SBA Loan Requirements & Tips for Qualifying

Lauren WardUpdated April 14, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

The U.S. Small Business Administration (SBA) helps businesses qualify for financing by guaranteeing loans through lenders. These loans typically feature comparable rates to traditional business loans and sometimes require a lower down payment. Businesses generally need to meet minimum standards and eligibility requirements in order to receive an SBA loan, and individual lenders may also have their own eligibility requirements. Find out what type of SBA loans are available to small business owners, who may qualify, and what can be done to help improve application materials before applying.

SBA Loan Eligibility Requirements

SBA loan requirements vary based on the type of loan a business is applying for. The SBA breaks down its financing options into four programs.

SBA 7(a) Loans

The most common program is the SBA 7(a) loans. Loan amounts range from $500 to $5 million and can be used for both working capital and fixed assets. In most cases, borrowers must provide a down payment of 10% of the loan amount. At a minimum, expect to need to meet the following requirements to get approved for a SBA 7(a) business loan:

For-profit status

Operating for profit is a core SBA financing requirement. Non-profit and religious organizations may not apply for SBA loans.

Location

Businesses must also be physically located in the U.S. (or territories) and operate there as well.

Size

In order to qualify as a small business, you must meet the SBA’s standards based on annual receipts or number of employees. Use the SBA’s Size Standard Tool to find out if your business meets this qualification.

Business owner investment

The business owner must have either time or money (or both) invested in the company in order to qualify. In other words, the SBA wants to ensure you’re sufficiently invested in the business to work hard towards its success (and repaying the loan).

Limited financing opportunities

The SBA’s “credit elsewhere test” requires lenders to document your business’s inability to get traditional business financing. Common reasons that could hinder you from getting an-SBA loan include things like:

Not enough collateral
Too new to meet lender’s standards
Requested loan amount too high

Certain types of businesses are not eligible for SBA loans. Ineligible businesses may include:

Real estate investment firms.
Firms that are involved in speculative activities, where the majority of profits are earned based on fluctuations in price, rather than the trade of goods.
Businesses that sell rare coins and stamps.
Businesses involved in lending, such as banks or other financial institutions.
Businesses set up in a pyramid sales plan.
Businesses that are involved in illegal activities
Businesses involved in gambling activities
Charities, nonprofits, religious institutions, and government-owned businesses.

Of course, individual lenders can implement stricter guidelines if they choose. They’ll also look at a number of other factors when reviewing each business loan application.

SBA Microloans

Microloans are available from the SBA.These are designed to help businesses in the short-term with smaller loan amounts. The maximum loan amount is $50,000 and they don’t usually require a down payment. The longest loan term available is six years. While the funds can’t be used to pay down debt, they can be used for things like purchasing machinery, leasehold improvements, and working capital.

SBA Disaster Loans

If your business is adversely affected by a declared disaster, you may qualify for disaster loan assistance (also known as Economic Injury Disaster Loans, or EIDL). This financing helps businesses replace assets that are damaged or destroyed, including machinery and inventory. This program differs from other SBA loans in that funds are actually provided by the U.S. Treasury, not external lenders. The maximum loan amount is $25,000 and eligible businesses include:

Small businesses
Small agriculture co-ops
Small aquaculture businesses
Private non-profit organizations

SBA 504 Loans

504 loans are for real estate and equipment financing. This SBA loan for existing businesses is designed to help expand and create jobs. Combined financing comes from both the SBA and the lender, and also requires a 10% down payment from the business. While all of these loans are guaranteed by the SBA, financial institutions actually originate and service the loans. Minimum guidelines are set forth by the SBA, which reduces the lender’s risk. It’s possible to shop around at different lenders who have different small business loan qualifications. The maximum loan amount is between $5 million and $5.5 million and comes with a fixed interest rate for a loan term of up to 25 years, depending on the type of loan. Businesses may qualify using an alternative size standard as long as they don’t exceed $15 million in tangible net worth and their two-year average net income doesn’t exceed $5 million.Recommended: Understanding Different Types of Small Business Loans

5 Tips for Qualifying for a SBA Loan

Following these five tips may help strengthen your SBA loan application and improve your odds of getting the financing you’re looking for.

