This story was updated 6/3/2021.
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 COVID-19 or a natural disaster like a flood, the SBA has extensive connections to local community banks that can help get the funds you need.
Before diving into SBA loans, determining qualifications for them 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 7(a) loans and COVID-19-focused loans.
To be clear, you won’t typically be going directly to the SBA for an SBA loan. You’ll normally work with a local bank or lender that will first 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 were affected by 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 some 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 for non-COVID-focused loans.
- 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 se, 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.
SBA loans can be ideal for working capital, property loans and disaster relief.
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:
- The small business owner and lender meet to discuss the business plan.
- The small business owner completes the loan application and submits it to the lender.
- The lender reviews the application and makes a decision about the loan.
- The lender submits an application to the SBA to back the loan.
- SBA reviews information and determines if the business can pay back the loan.
- The loan is funded, and the business receives its money.
- The lender secures collateral.
- The loan is signed by all parties.
- Loan documents are prepared after more research by the SBA.
- SBA and the lender sign loan agreements.
- SBA prepares a loan authorization for the small business owner.
- SBA submits a decision to the lender.
Traditional SBA loan options
The most common types of loans the SBA offers to small businesses include:
- 7(a) loans: The 7(a) loan program is the most common type of loan the SBA offers, and is used for purchasing real estate, working capital, refinancing business debt and purchasing equipment, furniture and machinery. The maximum 7(a) loan size totals $5 million.
- 504 loans: The 504 loan program helps companies in need of long-term financing that will in turn “promote business growth and job creation.” Among other uses, this includes buying buildings, land and machinery or equipment. The 504 loans are only offered from Certified Development Companies (CDCs). The maximum 504 loan size totals $5 million.
- Microloans: For small companies that only need a small boost to help them improve their business, the SBA offers the microloan program. These loans can help businesses with working capital, inventory, furniture, machinery, equipment and other select uses. They can not be used for existing debts or real estate purchases. The maximum loan size for microloans is $50,000 and the average size loan totals $13,000.
- Other programs: Additionally, the SBA offers several programs that can help small businesses get access to federal contracting dollars, grants and more.
COVID-19 loan and relief options
COVID-19 relief options from the SBA are treated differently than traditional offerings, such as 7(a) and 504 loans. Some programs such as the Paycheck Protection Program have closed, but a few SBA COVID-19 relief options remain including:
- COVID-19 EIDL: The SBA’s COVID-19 Economic Injury Disaster Loan (EIDL) program offers low-interest loans to help businesses “meet financial obligations and operating expenses that could have been met” had the pandemic not happened. The maximum loan size for this type of loan is $500,000, with a 3.75% interest rate for businesses and a 2.75% interest rate for nonprofits. The application deadline and covered period for these types of loans will end on Dec. 31, 2021.
- Shuttered Venue Operators grants: Shuttered Venue Operator (SVO) grants are for live venue operators that have been harmed by the pandemic, including independent movie theaters, concert spaces and performing arts organizations. The maximum grant size is $10 million. Recipients who receive these grants in the first phase have one year from receiving the award to use grant funds. The application portal for SVO grants is open and will close when all funding has been exhausted.
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 business’s situation and talk with a financial advisor to make sure your company is healthy enough to take on debt.
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