Finding funding is often a small business owner's biggest challenge. With extensive qualifications for normal bank loans, and high interest rates from some alternative online lenders, Small Business Administration (SBA) loans may be the best option for many small businesses. For instance, if your business has been affected by a natural disaster like a flood or hurricane, the SBA has an extensive program through local community banks that can help you get the funds you need.
Before diving into SBA loans, the qualifications and how you can get one, it is important to review the different types of loans. The SBA provides a full breakdown of all its loan offerings, but the most common SBA loans are either the 7(a) or 504 loan.
To be clear, you won't be going directly to the SBA for an SBA loan. You'll work with a local bank or lender who will determine your eligibility. That local bank will then work with the SBA to have the SBA back their loan to you, minimizing the bank's risk and encouraging the bank to lend money to businesses that have been affected by natural disasters, are owned by veterans or minorities, or have lower credit or revenue benchmarks.
Qualification requirements for SBA loans
Qualifying for an SBA loan requires extensive documentation, but qualifications may not be as stringent as typical bank loans. If you're not sure whether you will qualify, here are some points to consider.
- Years in business. The SBA wants to work with established local businesses, which means being in business for a minimum of roughly two years. There are some loan offerings for startups, but you will have to speak directly with an SBA expert to understand whether your new business can qualify.
- Credit score. If you're applying for a loan, they're going to check both your business and personal credit. While every situation is different, the general rule is that a credit score of 620 or higher is needed to acquire an SBA loan.
- Annual revenue. The SBA wants to see that your business is healthy and that you're driving revenue. You may not need to be profitable, per say, but you likely will need at least $100,000 in revenue each year to qualify. Again, this can vary based on your specific situation, but the key here is that your business needs to be established, healthy and capable of repayment.
Depending on the lender, there may be other requirements. It is very important to be transparent with your lender and determine what works best for your business.
Steps for obtaining an SBA loan
The SBA outlines some basic steps on how to apply, qualify and get funded through their program. These steps include:
- Small business owner and lender meet to discuss business plan.
- Small business owner completes loan application and submits it to lender.
- Lender reviews application and makes decision about loan.
- Lender submits application to the SBA to back the loan.
- SBA reviews information and determines if business can pay back loan.
- SBA submits decision to lender.
- SBA and lender sign loan agreements.
- SBA prepares a loan authorization for the small business owner.
- Loan documents are prepared after more research by the SBA.
- The loan is signed by all parties.
- Lender secures collateral.
- The loan is funded, and the business receives its money.
Is an SBA loan right for your business?
SBA loans can be ideal for working capital, property loans and disaster relief. Think of it as a government-backed loan. You will still be working with a local lender; however, the SBA takes on the risk of your loan from the lender, making it more likely for the lender to accept your funding request.
As with any financial decision, assess your businesses situation and make sure it's healthy enough to take on debt.