Did you just start your business? Congratulations! But it’s time to prepare for all of your business essentials, including your financing. If you don’t have a safety net of cash available, you have many financing options.
One popular option for financing is a small business loan guaranteed by the U.S. Small Business Administration (SBA).
An SBA loan has generous payback periods, low-interest rates and low down payments. This is a great option for businesses starting out and only have a little bit of capital to work with.
But before you apply, you should know the requirements for an SBA loan. Continue reading to know you qualify, all of your options, and some tips when applying.
SBA Loan Requirements
There are many types of SBA loans and all lenders usually have their own requirements. But here are the general requirements to have before applying for an SBA loan.
The General Requirements
Every loan and lender will usually require these aspects.
- At least two years in business
- A credit score of at least 620
- At least $100,000 in annual revenue
How does a lender get access to this information? You have to provide specific documents.
- Both personal and business tax returns
- Profit and loss statements
- Balance sheet
- Bank statements
While SBA loans are perfect for smaller companies, a lender still needs to trust that you can pay it back. That’s why they ask to provide proof of your revenue, your business length, and even your credit score.
A lender may not even be this strict. For example, let’s say your business doesn’t have a credit score but you can prove your revenue and business length.
A lender may look this over or may even accept your personal credit score.
Your Business Type Also Matters
Before we continue, it’s important to note that every type of business can qualify for.
However, some businesses have an easier time qualifying than others. These businesses include:
- Medical offices
- Gas stations
- Convenience stores
- Beauty salons
- Contracting businesses
- Landscaping businesses
- Trucking and logistics
Why do these businesses have an easier time qualifying? These businesses have the best financial track records. They also demand more spending, materials, and equipment compared to other businesses.
Other factors come into play. This includes the relevance of the market, the competition, and the number of workers needed for these businesses.
How to Get an SBA Loan
Now that you know the requirements, it’s time to apply for an SBA loan. Here’s what you need to know about the application process.
Know Which Type of SBA Loan You Want
SBA Loans can be broken down into:
- SBA 7(a) Loan
- SBA CDC/504 Loan
- SBA CAPLines
- SBA Export Loans
- SBA Microloans
- SBA Disaster Loans
The most common type of an SBA loan is the SBA 7(a) loan. That’s because they’re versatile. SBA 7(a) loans are used for working capital, to refinance debt, to buy real estate, purchase equipment, and even to buy another business.
If your business is looking to buy real estate, you’ll probably need the SBA CDC/504 loan. These loans offer a small business to buy or build owner-occupied commercial real estate.
SBA CapLines is comprised of four different types of SBA loan products or lines of credit. They can provide as much as $5 million. This loan program is best for businesses who need a revolving line of credit.
If your business is expanding into foreign markets, you’ll need an SBA export loan. This loan offers up to $5 million so businesses can enter foreign markets and engage in international transactions.
If your business is smaller, such as a home-based business or a non-profit, you’ll benefit from SBA microloans. The interest rates are low, between 8 and 13%. You can borrow up to $50,000.
Was your business a victim of a physical or economic disaster? You’ll need an SBA disaster loan. There are different types of SBA disaster loans used for different disasters.
When you know which type of loan you want, it’s time to research the best lenders. You have many lending options. This includes:
- Bank (corporate or local)
- Lenders backed up the SBA
Research each type.
Most businesses have the easiest time getting a loan through an online lender.
Major and commercial banks are also popular options, though it may take a couple of months to receive the funds. If your local community has a strong bank, they tailor to small businesses better than the corporate banks.
You should also search the U.S. Small Business Administration’s database for lenders.
Take a Look at Your Financial Situation
Since a lender will judge your loan amount and your interest in your financial situation, you should also understand what type of loan you can afford. This is why you should take a look at your financial situation before they do.
First, do a thorough look-through of your balance sheet, profit and loss statements, and your cash flow.
Second, take a look at your cash flow, gross margin, debt-to-equity ratio, accounts payable, and accounts receivable. The lender may ask you questions about these areas, so make sure you’re prepared.
If any of this confuses me, seek advice from an accountant.
You can even discuss what type of loan you want, how much you want, and the payment terms and interest rates you can work with. Make sure your accountant reviews or audits all of your documents.
With this being said…
Know How Much You Want to Borrow
One of the sections in the application will ask how much you want to borrow and what you will use the funds toward. While not all loans require collateral, this helps the lender understand your company and your situation.
If you’re unsure of how much you want to borrow, first look at what you need a loan for. Will you use it for equipment? Do you plan on expanding or moving into a new facility? Or will you start hiring?
