SBA Loan Requirements
It’s been a tough few years for small business owners. You survived a global pandemic, and now you’re facing high inflation, interest rates that have risen sharply and the prospect of a slowdown that may tip over into a recession.
In such an economic climate, many small businesses are struggling to secure the financing they need. In itself, this is nothing new. Access to funding has been a thorn in the side of small business owners everywhere since the first shopkeepers hung out their shingles in pre-industrial times.
Fortunately, financing solutions have always existed too. And for many small business owners today, SBA loans are an attractive and viable funding solution. So, grab a cup of coffee and join us as we take a closer look at SBA loans, SBA loan requirements and how to get approved for an SBA loan.
1. What is an SBA loan?
2. SBA loan types
3. SBA loan requirements
4. SBA loan rates and repayment terms
5. Do credit scores affect your SBA loan application?
6. How to apply for an SBA loan
7. SBA loan alternatives
What is an SBA loan?
SBA loans are business loans offered by lenders backed by the federal government agency known as the Small Business Administration (SBA). While these lenders are commonly referred to as SBA lenders, they’re not a part of the SBA.
Benefits of SBA loans
Here’s why SBA-backed loans are among the best small business financing options:
- Lower down payments . You’ll need to make a down payment for an SBA loan, but it’ll be a lower down payment (typically 10%) than you would need for a traditional loan (typically 20%+).
- Flexible loan amounts. Depending on the type of SBA loan you apply for, you can access funding amounts ranging from $500 to around $10 million.
- SBA guaranty. SBA loans are partially backed by the SBA, which reduces lenders’ risks in providing the loans — and increases your chance of being approved. For most 7(a) loans, for example, the SBA guarantees up to 85% of loans of $150,000 or less and up to 75% of loans over $150,000.
- Capped interest rates. While you’ll negotiate the specific rate with the lender, SBA loans are often low interest because the SBA imposes a limit on the interest rate.
- Variety of loans. SBA loan programs come in many flavors (there are, for example, seven types of loan options available under the 7(a) program alone). So no matter your financing need, chances are there’s an SBA loan that will meet it.
Drawbacks of SBA loans
On the flip side, there are also downsides to applying for an SBA loan:
- Collateral and personal liability. Depending on the lender and the amount of your SBA loan, you will likely be required to provide collateral. And you’ll need to provide an unconditional personal guaranty (as will anyone else holding a 20% or higher ownership interest in the business).
- Slower approval times. Your SBA application needs two separate approvals: the lender’s and the SBA’s. However, working with an SBA Preferred Lender can speed up the process.
- Restrictions on how you can use the funds. You can’t use SBA loans for distributions (or payments to related entities), real estate investments, to pay off taxes owed or to refinance bad debt.
Traditionally, another drawback of SBA loans was the complicated process, with business owners forced to pore over the fine print for each type of loan. Foro changes all that. You’ll spend five minutes filling out a guided business profile, which is then distributed to multiple potential lenders, both SBA and non-SBA. Foro helps owners evaluate the pros and cons of different kinds of loans and can answer any questions you may have about the process.
Types of SBA Loans
What SBA loan option should you choose? It all depends on what your business needs the funding for.
SBA 7(a) loans
The 7(a) loan is the SBA’s main loan program, and it’s usually the one most people are referring to when talking about SBA loans. You can use a 7(a) loan to meet a number of needs, including:
- working capital, both long-term and short-term
- commercial real estate purchases, including land and buildings
- certain asset purchases (for example, machinery or inventory)
- construction or renovation
- startup, acquisition, operation or expansion costs
- refinancing business debt (subject to certain conditions)
And in addition to the standard 7(a) loan, which offers a maximum loan amount of $5 million, there are several other 7(a) loan options available:
SBA Express: This 7(a) loan offers a maximum loan amount of $500,000 and a 36-hour response time from the SBA.
Export Express: Available to export businesses, export express loans allow you to obtain loan funds of up to $500,000, with an SBA turnaround time of 24 hours.
