How to Qualify for an SBA Loan in 2024

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Your business must meet several key criteria to qualify for an SBA loan in 2024. This includes having good personal credit as the business owner, operating within the U.S. or its territories, demonstrating a need for financing that can’t be met through traditional sources, and, in some cases, providing collateral to secure the loan.

SBA loans are financing that the Small Business Administration guarantees, making it easier for businesses to obtain loans from third-party lenders. While the SBA doesn’t lend money to businesses directly, it backs a portion of each SBA-approved loan, reducing the risk for lenders and increasing access to business funding.

Key Takeaways

• To qualify for an SBA loan in 2024 you must have good personal credit, the business must operate within the U.S. or its territories, and you must show a need for financing that can’t be met through traditional sources. You also may be required to put up collateral.
• SBA loans are often used for seasonal financing needs, refinancing business debt, and purchasing assets like real estate, machinery, and equipment.
• The SBA has a number of different loan types, which generally vary in the amount you can borrow, how they work, and how quickly you can get one.
• Alternatives to SBA loans include business loans from banks or credit unions, business grants, and business credit cards.

How to Qualify for an SBA Loan

Here are the general requirements to qualify for SBA loans:

• Meet various SBA requirements, such as that your business is for-profit, physically located and operates in the U.S. or its territories, and meets the SBA’s definition of a small business, which varies by industry.
• Demonstrate that you cannot secure financing from traditional sources, such as commercial bank loans or lines of credit.
• Generally, the business owner needs to have a credit score in the 600s, depending on the lender and type of loan.
• The loan must be used for an approved purpose, such as working capital or equipment purchases.
• You must have a clean criminal record, and typically, you must not owe money to the federal government.
• You may need to provide collateral in some cases. For instance, loans exceeding $350,000 used to acquire real estate, equipment, or inventory typically require collateral.
• Your business must operate in an eligible industry. Ineligible industries include financial businesses, life insurance companies, and government-owned entities.

What Can SBA Loans Be Used For?

SBA loans can be used for most business purposes, including long-term fixed assets and operating capital. Common uses include seasonal financing needs, refinancing business debt, and purchasing assets like real estate, machinery, and equipment.

They’re generally best suited for meeting long-term rather than short-term business needs. This is particularly true for entrepreneurs who can’t get approved for traditional lending products and want to avoid higher-interest options like credit cards.

Pros

• SBA-imposed cap on interest rates

• Interest rates below national average for credit cards

• Potential to borrow up to $5.5 million (SBA 504 Loan Program)

• Repayment terms up to 25 years

• SBA guarantee of at least 50% of loan if borrower defaults

Cons

• Generally rigorous application process

• Inconsistent requirements among SBA lenders

• Rejection of most SBA loan applications

• Potential collateral requirement

• Possible requirement for personal guarantee of loan

Be sure to shop around for the best SBA loan deal. You may be able to negotiate a loan’s interest rate, payoff period, and fees. To find an SBA-approved lender, use the agency’s Lender Match tool.

When Is It a Good Idea to Get an SBA Loan?

Whether an SBA loan is right for you depends on your business’s specific needs. If you’re unable to secure financing from traditional sources, like banks, due to limited credit history, lower credit scores, or a lack of collateral, an SBA loan might be a strong option.

The most common type of SBA 7(a) loan is often a good choice when expanding your business. This could include purchasing new equipment, buying inventory, or funding other business expenses expected to drive growth.

SBA loans are also useful for addressing working capital needs. They can provide funds to cover operational costs like payroll, inventory, or marketing, helping you manage cash flow shortfalls.

SBA Loan Types

Standard 7(a) Loan

SBA 7(a) loans can be used for various purposes, such as expanding a business, buying real estate, refinancing debt, or purchasing equipment. These loans are popular due to their attractive interest rates and low down payment requirements.

The maximum amount for a standard 7(a) loan is $5 million. SBA guarantees a standard 7(a) loan at 85% for amounts up to $150,000 and 75% for amounts greater than $150,000.

7(a) Small Loan

The 7(a) small loan is a sibling of the standard 7(a) loan. The primary difference with a 7(a) small loan is that you can only borrow up to $500,000. Proceeds can be earmarked for the same purposes as a standard (7a) loan, including working capital, purchasing equipment, and refinancing debt.

SBA guarantees a 7(a) small loan at 85% for amounts up to $150,000 and 75% for amounts greater than $150,000.

SBA Express

SBA Express loans, part of the SBA’s 7(a) loan program, offer the easiest application process and the fastest approval times among all SBA loans. These loans have payoff periods of up to 25 years for real estate purchases or 10 years for working capital, equipment, and inventory purchases. They can also be used as a line of credit.

The maximum amount for an SBA Express loan is $500,000. SBA guarantees 50% of an Express loan.

Export Express

SBA’s Export Express offers up to $500,000 in guaranteed loans or revolving lines of credit. It features a streamlined process similar to SBA Express but with higher guarantees—90% for loans up to $350,000 and 75% for larger loans. Interest rates are negotiable within SBA limits, and collateral requirements are flexible.

Export Working Capital

SBA’s Export Working Capital provides loans to businesses that generate export sales and need additional working capital to support these activities. Loans can go up to $5 million, with the SBA guaranteeing 90% of the loan, and revolving lines of credit have terms of up to 36 months.

CAPLines

This program is designed to help small businesses meet their short-term and cyclical working capital needs by offering four different types of credit lines. The loans generally have a maximum maturity of 10 years, except for Builders CAPLine loans, which can’t exceed 60 months plus the time needed to complete the construction or rehabilitation.

