How Do I Qualify for a Small Business Loan?

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If you need financing to help your small business grow, there are plenty of options at your disposal. However, the various types of funding come with different requirements, processes, timelines and fees, which may leave your head spinning.

Small business loans typically offer the most affordable means of financing, but they often have stringent borrowing standards that make them difficult to qualify for, especially through traditional banks. One solution is to apply for an SBA loan, which is provided by a private lender but guaranteed by the U.S. Small Business Administration. This government guarantee reduces risk for banks, making it possible for them to provide funding to small business owners who otherwise may face denial.

SBA loans typically offer competitive interest rates and fees, lower down payment and collateral requirements than other business loans, and in some cases, free counseling and education. In the 2020 fiscal year alone, the SBA guaranteed more than $28 billion through its traditional 7(a) and 504 loan programs.

Qualifying for an SBA loan entails all of the same legwork you'd face if you were applying for other types of business loans, plus some additional requirements depending on the SBA loan type. You'll work with a lender rather than directly with the SBA to apply for and obtain your loan, but the SBA can help match you with lenders if you're not sure where to start your search.

How Do I Qualify for an SBA Loan?

SBA loans are only available to established small business owners who can meet certain requirements.

For starters, all SBA loans require the borrower to operate a for-profit small business in the United States. The owners must have invested equity in the business, demonstrate the ability to repay, and be unable to obtain funding from other lenders. Depending on the loan program and lender, there may be additional requirements to qualify. For example, for the two main SBA loan types:

7(a) Loan

The most common type of SBA loan, the 7(a) loan is available in amounts up to $5 million. Funds can be used for real estate, short- and long-term working capital, refinancing existing business debt or purchasing supplies. Approval may depend on what type of business you operate, where you operate and your business credit score. Your lender can help you determine your eligibility.

504 loans

SBA 504 loans are also available in amounts up to $5 million—but these loans can only be used for financing "major fixed assets" that will help your business grow and create jobs, according to the SBA. This includes the purchase or construction of buildings, land or machinery, though you can also use it for improving or modernizing facilities, land or other physical properties. Borrowers must have less than $15 million in tangible net worth and average net income below $5 million (after federal income taxes) in the prior two years.

Your SBA lender can help you assess how much you need to borrow and which loan program is right for you. They can also guide you through the process of gathering necessary documentation, including personal and business financial statements, business licenses and certificates and tax returns.

Keep in mind that you may need to spend some time tightening up your finances and credit, creating financial reports and making the case for your financial need in the application.

What Is the Minimum Credit Score for an SBA Loan?

In the SBA loan application process, just like with any other loan, your creditworthiness is considered. The SBA doesn't list specific credit score requirements, leaving discretion to the individual lender. That said, there's fierce competition for SBA loans, so having strong personal and business credit scores improves your chances of approval.

When you apply for a 7(a) loan, the lender will check your business credit score and likely your personal credit score. Your business credit score indicates the financial health of your business and helps the lender assess the risk of lending your business large sums.

Before you apply, check the health of your personal credit scores and business credit scores. If there are any inaccuracies or you see room for improvement, consider addressing them before submitting your application.

How Long Does It Take to Get Approved for an SBA Loan?

While SBA loans offer borrowers crucial access to low-cost business financing, the tradeoff comes in the time it takes to process applications and fundings.

SBA loans usually take longer to process than other loans, largely due to the significant amount of paperwork and underwriting required through this government program. The larger the amount and the longer the loan term, the longer the underwriting process can take. However, the more prepared you are upfront, the more efficient the process can be—so ensure you have all your documentation in order before you apply.

The SBA approval process usually takes 60 to 90 days, and the closing process can add a few more weeks or months, so it may not be the best option for businesses who need money fast. In those cases, it could be worth considering online lenders with fast turnarounds, though the rates and terms may not be as competitive as with an SBA loan.

There is one way to speed things up: You can apply for an SBA Express loan, which is a type of 7(a) loan. The turnaround for approval is much faster and less paperwork is required, but the borrowing maximum is far lower at $350,000. Additionally, these loans are only guaranteed up to 50% by the SBA. That means the lender assumes more risk, which could translate to less favorable loan terms for borrowers.

The Bottom Line

The SBA lending program requires jumping through some hoops and being patient in order to obtain a small business loan. But if you're coming up short on other options and you're not in a hurry, an SBA loan's competitive terms and government guarantee could help you secure the financing you need—and at a much lower cost than other forms of borrowing.