sba loan requirements

SBA Loans: Who is Eligible for a Small Business Loan in 2022?

Ezra Cabrera | September 8, 2022

Contents

    Key Takeaways

    • The Small Business Administration created government-backed loans to help small businesses qualify for reliable financing.
    • To qualify for an SBA loan, you need to meet the SBA’s small business size standard, operate in the U.S., have acceptable personal and business credit, be a for-profit business, invest in your business, and more.
    • SBA-approved lenders may also set their own requirements, including collateral, time in business, financial forecasts, and capital.

    The Small Business Administration (SBA) created SBA loans to help small businesses like yours access bank-rate financing. These loans are among the most highly-coveted loans because they offer low interest loans, high loan amounts, extended repayment periods, and a variety of loan programs for every business need.

    The SBA guarantees up to 85% of these SBA loans, mitigating the risk banks and lenders face and making them more likely to approve your application. It’s important to note that the Small Business Administration does not lend to small businesses directly. Instead, it partners with banks, credit unions, community development organizations, and alternative lenders. So, you’ll have to work with an SBA approved lender to apply for an SBA loan.

    Here's everything you need to know about SBA loans.

    SBA Loan Requirements: Who is Eligible?

    According to the Small Business Administration, you need to meet the following basic SBA loan requirements to qualify:

    • Meet SBA’s small business size standard
    • US-based location and operations
    • Acceptable personal and business credit
    • For-profit business
    • Owned by an eligible person
    • Owner-supported and funded
    • Tried applying for other loan options
    • SBA-accepted industry

    Let’s dive into each requirement.

    Meet the SBA’s small business size standard

    The Small Business Administration considers three factors when measuring a business’ size:

    • Business net worth: A business is considered small if the net worth doesn’t go over $15 million or $5 million for net annual income.
    • Revenue (varies by industry): The revenue required varies depending on your industry. For example, the agriculture, forestry, fishing, and hunting industries average at around $750,000, while the accommodation and food service industries can go up to $32.5 million.
    • Number of employees (varies by industry): The number of employees for a small business also depends on your industry. The size standard in the number of employees for poultry processing industries is 1,250, while it’s 100 for fish and seafood merchant wholesalers.

    The average small business will likely meet the SBA’s definition of a small business. If you’d like to check for yourself, here are links to the Table of Small Business Size Standards and the Size Standards interactive tool.

    U.S.-based location and operations

    Only small businesses owned and operated in the United States are eligible to apply. You’ll be asked to provide a physical location and mailing address.

    Personal credit score

    Your personal credit score matters to the SBA and its partners. Lenders often ask for your Social Security number and ask to run a credit check for owners with ownership of at least 20%. The SBA does not set a minimum credit score requirement, but most lenders set 680 to 700 as the minimum.  

    You are entitled to a free annual credit report on AnnualCreditReport.com for each credit reporting agency: Equifax, Experian, and TransUnion. Visit their website or call them at 1-877-322-8228.

    You can also request by mail. Complete the Annual Credit Report Request Form and send it to:

    Annual Credit Report Request Service

    PO Box 105281

    Atlanta, GA 30348-5281

    Business credit scores

    Lenders will look at your business credit history based on your FICO SBSS score – a combination of personal and business credit data. The FICO score ranges from 0 to 300, 300 being the highest. The higher your credit score, the lower your risk to lenders.

    The SBA requires lenders to use the SBSS scores to prescreen borrowers. The current minimum scores are:

    • 7(a) loans: 155
    • Express Bridge Loan Pilot Program: 130
    • Community Advantage: 140

    If your score falls below the minimum, it doesn’t mean your application immediately gets tossed out the window. However, this might mean your application will undergo a more extensive review.

    For-profit business

    Only “for-profit” businesses can apply for SBA loans. This means nonprofit organizations and charities don’t qualify.

    Owned by an eligible person

    To be an eligible person, a business owner should own 20% or more of the company.

    Owners with criminal records may find it challenging to qualify. Additionally, the SBA does not approve people who are:

    • Incarcerated
    • On probation
    • On parole
    • Currently subject to an indictment, criminal information, or arraignment
    • Subject to formal criminal charges brought in any jurisdiction.

    Note: A person with a conditional discharge, order of protection, deferred prosecution, or on a sex offender registry is treated as someone with probation or parole.

    If the borrower has defaulted on a federal loan or financing program, they may not be eligible, but there are exceptions. Be sure to ask an SBA-accredited lender about it.

    Owner investment

    Investing in your business shows lenders and the SBA that you’re in it for the long run. Owner investment requirements are only needed for certain SBA loans, like 7(a) loans, a change of ownership, and startups less than a year old. However, potential lenders may have their own requirements.

