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SBA Loan Requirements: How to Get an SBA Loan

Small Business Administration (SBA) loans are popular for their relatively low interest rates, high loan amounts and flexible uses. But getting approved for an SBA loan can sometimes be more complex than getting approved for other types of financing. Understanding SBA loan requirements before you apply will save you valuable time you could spend launching or growing your business. The SBA approved $28.2 billion in loan funding for more than 63,500 small business loans in fiscal year 2019. If you qualify, an SBA loan might be the best financing option for your business.

What are SBA loans?

When you get an SBA loan, you are borrowing from an SBA-approved lender and your loan is partially guaranteed by the government. By backing these loans, the SBA is helping lenders to reduce their risk, which helps more business owners qualify for access to financing.

There are a few major types of SBA loan programs:

SBA 7(a) loans

The 7(a) loan program is the primary SBA loan program, and many people use the terms “SBA loans” and “7(a) loans” interchangeably; most of the time, unless your business has some specific purpose or qualifies for a certain category of SBA loan, you will be applying for an SBA 7(a) loan. These loans can be used for almost any business purpose, including business expansion, working capital, long-term capital expenditures such as facilities or equipment purchases, refinancing business debt, buying inventory or starting a business.

Standard 7(a) loans have a maximum loan amount of $5 million and a maximum term of up to 25 years for real estate loans or equipment with a useful life exceeding 10 years. Most standard 7(a) loans for working capital or equipment purchases have a term of five to 10 years. The SBA guarantees 85% of loans up to $150,000 and 75% for loans greater than $150,000. Rates are fixed, meaning the interest rate doesn’t change over the life of the loan, or variable, meaning the rate may change.

Other types of 7(a) loans include:
  • 7(a) Small Loan: Loan amounts up to $350,000, with collateral required for loans over $25,000.
  • SBA Express: Loan amounts up to $350,000 with faster approval, within 36 hours.
CAPLines

Also a 7(a) program, CAPLines are loans up to $5 million that help small businesses with short-term and cyclical working-capital needs. Maximum terms for CAPLines are up to 10 years with the exception of the Builders program. The four lines are:

  • Seasonal CAPLine: Finance seasonal increases in receivables, inventory or labor costs.
  • Contract CAPLine: Finance labor and material costs for assignable contracts.
  • Builders CAPLine: Designed for small construction companies, general contractors and builders.
  • Working CAPLine: Capital for companies that provide credit to other businesses and that repay their CAPLine by converting short-term assets to cash.
Community Advantage

A pilot program set to expire on Sept. 30, 2022, Community Advantage (CA) loans are issued by mission-focused nonprofit lenders to small businesses in underserved areas. Loan amounts are up to $250,000 with a maximum term of 10 years for working capital or business equipment, and up to 25 years for real estate purchases or equipment with a useful life exceeding 10 years.

Disaster assistance

The SBA also offers low-interest disaster assistance loans to help businesses recover from declared natural disasters. If your business is in an affected area, you can apply for SBA disaster loans including the Express Bridge. The Express Bridge program is set to expire on Sept. 30, 2020.

SBA 504/CDC loans

SBA 504 loans are part of a specialized loan program where the SBA works with approved private lenders and private nonprofit corporations, called Certified Development Companies (CDCs), to provide long-term loans of up to $5.5 million. But 504 loans can only be used for major investments like real estate and heavy equipment purchases.

Interest rates for 504 loans are fixed but will vary since they are correlated with the current market rate for five-year and 10-year U.S. Treasury bonds.

Microloans

SBA microloans are issued through nonprofit lenders and have a maximum loan amount of $50,000. These loans cannot be used for real estate and have a maximum term of six years.

Am I eligible for an SBA loan?

Each program we’ve described above may have individual requirements, but there are SBA loan requirements you must meet in order to qualify for any of its loans.

SBA requirements

  • Be a for-profit business that is officially registered and legally operating.
  • Be physically located and operating in the U.S. or U.S. territories.
  • Have the business owner’s own equity (time and/or money) invested in the business.
  • Meet the SBA’s size standards: Your business must qualify as a “small” business based on average annual receipts or average number of employees.
  • Not be receiving funds from any other financial lenders.
  • Be able to repay the loan based on your business’s projected operating cash flow.

As the business owner, you also are expected to meet certain requirements related to your managerial skills and personal integrity, including having:

  • A feasible business plan
  • Necessary management expertise and commitment to succeed
  • A personal statement showing that you are a law-abiding person who has good character and a history of repaying debts

Some types of businesses are ineligible for SBA loans, such as:

  • Real estate investment firms
  • Firms involved in speculative activities (wildcatting for oil or trading commodities futures)
  • Pyramid selling plans
  • Gambling enterprises such as racetracks and casinos
  • Charitable, religious or nonprofit organizations
  • Dealers of rare coins or stamps
  • Any business that is engaged in illegal activity or where the business owner is on parole

Read the SBA’s full terms, conditions and eligibility requirements before you apply.

