15 Things You Need to Know About SBI Loan Requirements
For small business owners, an SBA loan is the gold standard of business funding. SBA loans are long-term, low-rate government-guaranteed business loans for the most qualified borrowers. They offer a great deal of flexibility. You can use SBA loans to buy equipment, real estate, or inventory, to refinance existing debt, or to just get some extra working capital.
Since SBA loans have very favorable terms, they are highly competitive. The process of applying for one of these loans can be complex and take several weeks. The best way to speed up the process and increase your chances of approval is by understanding all of the SBA loan requirements before you apply.
To qualify for an SBA loan, the SBA requires that you have a US-based, for-profit business that meets their definition of “small” (varies by industry). You have to demonstrate excellent personal credit, adequate collateral, and strong business financials. Anyone who owns 20% or more of the business must be willing to sign a personal guarantee.
Beyond these general requirements, specific requirements vary based on the type of SBA loan you apply for, the loan amount you need, and how you plan to use the funds. In this guide, we’ll walk through all the SBA loan requirements you need to know to submit a successful application.
Here Is A List Of 15 Essential Of SBA Loan Requirements :
Now that you understand your SBA loan options and have decided which SBA loan program is best for your financing needs, time to submit your SBA loan application and all required documents. Before submitting your application, you should see if you can qualify for other types of business loans. The SBA won’t guarantee your loan if you can find financing with reasonable terms without their help. SBA loans are heavy on paperwork and detail, so your best bet is to get organized and have all the documentation ready to go in advance.
Here’s a list of the main SBA loan requirements:
For-Profit Business In Eligible Industry :
The most basic SBA loan requirement is that you must have a US-based, for-profit business in an eligible industry. Non-profit businesses aren’t eligible for SBA loans, and the following industries are barred from receiving SBA loans:
- Businesses primarily engaged in lending
- Businesses primarily engaged in political or lobbying efforts
- Life insurance companies
- Businesses making most of its revenue from gambling activities
- Speculative businesses (e.g. medical research, shopping center developer)
- Most passive income businesses (e.g. flea market, shopping center)
For a complete list, view the SBA’s eligibility questionnaire. On the top of the SBA’s requirements, lenders might have their own list of eligible and ineligible industries, so make sure you check if you’re in doubt.
Meet SBA Size Standards :
The SBA is dedicated to helping small businesses—so they’ll want to verify that your company is indeed small. Business size can be measured in three ways:
- Number of employees based on industry: Based on what industry your company belongs to, small business can mean anything under 100 employees all the way up to anything under 1,500 employees.
- Business revenue based on industry: Alternatively, you can qualify as small based on business revenue. Based on what industry you’re in, this can mean anything from $0.75 million to anything under $38.5 million.
- Business net worth: Businesses are considered small if they don’t exceed $15 million in net worth or $5 million in net annual income.
Your business can qualify as “small” under any of these definitions, and the SBA often changes what “small business” means. That said, the average neighborhood business is almost certain to meet the definition, and if you have any doubts, try the SBA’s size standards interactive tool.
Personal Background and Character :
As a part of the SBA loan qualifications, you’ll need to submit information about your personal background, including previous addresses, your citizenship status, and your criminal record.. For SBA 7(a) loans, microloans, and CAPLines, this can be found in SBA Form 1919. Lenders usually supply their own forms for 504 loans.
Small businesses have a higher risk than large corporations in paying back business loans, so lenders verify a lot of personal information about the owner when deciding whether to approve the loan. Keep in mind that the SBA requires anyone who owns 20% or more of the business to sign a personal guarantee on the loan and submit their personal information.
Having a criminal record doesn’t automatically disqualify you from SBA financing, unless the crime is a felony of “moral turpitude” (i.e. involving violence or dishonesty). However, the lender will evaluate your application with more scrutiny. The SBA asks for your citizenship status because only US Citizens and permanent residents can qualify for SBA loans.
Resumes of Company Management:
Along with your personal background, a resume will be on your list of SBA lending requirements. This document will give lenders an idea of what your business background is, and how experienced you are in your industry.
A resume is particularly important if you need your small business loan to start your business, so make sure you’ve prepared this document fully and professionally. A resume is a great opportunity to describe all the work experience you’ve had before you started your own small business. Plus, you can use this document to show how you are prepared to run your company successfully.
Along with a resume, a business plan is an important part of the SBA loan requirements. Your business plan is a great chance to prove to the lender that investing in your small business is a smart decision.
Your business plan should include all of the following:
- Explanation of your product, service, and value proposition
- Analysis of your competitors
- Marketing/advertising strategy
- 3 to 5 years of financial projections
- Historical financial statements (for existing businesses)
- Terms of any existing debt
- Use of loan proceeds
Why is your company unique and important? Where do you see your company growing? You have faith in the success of your small business—but you need to convince the lender of your potential. A business plan is the perfect opportunity to convince the lender that you’re worth the investment.
Use of loan proceeds is an important section of your business plan. Remember, you have to use the capital for an eligible business purpose, and this varies based on loan type. 7(a) loans and microloans allow for a wide range of uses. CAPLines are for short-term financing and cyclical working capital. And for CDC/504 loan, your loan is limited to the purchase of major fixed assets.
Time in Business
This is a pretty self explanatory requirement, but lenders will want to know how long you’ve been in business before they approve your SBA loan. With the exception of some of the CAPLines lines of credit (which require a one year minimum time in business), the SBA doesn’t have a fixed time in business requirement.
