SBA Loan Requirements to Be Aware Of Before Applying
SBA loans are meant to be last resort options for entrepreneurs who cannot get funding in another way. For example, if a business owner applies for a bank loan, but doesn’t have enough collateral or a high credit score that means the bank’s requirements, they could be a candidate for an SBA loan.
If your business needs financing and has exhausted other options, read this post to ensure that you understand the SBA’s loan requirements prior to applying for their loan options.
Types of SBA Loans
The 7(a) is for general business use, covering various needs such as real estate for both startups and existing businesses. In addition to backing part of the loan, the SBA also caps the interest rate that lenders can charge at a set amount above the prime rate.
The 504 Local Development Company Program works in conjunction with Certified Development Companies to help small businesses acquire long-term, fixed-rate funding for real estate, machinery, and equipment they will use to generate commerce.
As the name suggests, Microloans are in amounts that may be in amounts that are too low to be received through a standard term loan. It’s meant to cover short-term, working capital needs, but not debts or property purchases. With Microloans, money is lent on a long-term, low-cost basis to qualified SBA Microloan lenders. Then, these lenders extend smaller, short-term loans to business owners to cover working capital.
Within the broad loan programs are more niche categories. For example, the SBA 7(a) Express Loans program offers faster time to funding for small amounts at the cost of higher interest rates and less government funding than the standard kind.
How to Qualify
The criteria for eligibility is similar to standard loans. Lenders will want to see a good credit score and financial history, a down payment, and ideally some kind of collateral. You must also be a registered qualifying small business operating in the U.S. The exact requirements will depend on the lending institution and the type of loan that you’re applying for, and is subject to change. However, there are a few broad requirements that dictate eligibility.
The SBA loan programs are not meant to take the place of traditional lending institutions or standard practices. To qualify for financial assistance, entrepreneurs must prove that they have tried everything else to get funding – including rejected loan applications, and possibly personal assets.
Start-ups have a harder time qualifying for SBA loans for the same reasons that they may not qualify for a standard term loan—for example, not enough business financial history. Also, you may be disqualified for past delinquency on personal or business debt, or a low individual credit score. However, being able to show history of business success could work in your favor. Note that the amount and type of loan you apply for may also make a difference. For example, fledgling businesses should consider microloans which are friendlier to newbies.
Finding the Right Program
Occasionally, the U.S. SBA may pilot programs to serve specific policy agendas. For example, the SBA previously offered a Community Advantage loan program in targeted markets by extending loans with lower eligibility requirements. Other programs may look to help companies in specific industries, such as energy, conservation, manufacturing, or import-export. Depending on where the political winds blow and the type of business you own, you may benefit from one of these programs.
Besides type of industry, you are far more likely to qualify if other aspects of your business align with public policy goals. For example, if you are a women or minority-owned organization. You may also be more likely to approved for a 504 if your geographical location coincides with district revitalization efforts in Enterprise Zones.
There are numerous factors that go into applying for a SBA loan. Requirements range from business history to the applicant’s personal CV, and depend largely on political climate. However, understanding the requirements for SBA-backed loans can help small business owners who are struggling to get funding through traditional means.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.