    Unable to secure financing elsewhere

    The SBA specifically created SBA loans to help small business owners who have had trouble accessing a traditional loan. However, this doesn’t mean you need to apply for other loans and get denied. Instead, lenders need to report to the SBA that other loan programs are not available to you because of factors like credit scores, time in business, or borrowing history.

    Restricted industries

    Here are some of the industries that SBA will not guarantee:

    • Businesses engaged in illegal activities, loan packaging, gambling, multi-sales distribution, or investment or lending
    • Earn a passive income from real estate rental without any additional services
    • Firms involved in speculative activities that profit from fluctuations in prices instead of normal trading
    • Pyramid sales plans
    • Dealers of rare coins and stamps
    • Gambling activities
    • Religious services
    • Government-owned corporations
    • Insurance companies

    SBA-Accredited Lender Requirements

    Aside from the requirements listed above, SBA lenders may ask for other documentation to determine whether you’re eligible or not.

    Collateral

    You may need to use your business assets to secure a loan, such as commercial real estate, inventory, or equipment. If your business doesn’t own any valuable assets, you may need to put up a personal guarantee – your home, property, or vehicles as a guarantee in case you default on the loan. The lender may not ask you to cover the entire loan amount, but they may require you to pledge all you have.

    Time in business

    Startups and established businesses can apply for SBA loans, but lenders can have their own requirements. Most lenders approve companies that have been in business for at least two years, but some are more lenient.

    Financial forecasts

    Lenders may ask for your financial forecasts for the next few months or years. Before applying, be sure you can show how you allocate your finances, including a plan on how to repay the loan.

    Capital

    How much do you need to borrow? Lenders want to see that you’ve carefully thought of your business plan. Show them that you have a number in mind and a plan on how to use the money to grow your business. Don’t forget to include how the loan repayments will affect your company.

    How to Prepare for an SBA Loan Application

    While SBA loans are the best option for small businesses, the application can be challenging and highly competitive. Businesses with stellar credit, financials, and cash flow can apply.

    To put your best foot forward and increase your chances of approval, here are four steps to prepare for an SBA loan application.

    Step 1: Build your credit score.

    As mentioned, the SBA does not have a minimum credit score requirement but a credit score of approximately 640. Of course, a higher score means a higher chance of approval.

    If you think your scores need to improve, here are a few things you can do:

    • Pay your dues on time.
    • Review your credit reports and address any errors.
    • Decrease your credit utilization ratio or the ratio of your total credit to your debt.
    • Establish credit accounts with suppliers.

    Step 2: Make a business plan.

    Not all loan types or lenders need business plans, but some may ask for one. Regardless, a business plan gives you and potential lenders a blueprint on how you plan to run your business and demonstrate your capacity to repay the loan.

    Creating a business plan from scratch can be overwhelming, but you can get help at SBDC or find a SCORE mentor.

    Step 3: Prepare your collateral.

    Most SBA loans require collateral, like commercial real estate, equipment, or inventory. Talk to your lender about the business and personal assets you can use to cover a portion of the loan in case of a default.

    Step 4: Gather the necessary documents.

    An SBA lender may ask for personal or business bank account statements and other financial statements. Each SBA loan program has specific requirements, but the documents required for 7(a) loans may also apply to other SBA loans.

    The first thing you need to do is to fill out the borrower information form and the Statement of Personal History, if applicable.

    Other financial statements required may include the following:

    • Balance sheets
    • Year-end profit and loss statements for the past three years
    • Reconciliation of net worth
    • Interim profit and loss statements
    • Year-end balance sheets for the last three years
    • Debt schedule
    • Financial forecasts for at least one year

    Other documents to prepare:

    • Partnership agreement
    • Business lease
    • Business plans or overview and history
    • Resumes
    • Articles of incorporation
    • Business tax returns
    • Business license

    How to Find an SBA-Accredited Lender

    Getting an SBA loan requires a lot of preparation, and the application process can be tedious. But with the tips above, you’ll be able to prepare your application better and increase your chances of qualifying.

    If you’re set on applying for an SBA loan, here are a few things you need to do:

    Another way to find an SBA-accredited lender is to apply through SMB Compass. We can help you find the best SBA loan and lender for your business. Here’s what you need to do:

    • Fill out a one-page online application.
    • Our financial advisors will review your application and get in touch with you.
    • They’ll connect you with SBA-accredited lenders within our network and help you choose the best one for you.
    • Get approval and funding.

    Don’t hesitate to give us a call at 888-853-8922 or send us an email at [email protected].

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.