1: Start With Existing Banking Relationships

The SBA recommends working with a financial institution with which you already do business, when possible. Not only do they have a clearer picture of your financial history, they may also have insights into your character. Even if you get an initial “no” response, that doesn’t mean you won’t be approved elsewhere.Recommended: Business Line of Credit vs Loan Comparison

2: Enhance Your Business Plan

Your business plan is one of the most important components of your SBA loan application. Lenders generally want to see a clear description of your company and your plan for moving forward. Review your business plan and make sure it’s as impactful as possible before presenting it to a potential lender.The primary aspects of a solid business plan are:

Management plan

This section is a high level overview of the company. It should introduce lenders to your company and provide information on company management, including resumes and bios of owners or top tier management.

Financial plan. This section typically includes the key financial statements for a company. The goal is to illustrate how viable a company is.
Marketing plan. Consider as comprehensive a plan as possible. In addition to advertising, a marketing plan may also include things like packaging, pricing, identifying the product’s target market and creating a plan for differentiating your company from competitors.
Operations plan. This section will outline strategies for developing your business. Things like company goals, procedures, and timelines are generally included in this section.

Each piece works together to assure the lender that you have a clear vision for your company that can be successfully executed with the right financing.

3: Check Your Credit Score

Your credit score is one of the primary factors in your business loan approval. While there’s no SBA loan credit score minimum, lenders may have their own individual standards. In fact, they’ll likely evaluate both your personal and business credit scores to determine how likely you are to repay a loan. Your personal credit score comes from the three major credit bureaus: Experian, Equifax, and TransUnion. Before applying for an SBA loan, request a free copy of all three credit reports and make sure they’re accurate. If your company is already established, you may also have a business credit score. In addition to Experian and Equifax, Dun and Bradstreet is another common resource for lenders to gauge your financial history. Data points typically include business loans and credit cards. Unlike your personal credit report, you’ll usually have to pay a fee to request copies of your business credit reports. It’s usually worth checking that all of your credit accounts are represented correctly before you apply for other funding. Recommended: Does a Business Loan Affect Your Personal Credit Score?

4: Explain Upcoming Changes in Cash Flow

Cash flow is also an important factor because it demonstrates whether or not your company can handle both current operating expenses and a new loan payment. Not having enough cash flow can be a red flag to lenders. You’ll likely need to present historical cash flow as well as a 12-month projection as part of your application. Both sets of financials demonstrate how well the company will be able to handle the loan. You may also wish to describe how your cash flow may improve as a result of new revenue streams or other future changes resulting from getting approved.

5: Weighing the Pros and Cons of Using Collateral

Collateral isn’t required to get approved for an SBA loan, but it may improve your chances if your credit and cash flow aren’t ideal. Both personal and business assets may be used to secure an SBA loan, including inventory, equipment, real estate, and cash savings. For real property, make sure you know the true appraised value of your asset, otherwise you might be disappointed by the bank’s appraisal. Also recognize the inherent risk that comes with getting a secured business loan. You could lose that property in the event you default. Depending on your risk appetite and the state of your business, you may or may not feel comfortable offering any collateral.

Alternative Business Loans

In addition to SBA loans, explore other small business loan options as well to make sure you’ve exhausted your resources and get the best financing deal possible. Online loans are an alternative to both SBA and traditional bank loans. They are often unsecured and may be more flexible with credit scores. The approval process may be faster than working with a traditional lender. But just like any loan, it’s crucial to carefully review the SBA interest rates (which may be higher) and repayment terms to make sure you fully understand your offer.Depending on your business, crowdfunding may be another option to consider, especially if you’re launching a product or service that would appeal to a large mass of consumers. Crowdfunding platforms allow you to fundraise towards a specific financial goal, sometimes offering donors different levels of rewards based on their contributions. Alternatively, you could fundraise in exchange for partial company ownership through an equity-based crowdfunding platform.There are also some collateral-based financing opportunities, such as merchant cash advances, equipment financing, or accounts receivable financing. While you may get a needed infusion of capital with any of these options, they typically come with expensive APRs and fees.Finally, it may be worth exploring small business grants, which provide a lump sum and don’t require repayment. Your company typically needs to be in a qualifying industry to apply, which currently includes scientific research and development and exporting.Recommended: Conventional Business Loans vs SBA Loans

The Takeaway

SBA loans are designed to help small businesses get the capital they need to succeed. Explore all of the loan options and eligibility requirements to find the best options. Remember that approval qualifications and loan terms are likely to vary from lender to lender, even for the same type of SBA loan. Shop around and compare offers before making a decision for your company. In some instances, an alternative type of financing may make more sense. Avoid rushing through the application process so that you both maximize your odds of getting approved and pick the most beneficial type of funding. Whether you're looking for an SBA loan, term loan, line of credit, or other options, Lantern by SoFi can help you find the right financing for you.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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