Export Working Capital: Open to businesses generating export sales that need extra working capital, export working capital loans offer up to $5 million in funding (but note that there is no maximum interest cap).
International Trade: Also offering loan proceeds up to $5 million, this 7(a) loan is geared toward the expansion of export sales or dealing with the negative impact of imports.
CAPLines. This loan program contains four lines and is geared toward small businesses needing short-term or cyclical working-capital support.
SBA 504 loans
Also known as CDC/504 loans, the 504 loan provides long-term financing for the acquisition of long-term fixed assets (for example, land or buildings). Applications for 504 loans go through Certified Development Companies (CDCs), which are non-profit organizations regulated by the SBA.
A 504 loan is typically structured as follows:
● 50% as a conventional first mortgage from a traditional senior (or commercial) lender
● up to 40% as an SBA-guaranteed second mortgage
● borrower’s down payment for the remainder (usually 10%)
You can use 504 loan proceeds to purchase or construct long-term fixed assets or improve or modernize land or facilities. But you can’t use the funds for short-term needs such as working capital or inventory needs or to refinance debt or invest in rental real estate.
If you’re in need of a smaller loan amount of up to $50,000, the SBA microloan might be an effective financing route. The program is provided through nonprofit community-based organizations that serve as intermediary lenders, and you can use the funding for various needs, including working capital and inventory. You can’t, however, use microloans to pay off debt or acquire real estate.
Disaster relief loans
While your business will hopefully not require disaster relief, here’s a brief overview of the SBA’s disaster relief program. Unlike other SBA loans, SBA offers disaster relief loans directly to borrowers. If your business is located in a declared disaster area and you’ve suffered business losses as a result, the following loans are available:
- Physical damage loans: to repair and replace physical assets
- Mitigation assistance loans: to fund operating expenses
- Economic injury disaster loans: to cover economic injuries
- Military reservist loan: for operating expenses related to employees on active duty leave
SBA loan requirements
You’ll need to meet several requirements to be eligible for an SBA loan: general requirements, loan-specific requirements and lender requirements.
General SBA requirements
In general, your business should:
- be officially registered as a for-profit business
- be physically located and operating in the US
- have reasonable owner equity to invest
- have used other financing resources before applying, including personal assets
Specific SBA Loan Requirements
Each type of SBA loan has its own set of specific criteria as well:
7(a) loans. To be eligible for a 7(a) loan, your business must:
- qualify as a small business
- demonstrate a need for financial assistance
- have a sound business purpose for use of the funds
- be up-to-date on government debt obligations, with no previous defaults
- not operate within an ineligible industry
504 loans. To qualify for a 504 loan, your business must fall within the SBA’s small business size guidelines and have:
less than $15 million in tangible net worth
less than $5 million average net income in the two preceding years, after federal income taxes
● qualified management
● a viable business plan
● good character
● ability to repay the debt
Ineligible businesses include nonprofit organizations and those that engage in passive or speculative activities.
Microloans. Eligibility criteria for SBA microloans vary depending on the intermediary lender, as each will have its own requirements.
Individual lenders will also have their own eligibility requirements, which typically include:
- age of the business (how long you’ve been in business)
- business plan
- business financial statements, including profit and loss statements, balance sheets, and income statements
- credit profile (both business and personal)
SBA loan rates and repayment terms
You’ll be negotiating your loan rate with the lender, but that rate will be subject to the SBA’s interest rate caps.
Interest rates for 7(a) loans can be either fixed or variable. Payments stay the same for fixed rate loans, but variable rate payments will adjust whenever the underlying index rate changes.
Fixed rate loans. The maximum interest rates on fixed rate loans are based on the loan amount and the prime rate in effect on the first day of the month:
Variable rate loans. The base rate for variable rate loans can be the prime rate, the LIBOR rate, or the SBA optional peg rate, and the maximum rate depends on the loan amount and maturity:
Interest rates for SBA 504 loans are fixed and based on market interest rates. The interest rate is determined by the market rate for 5- and 10-year U.S. Treasury Notes at the time of loan closing, plus a spread set by the SBA and the lender.
