What Is an SBA Loan?

This story was updated 4/29/2021.

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 shutdowns 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, the 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, 504 loans and COVID-19-focused loans such as PPP.

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 have been affected by COVID-19 or natural disasters, are owned by veterans or minorities, or have lower credit or revenue benchmarks.

[Read: A Practical Guide to Funding Your Small Business with Business Loans and Beyond]

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 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:

• 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.
• SBA submits a decision to the lender.
• SBA and the 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.
• The lender secures collateral.
• The loan is funded, and the business receives its money.

COVID-19 loan and relief options

The above steps and rules generally apply to all loans that are unrelated to COVID-19 relief, which is treated differently by the SBA than its traditional offerings, such as 7(a) and 504 loans. Popular SBA COVID-19 relief options include:

• Paycheck Protection Program (PPP): The PPP loan program was first created in March 2020 to provide forgivable loans to struggling businesses as long as those businesses did not reduce payroll. The SBA will continue to accept first- and second-draw PPP loan applications until May 31, 2021, or until funds for the program are depleted.
• 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. Unlike the PPP loans, EIDL loans are not forgivable and must be paid back.
• Restaurant Revitalization Fund grants: While not a loan, the SBA’s Restaurant Revitalization Fund grants may provide much-needed financing to restaurants, bars and associated businesses. Most restaurants and bars that lost revenue in 2020 versus 2019 are eligible to apply. The maximum grant size is $5 million for restaurants and $10 million for restaurant groups. Applications for the program open on Monday, May 3, 2021.
• Shuttered Venue Operators grants: Similar to RRF grants are Shuttered Venue Operator (SVO) grants 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. The application portal for SVO grants is now open.

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.

[Read: Everything You Need to Know to Prepare to Apply for a Business Loan]

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