Loan checklist

If you meet the SBA’s general criteria, you may need to provide basic documentation about you and your business. Not all of these documents and forms will be required for or apply to every applicant or program, but some of the most common items to include with your loan submission may include:

  • Personal financial statement
  • Current business income statement and balance sheet
  • Federal income tax returns for the previous three years
  • Cash flow projections (month-by-month, for one year)
  • Real estate purchase agreements (when buying real estate with SBA loan proceeds)
  • Articles of organization
  • Business licenses
  • Documentation of any lawsuits, judgments or bankruptcies

Lender requirements

Small businesses not only have to meet the SBA’s requirements, but they also need to meet their lender’s requirements. SBA-approved lenders have the flexibility to decide which loan applicants to approve, but in general, SBA lenders will be taking a close look at:

  • Time in business: If you have been in business for at least two to three years, you might be more likely to get approved; however, according to the SBA, 33% of approved businesses have less time in business than two years.
  • Business income: Be prepared to share your profit and loss statements.
  • Business plan: Do you have a detailed business plan, including financial projections?
  • Personal financial history: Along with your business credit history, be prepared to share your personal income tax returns.
  • Personal credit score: Those with a personal FICO Score of 680 or higher may have a greater chance of being approved, but some types of SBA loans might have even lower credit score requirements.

Credit scores. You don’t need to have perfect credit to get an SBA loan. While the SBA doesn’t set a specific minimum credit score, some lenders might. The SBA pre-screens prospective borrowers using the FICO Small Business Scoring Service (SBSS). The SBSS score is calculated based on data from business credit bureaus, consumer credit bureaus and other application data and borrower financial information.

Not everyone can get an SBA loan. But if your business is overlooked by the conventional loan approval process, an SBA loan might be more accessible.

SBA loan rates and requirements

The interest rate for an SBA loan will be negotiated with the lender, but it cannot exceed the SBA’s maximum interest rate, which may depend on the term length, the loan amount and the prime rate. The prime rate changes depending on federal interest rates and overall market trends. Some SBA loans also require a down payment. Here’s a closer look at SBA loan rates and requirements by type of loan:

SBA 7(a) loan programs

These rates also apply to CAPLines. Some types of SBA loans might require additional forms.

Loan program Maximum interest rates* Requirements Fees
7(a)  Fixed rates: 

$25,000 or less: 12.75%

$25,000-$50,000: 11.75%

$50,000-$250,000: 10.75%

Greater than $250,000: 9.75%

  • One-time guaranty fee
  • Annual service fee
7(a)  Variable rates: 
$25,000 or less: 9%
$25,000-$50,000: 8%
$50,000 or more: 7%
  • Greater than seven-year repayment schedule
  • Same requirements as above
  • One-time guaranty fee
  • Annual service fee
7(a) Variable rates:
$25,000 or less: 8.5%
$25,000-$50,000: 7.5%
$50,000 or more: 6.5%
  • Less than seven-year repayment schedule
  • Same requirements as above
  • One-time guaranty fee
  • Annual service fee
Community Advantage 10.25% (prime rate + 6%) on amounts up to $250,000
  • Collateral may be required for loans greater than $25,000
  • SBA Form 1919 and SBA Form 1920
Same as 7(a)
SBA Express $50,000 or less: 10.75%

$50,000-$350,000: 8.75%

  • Collateral may be required for amounts above $25,000
  • SBA Form 1919
Same as 7(a)

*Based on prime rate of 4.25%

SBA 504 loan program

Loan program Effective interest rates* Requirements Fees
SBA 504/CDC 10-year terms: 2.85%-3.89%
20-year terms: 2.81%-4.00%
25-year terms: 2.88%-3.71%

Rates change according to U.S. Treasury bond rates

  • Personal guaranty
  • Down payment between 10% and 20%
  • Processing
  • Closing
  • Servicing
  • Assumption
  • Underwriting

Total fees amount to about 3.5% of proceeds + 1% of unpaid balances

*As of March 8, 2020

SBA microloan program

Loan program Interest rates Requirements Fees
Microloans Average rate was 7.5% in fiscal year 2019. While amounts range up to $50,000, the average loan was $14,735 in FY2019.
  • Collateral and personal guarantee generally required
  • Packaging fee up to 2% or 3%
  • Closing fees

How to apply for an SBA loan

Now that you understand SBA loan requirements, you’re ready to apply. Start with the SBA Lender Match, a free online tool to connect small business owners with SBA-approved lenders. Within two business days, you will receive an email with contact information for interested lenders; some will contact you, or you can contact the lenders directly.

Are you already banking with an SBA lender? Check out this list of the 100 most active SBA 7(a) lenders to see if your bank is already approved to offer SBA loans; if so, ask your business banker about your options for SBA loans.

If you want to learn more about how to choose an SBA lender or how to understand the SBA loan approval process, consider reaching out for advice from a local Small Business Development Center, SCORE business mentor or SBA office. They can help you understand your options for SBA loans.

The SBA loan process might seem complicated and time-consuming, but the benefits can be worth the effort. Understanding the SBA loan requirements upfront can help you have a better-informed conversation with your SBA lender and make the right choice for your business.

 

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