SBA Loan Requirements: What Does the SBA Require for Its Loans?

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In order to qualify for an SBA loan, you'll need to be sure you have all the right paperwork and information ahead of time. SBA loans can sometimes take months to process, so being prepared and organized will help expedite the process. We put this guide together to help you get started on the SBA loan application process.

SBA Loan Requirements

It can be tough to qualify for an SBA loan. While some of the toughest requirements may come from the lenders themselves, the SBA sets its own requirements as well.

Business Must Meet SBA's Size Standard

First, a business must actually be deemed "small" in the eyes of the SBA to qualify for an SBA loan. The SBA's definition comes in the form of two main parameters:

  • Number of employees
  • Net worth or revenue

Knowing your business's classification will be key, as size definitions vary significantly across each field. For example, a motor-vehicle parts business cannot have more than 100 employees to be considered small. On the other hand, a greeting card publishing company can have up to 1,500 employees while still being considered small.

Similarly, a commercial bank is allowed to have $550 million in assets and still be considered small, while a soybean farmer can only have up to $750,000 in assets to be considered small. To keep things simple, we recommend using the SBA's size standards tool—and have your six-digit NAICS code handy. ave

Eligible Industries

Your business must be for-profit and based in the U.S. to qualify for an SBA loan. The SBA has a running list of businesses that are ineligible for SBA loans. If your business falls into one of the ineligible categories, you can still try to make a case for your business in the comments section on the application. Unfortunately, lenders themselves also may not lend to certain businesses, so you'll need to check their requirements, too.

Background Check

The final requirement for an SBA loan is a basic background check. Depending on the specific loan you apply for, you'll be required to fill out an SBA form 1919 and/or a SBA form 912 or Statement of Personal History.

The SBA uses this information to validate your personal details such as past addresses, personal citizenship and criminal history. If you have a criminal record, your application won't be automatically denied, but it will be reviewed much more closely. The SBA only bans lending to those associated with crimes of "moral turpitude," which includes crimes with violence or dishonesty.

Keep in mind that while the SBA may not automatically disqualify a borrower with any criminal record, lenders might.

How to Qualify for a Business Loan

While the SBA does set its own requirements, most borrowers actually fail to meet the requirements set by the lenders. As most SBA loans are sourced by traditional lenders such as banks, they tend to have some of the strictest requirements in the market.

Business Plan

Any lender will want to see an applicant's business plan to gain insight into their high-level strategy, direction and intended use of the financing. It's especially important to highlight your business description, financial analysis, product description, and market and competitive analysis.

Know the Lender's Requirements

While requirements will vary from lender to lender, the most common parameters are typically the applicant's credit score, age of business, annual revenue and cash reserves available. If you're applying for an SBA loan, chances are you're working with a traditional lender like a bank. Banks will likely require a minimum credit score of 680, two years in operation, at least $250,000 in annual revenue and enough assets to secure the loan you borrow.

Applicants will want to prepare the following documents ahead of time:

  • Personal and business income tax returns
  • Personal and business bank statements
  • A photocopy of the business owner's driver's license
  • Any commercial leases or licenses
  • Official articles of incorporation
  • A resume that shows relevant management or business experience
  • Business plan

Required Documents

Personal Information

  • Completed Borrower Information Form
  • Resumes
  • Statement of Personal History
  • Personal Financial Statement
  • Extraordinary Expenses
  • Personal Income Tax Returns
  • Personal Property Insurance Information

Business Financials

  • Identification Information
  • Financial Reports
  • Business Certificate/License
  • Proof of Collateral
  • Loan Application History
  • Business Banking Statements
  • Income Tax Returns
  • Business Plan
  • Business Lease

Is an SBA Loan Right for You?

SBA loans are typically the most competitive loans in the market. While the SBA doesn't lend directly to borrowers, it guarantees portions of each loan so lenders are incentivized to keep rates low. The guarantee ensures that if a borrower were to default, the SBA would pay the lender a portion of the borrowed loan. Additionally, the SBA sets its rate ceiling at the prime rate + 4.75%. The prime rate changes with the market, so it's variable. On top of low rates, SBA loans are typically larger compared to others in the market. In other words, they're cheap and flexible.

However, SBA loans often come with tougher requirements. The SBA sets its own basic requirements, detailed below, but lenders they partner with also have their own set of requirements. For the most part, the SBA will work with traditional lenders like banks to lend to small businesses. Banks, especially compared to online lenders, can be very difficult to qualify with. They'll usually require strong cash flows, high cash reserves, strong credit scores and a minimum age of business. It's because of these more stringent requirements that online lenders with more lenient requirements exist in the first place.

In addition, it's important that you compare an SBA loan to every financing option you have in the market. The SBA product line is varied and there should be a right fit for your needs assuming you can qualify with a lender that offers SBA loans.

Available SBA Loans

One of the strongest benefits to this program is the variety of available loans. Whether you're looking for equipment financing or a microloan, there is likely a SBA product for you. However, you'll have to find a bank that offers the specific loan you've chosen.

SBA 7(a) Loan

What we like: When people talk about SBA loans, they're likely talking about the SBA's flagship 7(a) loan. It's the SBA's most popular loan for good reason. The maximum you can borrow is $5,000,000, which is high for a term loan. Because the SBA mandates a rate limit, the 7(a) loan will likely be one of the cheapest options you can find for a loan of its size. The SBA sets a limit of the prime rate + 4.75%, but rates will typically float around 9% or 10%.