That said, the longer your business has been operating, the more likely you are to get approved for the loan. Companies that have been in business for a while already are more likely to be able to pay back the loan. On the other hand, a young business doesn’t have much proven long-term success. So when you’re applying for an SBA loan, many lenders will require a minimum time in business of two years.
There might be extenuating circumstances, especially if you have great credit and finances, but in most cases, two years is the minimum.
Personal Credit Report
In terms of SBA loan eligibility, your personal credit score is very important. Your personal credit score is a window into how you’ve managed your personal finances. And stellar personal credit gives the lender reassurance that you’ll be trustworthy with your business’s finances and be able to pay back the loan.
In your SBA loan application, you’ll provide your social security number and sign a credit authorization, which will allow the lender to obtain your credit report. But before you apply, you’ll want to get your own copy of your report, so you can see where your credit score stands. When you get your credit report, make sure you review it closely. If you see an error in the report, there are clear procedures for correcting the mistake.
All three credit reporting agencies use the FICO scoring system, which follows this rubric:
- Excellent: 750+
- Good: 700-749
- Fair: 650-699
- Poor: 600-649
- Bad: Below 600
Don’t know your credit score? Check here for free. If your credit score isn’t above 700, you might have some difficulty qualifying for an SBA loan. If that’s the case, you might want to take some time to improve your score before applying.
Business Credit Report
Unless you’re seeking a loan to launch a brand new business, your business credit report will also be part of the SBA loan requirements. Every established business has a business credit report that evaluates how well your business has met financial obligations to vendors, lenders, and suppliers. There are several business credit reporting agencies, but FICO Small Business Scoring Service (SBSS) is most important for SBA loans.
The SBSS score ranges from 300 to 850. The SBA uses the SBSS score to prescreen 7(a) loan applications, and will reject your application if your score is below 140. And lenders set their minimums even higher, usually at 160.
If your business credit score isn’t quite that high, you can improve your SBSS by paying all your business’s bills early and by using credit smartly (via a small business credit card or line of credit). Check your business credit score for free.
Personal & Business Income Tax Returns
Personal tax returns are a big part of your SBA loan requirements for the same reason your personal credit score is—lenders want to scrutinize your personal financials to gauge whether or not you’ll be responsible when you take on your SBA loan. With personal tax returns, lenders will verify your income.
Similarly, lenders use business tax returns to verify your business’ income. Conventionally, lenders ask to see the past three years of personal and business income tax returns, so make sure to get these documents in order.
Business Financial Statements
There are a lot of financial documents that are a part of your SBA loan requirements. When you apply for your SBA loan, lenders will likely ask for these two statements:
- Balance Sheet: A balance sheet is a snapshot of your business’s financial health, and will give the lender some insight into how your business functions. Your balance sheet shows how you manage your business’s assets and liabilities.
Assets are anything of value that belongs to or is due to your business, such as accounts receivables, inventory, equipment, land, and buildings. Your liabilities are anything you owe, like accounts payable, accrued expenses, notes payable, and debt.
- Profit & Loss Statement: A profit & loss statement, also known as an income statement, shows your lender your small business’s revenues and expenses over a specific period of time. A P&L statement will give the lender some insight on where your money is coming from and going to. A strong P&L can convince your lender that your cash flow is steady enough to weather bad months of business and cover any unexpected costs that might come up.
Business Debt Schedule
A business debt schedule, much like it sounds, is a list of all the debts your business currently owes. This document breaks down your debt by monthly payments, and shows the interest and principal due each month. If you have existing debt, you and your lender will want to consider your business debt schedule closely to make sure that taking out another loan makes sense for your business.
Most lenders will ask to see a year’s worth of personal and business bank account statements along with the rest of your SBA loan application. Your bank statements show how much of a cash cushion you can maintain and how you manage your business’s daily finances.
While collateral valuation won’t always be on your list of SBA loan requirements, you should be prepared to document the collateral you’re willing to offer in exchange for the loan. The SBA requires lenders to obtain “adequate collateral,” when available, to secure an SBA loan.
Collateral can be anything that you’re willing to pledge if you can’t repay your SBA loan—whether that’s real estate, equipment, or inventory you use in your small business’s operations.
If the lender considers your loan higher risk, they’ll probably ask for a substantial amount of collateral for your loan. If your business plan and financial statements are strong, you might not need to put up much collateral.
Although lenders evaluate collateral on a case-by-case basis, a personal guarantee is necessary for all SBA loans. A personal guarantee is a signed promise to pay back the loan with personal assets if the business can’t afford to pay back the loan.
If a business defaults on an SBA loan, the lender will first seize any collateral or business assets to repay the debt. If those aren’t available, then the personal guarantee authorizes the lender to seize personal assets as well, such as your car, personal bank accounts, or even your home in some cases.
Anyone who owns 20% or more of the business must sign a personal guarantee for an SBA loan.
Last, but not least, you’ll need to provide some legal documents to support your loan application. These SBA loan requirements will vary from loan to loan, but these are a few documents you might have to submit:
- Business licenses and registrations allowing you to conduct business
- Articles of Incorporation (for Corps) or Article of Organization (for LLCs)
- Contracts with third parties (like clients or suppliers)
- Franchise agreements
- Leases for commercial real estate or business equipment
We recommend keeping all essential documents in a secure electronic file on your computer or in cloud-based storage. Then, you can easily print out hard copies whenever you need to.