The maximum term of an SBA microloan is six years, with no penalties for early repayment. The interest rate varies depending on the lender but is typically between 8% and 13%.
How to calculate current interest rates for SBA loans
The interest rates discussed in this blog may not reflect current market rates. You can find up-to-date interest rates for SBA 7(a) loans, as well as SBA 504 loans and SBA Microloans, by visiting the SBA website.
How to apply for SBA financing
If the words “loan application” make you think of countless forms, murky eligibility requirements and dead-end conversations with potential lenders, we don’t blame you. That’s how it’s often been. But with Foro, you can begin the loan application process in a matter of minutes. Simply fill out a guided business profile with basic information like your location, industry and financing needs. Within 48 hours, we’ll provide you with a list of lenders that are interested in supporting you with an SBA loan.
7(a) Loan application forms
One of the advantages of working with a preferred SBA lender (a bank or other financial institution that has been pre-approved by the SBA) is a more streamlined process with fewer forms to complete. For example, forms 148, 413 and 1919 are typically handled by preferred SBA lenders, who collect all that information from the borrowers.
With that in mind, here’s an overview of the forms that may be required in your 7(a) loan application:
SBA Form 148 (unconditional guarantee)
All individuals with an ownership interest of 20% or more in your business will need to provide an unlimited personal guarantee. Your lender may ask you to fill out Form 148, or it may use its own form.
SBA Form 413 (Personal Financial Statement)
SBA Form 413 provides information about the financial condition of the owners of your business. A separate form needs to be completed by each owner (including partners, LLC managing members and anyone holding a 20% or greater equity interest), as well as any individual providing a guaranty on the loan.
SBA Form 1919 (Borrower Information Form)
SBA Form 1919 is the form you’ll need to complete and submit to the lender as part of your SBA loan application. It’s split into three sections:
- Section I requires information about your business
- Section II requires information about individuals with an equity interest in your business
- Section III requires information about entities with an equity interest in your business
A separate Section II or III must be completed and signed by each relevant individual or entity.
SBA Form 1920 (Lender’s Application for Loan Guaranty)
Your lender fills out SBA Form 1920. Part Two of the form requires detailed information about your business that you’ll likely have to provide to your lender, such as:
- general information (for example, business name, address)
- what you’ll be using the loan proceeds for
- general eligibility
- specific eligibility information, such as personal history (criminal records) and defaults or delinquencies on government debt
- information relevant to the purpose of the loan
SBA loan alternatives
SBA loans are a great financing resource for small businesses. But you may have problems qualifying, or you may need quicker funding. In such cases, it might be worth investigating other funding options, such as:
- alternative lenders, including online lenders, private lenders and marketplace lenders
- crowdfunding platforms, such as Kickstarter or Indiegogo
- business credit cards
- asset-purchase-as-collateral financing (for example, equipment financing)
- accounts receivable financing (for example, using outstanding invoices as collateral)
If you qualify for an SBA loan, it’s often well worth applying. With its flexible repayment terms and maximum interest caps, the SBA loan can be a good option for small businesses that have exhausted traditional financing avenues.
What are the minimum requirements for an SBA loan?
To apply for an SBA loan, your business must, at a minimum:
- be a legal, for-profit business
- be located and run in the US
- have owner invested equity
- have attempted other means of financing
You’ll also need to meet the specific eligibility criteria required by the type of SBA loan you’re applying for, and the lender.
What disqualifies you from getting an SBA loan?
A number of factors can disqualify you from getting an SBA loan, including:
- operating in an ineligible industry
- previous default or current delinquency on a government debt
- poor credit scores
Belle Wong is a freelance writer specializing in finance, tech/SAAS, small business and marketing. She spends her spare moments testing out the latest productivity apps and plotting her latest novel. Connect with Belle on LinkedIn.