SBA Microloans

SBA microloans are designed to help small businesses and some nonprofit childcare centers rebuild, reopen, repair, or improve their operations. They’re geared toward entrepreneurs such as veterans, women, minorities, and startup founders, and those with lower credit scores. Microloans can be used for working capital, supplies, furniture, and equipment.

The maximum loan amount is $50,000, with the average loan being around $13,000. Interest rates typically range from 8% to 13%, and the maximum repayment term is six years.

International Trade Loan

This program offers SBA-backed loans of up to $5 million to help small businesses compete in global markets. The loans can be used to purchase or upgrade facilities and equipment in the U.S., develop foreign markets, and provide working capital for export activities. The SBA guarantees up to 90% of the loan, with interest rates negotiated between the lender and borrower. Credit decisions typically take five to 10 business days.

504 Loans

504 loans are provided through SBA-licensed certified development corporations (CDCs). The maximum amount available is either $5 million or $5.5 million, depending on the type of business or project.

Proceeds from a 504 loan can go toward real estate, heavy equipment, and other fixed assets. 

An SBA loan allows businesses to borrow between $500 and $5.5 million. Depending on the type of loan, the proceeds can be used for working capital, business expansion, equipment acquisition, furniture purchases, and debt refinancing.

Choosing a Lender and Applying for an SBA Loan

To find SBA lenders, use the agency’s Lender Match tool. To narrow down the possibilities:

• Consider using an SBA Preferred Lender. Lenders in this program enjoy more authority to process, close, and service than lenders without this status do, which speeds up the process.
• Find out whether your current bank or credit union offers SBA loans.
• Compare interest rates that a lender charges.
• Look at a lender’s SBA loan fees.
• Ask about a lender’s experience with SBA loans.

Documents you need to provide for an SBA loan application include:

• Personal financial statement
• Statement covering your personal history
• Business overview and history
• Profit-and-loss statements for the past three years
• Income tax returns for the past three years
• Business certificate or license
• Records showing previous loan activity

Key Terms

• 7(a): The SBA’s most popular loan program.
• Collateral: Something of value, such as business assets, that a lender can seize if a borrower fails to repay a loan.
• Interest rate: The percentage a borrower pays to the lender for the loan, which can be fixed or variable.
• Guarantee: An SBA guarantee protects a lender, up to a certain percentage of an SBA loan, if a borrower defaults. A personal guarantee from the borrower means the borrower promises to repay the loan using their assets, if necessary.
• Maturity: Maturity refers to the date a debt is due or the time a borrower has to pay off a loan.
• Working capital: The difference between a business’s short-term assets and liabilities. Working capital loans allow businesses to bridge the gap when cash is in short supply.
• Debt service coverage ratio (DSCR): A measure of a business’s ability to service its debt, calculated by dividing net operating income by total debt service.

Compare the Best SBA Loans for Startups

Alternatives to an SBA Loan

The SBA provides access to an array of loans. But SBA loans aren’t the only source of funding for a business. Among the alternatives are traditional loans, grants, and credit cards.

Business Loans From Banks or Credit Unions

SBA loans tend to come with lower interest rates, lower credit score requirements, and better payoff terms than traditional business loans do. However, a bank or credit union might provide different types of business loans, such as those solely for buying equipment or real estate. A loan from a bank or credit union might be appealing if you already have a relationship with a financial institution and have a solid credit record. Additionally, traditional loans often have the benefit of a faster approval process.

Business Grants

In addition to business loans, the SBA offers small business grants. For instance, grants are available to small businesses engaged in scientific research and development and to businesses involved in exporting goods or services. Several other government agencies, corporations, and nonprofit organizations also provide business grants.

The biggest advantage of business grants is that the money doesn’t need to be paid back.

Business Credit Cards

Unlike a personal credit card, a business credit card is—as the name suggests—taken out in the name of a business.

A business credit card helps separate business expenses from personal expenses. The credit limit for a business credit card is typically higher than the credit limit for a personal credit card. However, business credit cards tend to charge higher interest rates than SBA loans and traditional business loans.

Business credit cards generally are a better option than a business loan when meeting short-term financial needs. In addition, a business card might be preferable if you can score a low- or no-interest promotional interest rate and you want to take advantage of various credit card perks.

What Disqualifies You From Getting an SBA Loan?

Generally, you’re disqualified from getting an SBA loan if your business is involved in illegal activities, speculative ventures, multilevel marketing, gambling, investing, or lending, or if the owner is on parole.

What Credit Score Is Needed for an SBA Loan?

The SBA doesn’t set specific credit score requirements, but individual SBA lenders may require a minimum credit score. This minimum varies depending on the lender and the type of SBA loan, but generally, most SBA lenders prefer to see a good credit score.

How Much Collateral Does the SBA Require?

In some cases, no collateral is required for an SBA loan. But in other situations, collateral may be required. For example, if a business borrows more than $350,000 through a standard 7(a) loan, a lender must have collateral worth as much as the loan amount.

How Fast Do SBA Loans Get Approved?

SBA loan approval time varies widely. In general, SBA loans are approved in 30 to 90 days—and up to six months—depending on the lender and the type of loan. SBA Express loans can be approved within 36 hours.

The Bottom Line

Qualifying for an SBA loan in 2024 requires meeting key criteria, including having good personal credit, demonstrating that you cannot secure financing from traditional sources, operating within the U.S., and possibly providing collateral.

SBA loans, backed by the Small Business Administration, offer favorable terms compared to traditional loans, making them a strong option for businesses that need long-term financing or have difficulty securing funds through conventional lenders. For many growing businesses, the time and effort invested in securing an SBA loan can be worthwhile, as it often leads to significant growth opportunities. Just remember that the SBA loan application process can be rigorous and take a long time to get funded. Consider your business’s needs and explore all available funding options before proceeding.

Read the original article on Investopedia.