Drawbacks: There are two main downsides to the 7(a) loan: the amount of paperwork and the qualification requirements set by the SBA. While the size of funding is important, the time it takes to get that funding can be equally as important. Many online lenders today process loans within hours or days. The 7(a) loan, unfortunately, can take weeks or months to process. The heavy majority of lenders that offer SBA loans are banks, and they usually require a personal credit score of 680 or higher, multiple years in operation and strong cash flows.

Highlights:

  • Loan maximum of $5,000,000
  • Rate ceiling set at prime rate + 4.75%
  • Borrowers are subject to the requirements of individual lenders, which can be very difficult for small-business owners to meet

SBA Express 7(a) Loan

What we like: The SBA Express loan, a variant of the 7(a), is typically processed within 36 hours of completing the application. While the Express loan offers a quicker decision turnaround than 7(a) loans, the downside is borrowers are subject to smaller loan sizes and slightly higher rates.

Drawbacks: The Express loan is smaller compared to its parent loan, the 7(a), with a maximum limit of $350,000. We don't see this as a huge drawback, though, because it's still relatively large compared to other loans in the market. However, those looking to finance business acquisitions, commercial real estate deals or other large projects should look elsewhere.

Highlights:

  • Loan maximum of $350,000
  • Rate ceiling set at prime rate + 6.5%
  • Borrowers are subject to the requirements of individual lenders, which can be very difficult for small-business owners to meet.

SBA Community Advantage Loan

What we like: SBA Community Advantage (CA) loans are intended to help underrepresented business owners, such as veterans, or finance businesses in underserved communities. The SBA primarily offers CA loans through lenders that are known to provide for these types of communities, which helps ensure the right market can access these loans. Because CA loans target those who are unlikely to secure loans through traditional means, they are easier to qualify for than other loans. They are also competitively priced, with a maximum rate of the prime rate + 6%.

Drawbacks: The biggest drawback to the CA loan is its smaller size compared to other SBA loans. The maximum you can borrow is $250,000. Qualifying for a CA loan also means businesses need to demonstrate they are part of an underserved community. Despite these drawbacks, the CA loan is a great option for any business owner who has been turned down for similarly sized loans.

Highlights:

  • Loan maximum of $250,000
  • Rate ceiling set at prime rate + 6%
  • Borrowers must prove they help serve or are part of an underserved community.

SBA CAPlines

What we like: SBA CAPlines is actually an umbrella term that covers four distinct programs, which offers flexibility for those with varied uses. It covers a contract loan, a seasonal line of credit, a builder's line and a working capital line of credit. Each program varies in intended use from financing specific contracts to acting as a general business line of credit available for working capital. SBA CAPlines are set at a maximum of $5 million with a maximum rate of the prime rate + 4.75%.

Drawbacks: There aren't too many drawbacks to the SBA CAPlines family of loans other than the usual strict requirements. The SBA may require a lien or collateral for the loan, like other SBA loans, but lenders will typically require high personal credit scores of around 680 or higher and very strong cash flows.

Highlights:

  • Loan maximum of $5 million
  • Rate ceiling set at prime rate + 4.75%
  • There's a variety of loan types under the CAPlines family, including business lines of credit, which makes this a very flexible option.

SBA Microloan

What we like: SBA microloans are smaller loans offered by the SBA and nonprofit lenders throughout the U.S. The maximum you can borrow is $50,000 and can be used for working capital and machinery or equipment purchases. It's a small general-use loan ideal for businesses that can't qualify for or don't need larger loans. Rates are usually capped at around 8%–13%.

Drawbacks: Microloans are designed for very specific use cases and generally don't fit the majority of financing needs. Most businesses will require larger loans for longer-term projects or just larger needs. Also, if a borrower is looking to use a loan to refinance debt or for anything outside of general working capital, they should look elsewhere, as the SBA specifies against using microloans for these needs.

Highlights:

  • Loan maximum of $50,000
  • Rate ceiling set at 8%–13%
  • Strictly to be used for working capital

SBA 504 Loans

Why we like it: SBA 504 loans are primarily used for real estate and long-term equipment or machinery purchases. The 504 loan is lesser-known compared to its more popular SBA loan companions, and it is also structured a bit differently. When a loan is issued to a borrower, 50% or more of it is comprised of a traditional bank loan and up to 40% of the loan is issued by a Certified Development Company (CDC). Borrowers are responsible for a 10% down payment, and the SBA guarantees the CDC portion of the loan, which is why some people refer to the 504 loan as a SBA CDC/504 loan.

Because it is intended to be used for larger projects such as purchasing real estate or large machinery, the 504 loan is quite large with a maximum limit of $10,000,000. Rates are fixed and correlated with five-year and 10-year U.S. Treasuries, which is different from the rate structure of other SBA loans.

Drawbacks: Borrowers with large financing needs may be tempted to apply for a 504 loan, but if they don't intend to use the loan for real estate or large machinery, they should look elsewhere. Also, the 504 loan is one of the few loans that requires a down payment, but that's mostly due to the large loan size. Acquiring a 504 loan also means working closely with a local or nearby CDC.

Highlights:

  • Largest SBA loan with a cap of $10,000,000
  • Rates are fixed and tied to U.S. Treasuries
  • These can be used for refinancing loans as long as the ultimate financing goal is for real estate or large machinery transactions.

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