs) and require that your business have:

• A tangible net worth that does not exceed $15 million
• An average net income less than $5 million for the two years preceding your loan application (this figure is measured after deducting federal income taxes paid)

Similar to SBA 7(a) loans, your business must not be involved in any passive or speculative activities. Some examples of this are:

• Businesses that resell collectible items
• Real estate investment firms
• Businesses involved in lending money

To learn more about what it takes to be eligible for this type of loan, head over to our guide on the SBA 504 loan, where we address how it works and who it’s right for.

The most common additional requirements for SBA disaster loans is to provide proof that your business has been impacted by a declared disaster, has been unable to obtain financing from other lenders, and has a need for funding to cover daily operating expenses.

The SBA offers four different types of disaster loans, and the specific requirements can change depending on the type and nature of the declared disaster. To learn more, you can read our guide on SBA disaster loans.

Your personal and business credit can both be reviewed to determine your eligibility for an SBA loan. Having a history of late payments can make it more difficult to get approved. Credit scores are also important as they are used to illustrate the likelihood you’ll continue making payments in a timely manner based on your previous history.

Personal credit scores typically range from a low of 300 to a high of 850, and it’s recommended that you have at least a 680 to improve your chances of getting approved. If a lender reviews your business credit score, it may use the FICO Small Business Scoring Service, which ranges from 0 to 300. Having a score of 160 will greatly improve your chances of landing an approval.

The DSCR is meant to be used as one indicator of your company’s ability to repay debt, and many lenders look for a DSCR of 1.25x or greater. It is calculated by taking your business annual net operating income and dividing it by its current year obligations. Alternatively, you can use our DSCR calculator.

Some lenders may look at the amount of annual revenue your company earns as a basis for determining your eligibility for an SBA loan. Lenders may also use this information to determine the rate you qualify for.

It’s recommended to be in business for at least two years. Otherwise, you’ll be considered a startup and may have more difficulty getting an SBA loan. This is because startups have a high failure rate.

Although not impossible to get an SBA loan as a startup, the process tends to involve more paperwork and other documentation to allow lenders to better assess the risk associated with lending to you. If you are a startup, we recommend reading our guide on how to get an SBA startup loan.

SBA loans typically require a minimum down payment of 10%. This applies to loans such as 7(a), 504, and microloans. However, keep in mind that although this may be a minimum requirement for many lenders, a larger down payment may be needed if other areas of your business are not as strong. In some cases, down payments may need to be as large as 30%.

Depending on the overall strength of your applications, lenders may sometimes require additional collateral or a personal guarantee. Collateral pledged for a loan reduces a lender’s risk of financial loss because it gives it the right to take possession of it in the event you default on the loan. Similarly, a personal guarantee for a loan means that a lender can pursue your personal assets even if your business defaults.