When you determine what you’re using the loan for, calculate the costs. You may want to borrow a little extra to ensure you can cover all of your expenses.
You should also be humble and only take what your business can afford.
Keep that in mind when planning your expenses and how much you’ll need.
Have Your Documents Ready
When you decide on a lender, have your documents ready before the application process.
Your financial history and your credit worthiness are huge contributors to your loan acceptance.
In addition to the documents mentioned, it’s beneficial to provide additional documentation, if it applies. Here are some examples:
- Current loans
- Any assets
- Your investors
These extra documents will increase your likelihood of acceptance.
From here, you can start applying for an SBA loan. Here’s the information the lender will request:
- Your business name and your DBA (if applicable)
- The federal tax ID number
- Your executive officers
- Your legal structure
- Your financial information
- Projected income
- The loan amount you’re requesting
- Your business credit report (can also submit a personal one)
- Your collateral (if applicable)
- Your business plan or executive summary
- Your tax returns
- Bank statements
Some lenders will request more information, and some lenders will only require some of this information.
Your lender may also do some basic research on your business before accepting your application. They do this by:
- Reviewing your website
- Reviewing your social media pages (Facebook, LinkedIn, etc.)
- Read any reviews
- They may even find your personal social media profiles
It’s best to touch up your website and social media pages before applying for a loan. Make sure all information is up-to-date, everything looks professional, and maintain an active presence.
Read the Terms of the Loan
Were you approved for your SBA loan? Congratulations! But your work isn’t over yet. Before signing on the dotted line, you must read the terms of the loan.
Here’s some information you’ll find in the terms.
- Your interest rate
- How often you pay (usually is either weekly or monthly)
- The combined interest and minimum payment you have to make
- Any additional cost or fees (loan origination fees tax deductible, underwriting fee, administration fee, loan processing fee, etc.)
- If your lender can call a default on the loan
- If your lender needs any additional financial reports
- Any limits on the loan
- Any penalties (paying the loan off early, etc.)
Even if you’re approved for a loan doesn’t mean you need to accept it. If you don’t agree with all of the terms, move on to the next lender.
Tips When Applying
Now that you know the qualifications and how to apply for an SBA loan, there are some additional tips that will help you with the application process.
Build Both Your Personal and Credit Score
As stated previously, SBA loans look for a credit score of at least 620.
You shouldn’t focus on your business credit score, but also your personal score. Try and get that score as high as you can. If you haven’t built business credit yet, sign up for a business credit card and use that before signing up for a loan.
Meet More Than the Minimum Qualifications
Every lender is different, but they all look for three things: your financial history, your credit score, and the time you’ve been in business. Do you meet all the requirements?
Even if you do, try and meet more qualifications. This will make you a stronger applicant and will increase your chance of acceptance.
Gather Legal Documents
Every applicant needs to gather financial documents. But what about legal documents?
These aren’t necessary but they will help during the application process. Examples include your driver’s license, your lease, any business licenses, articles of incorporation, and your full resume.
Include Your Loan in Your Business Plan
This may seem silly, but it’s really helpful to include your loan in your business plan. Record all information about the loan and detail how you will use the loan.
This helps to ensure you’re spending the money well and you’re keeping track of your expenses.
Provide Collateral Anyway
Many SBA lenders don’t require collateral. Great – provide collateral anyway. This ensures your lender will trust you, improving your chance of acceptance.
Are you unsure of what you can use as collateral? This may be risky for some business owners. You may have no choice but to give your office, equipment, or even your merchandise.
Were You Not Qualified for an SBA Loan?
What if you go through this process, only to not qualify for an SBA loan? Here are a few reasons why a lender rejected your application.
- You have only been in business for less than two years
- Your credit score is too low
- You didn’t provide collateral or don’t have enough collateral
- You didn’t agree to all of the terms established in the loan
- The lender didn’t think your business will be as successful or make enough money
- Your business doesn’t generate enough revenue
While SBA loans are great for small businesses, you do need to meet specific qualifications. Go back through this list and see where your company falls short.
You can also ask the lender why they denied your application.
Time to Get an SBA Loan
If your small business needs financing, consider getting an SBA loan.
SBA loans are flexible and convenient loans for small businesses. But before you can take out a loan, you have to make some SBA loan requirements. It’s always best to have more than the minimum requirements and to do plenty of research.
Are you ready to sign up for a business loan? We offer plenty of options and our online platform makes signing up for loans easy and safe.