A Succinct Guide to Qualifying for an SBA Loan

One of the most desirable small business loans is from a lender who genuinely wants to help you.

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By Jared Hecht

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For most owners of smaller businesses, expanding their business, buying new equipment or opening a second location is simply a pipe dream without access to capital.

Without access to enough money, it's difficult to continuously grow a business. If you've found yourself in a growth rut and are in need of capital, it might be time to apply for an SBA loan.

Before you jump feet first into the process though, it's important to know what an SBA loan is, how to qualify, and who is eligible.

Related: The 7 Different Loans You Can Get as a Business Owner

What is an SBA Loan?

An SBA Loan is a long-term, low-interest loan given to a small business through the Small Business Administration. The SBA (a part of the federal government) works with trusted lending partners to offer loans to small businesses.

The SBA doesn't lend money directly to small-business owners, but it does guarantee a portion of the loan, lowering the risk for the lending partners.

Depending on what you want to use your SBA Loan for and how much capital you need, there are a few types of SBA Loans you should know about.

Related: 4 Mistakes to Avoid When Applying for a Bank Loan

1. SBA 7(a) Loans

An SBA 7(a) loan is by far the most common SBA Loan. This type of SBA Loan can be for up to $5 million and can be used for working capital, refinancing debt, or buying another business, real estate, or equipment.

2. CDC / SBA 504 Loans

The CDC / SBA 504 Loan combines a loan from a non-profit Community Development Corporation or CDC with a loan from a bank lender to create a long-term, low-interest loan. The CDC / SBA 504 Loan can only be used to purchase fixed assets such as commercial real estate or heavy equipment.

3. SBA Microloans

SBA Microloans are small loans, usually only up to $50,000. They are typically offered for a shorter term and have a slightly higher interest rate than other SBA Loan types. Microloans are financed by the SBA through non-profit, community organizations.

There are many more types of SBA Loans but these are the most common.

Related: 5 Main Reasons Banks Turn Down Small-Business Owners for Loans

Who can get an SBA loan?

Who is eligible for an SBA Loan varies with the type of loan you're applying for. In general, though, a business must meet the following requirements to be eligible for an SBA Loan:

  • Be a registered business.
  • Be located and operate in the United States.
  • The business owner must have invested their time or money into the business.
  • The business must have exhausted all other financing options.

Eligibility requirements vary depending on what type of loan you're looking for, but in general, the SBA is looking to assess what the business does to make money, where it operates, and the owner's character.

The SBA wants to make sure a business will be able to repay the loan, but even a business with bad credit may be eligible for startup funding.

In general, the SBA looks for two-plus years in business, a 620 or higher credit score and $100,000 or more in annual revenue.

Related: When Seeking an SBA Loan, Remember the 5 C's

How does an SBA loan work?

One of the most common misconceptions about an SBA loan is that the money comes from the SBA. Instead, the SBA works with trusted lending partners and guarantees a portion of the loan.

Because a portion of the loan is guaranteed by the federal government, it allows the lending partners to feel safe to offer low-interest, long-term loans with minimal risk.

When a small business applies for an SBA loan, the borrower must be approved by not only the SBA but also by the intermediary lender. Because of this double-approval process, receiving approval and funding for an SBA Loan is often a longer process with more paperwork when compared to traditional loans.

The pros of an SBA loan include low down-payments, long payment terms, and reasonable interest rates. The interest rates for SBA loans typically start as low as 6.5 percent and can be paid off over 5-25 year terms.

When it comes to growing your business affordably, an SBA loan is truly the best way to go. It's not an easy approval process, but there are ways to improve your chances.

Related: We're Bringing Unsexy Back to Entrepreneurship

How can you improve your chance of approval for an SBA loan?

As most small-business owners quickly learn, receiving an SBA Loan is no easy feat. There are a lot of eligibility requirements and paperwork to work your way through.

Before you apply, make sure you have all of the necessary documentation, build-up your credit scores, develop a strong business plan, and provide collateral.

Gather Necessary Documents

When you apply for an SBA Loan, you'll need to provide the following documents:

  • Driver's license
  • Voided business check
  • Bank statements
  • Balance sheet
  • Profit &; loss statements
  • Business tax returns
  • Personal tax returns
  • Business plan
  • Business debt schedule

Build Credit

You might be surprised to learn that another important factor when applying for an SBA Loan is your personal credit score. Checking and working to improve your credit score will make it easier to receive approval for an SBA Loan.

You can improve your credit score by moderating your credit utilization, paying off credit cards, and paying bills on time.

In addition to checking your personal credit score, the SBA or secondary lender may want to check your business credit score.

Develop a Business Plan

Before you're approved for an SBA Loan, the lender will want to see your business plan. A business plan shows the lender how you plan to use the money and increase profits. Remember: the lender wants to make sure you'll be able to repay the loan.

Your business plan might also detail your product or service, management team, analysis of the industry, an operations plan, a sales and marketing strategy, and analysis of the businesses weaknesses and strengths.

Provide Collateral

Before qualifying for an SBA Loan, you may have to provide collateral to back the loan. This means that if you default on repaying the loan or your business fails, the lender can recover their money. Collateral typically includes real estate, equipment, inventory, or another asset that can be sold by the lender.

When it comes to growing a small business, there's no better loan than an SBA Loan. If your business qualifies for an SBA Loan, you're in for a low-interest, long-term boost to your small business.

Jared Hecht

Co-founder and CEO, Fundera

Jared is the CEO of Fundera, an online marketplace that matches small business owners to the best possible lender. Prior to Fundera, Jared co-founded GroupMe, a group messaging service that in August 2011 was acquired by Skype, which was subsequently acquired by Microsoft in October 2011. He currently serves on the Advisory Board of the Columbia University Entrepreneurship Organization and is an investor and advisor to startups such as Codecademy, SmartThings and TransferWise.

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