If you need financing for your business at a reasonable interest rate, a loan that’s partially guaranteed by the Small Business Administration (SBA) might be the perfect way to get your venture off the ground.
The Small Business Administration works with lender partners, microlenders, and community development organizations to make low-rate loans available to aspiring entrepreneurs and existing businesses.
By partially guaranteeing small-business loans from $500 to $5.5 million, the SBA reduces risks for lenders and borrowers alike. Money borrowed through SBA loans can be used for virtually any business purpose, including funding operations and purchasing long-term fixed assets.
But to qualify for these low-interest loans, you must meet strict requirements. If you’re interested in finding out how to get an SBA loan, this nine-step guide will take you through the process from beginning to end.
1. Choose which SBA loan is right for you
There are three main SBA loan programs to choose from. Start by researching your options to determine which loan is right for you:
- The 7(a) loan program is the most common option. Small businesses frequently use it to buy equipment or real estate, acquire other companies, meet capital requirements, and refinance existing debt. You can borrow up to $5 million if you meet 7(a) loan requirements, and you might be eligible for variable- or fixed-rate loans.
- The 504 loan program provides funding for major fixed asset purchases, such as buying land or buildings, purchasing equipment, or constructing or refurbishing new or existing buildings. You can borrow up to $5.5 million, but you aren’t eligible if your net worth exceeds $15 million or if your net income was more than $5 million in the preceding two years. Interest rates are fixed.
- The Microloan program provides small businesses or new businesses with funding for furniture, fixtures, inventory, and working capital. You can borrow up to $50,000 with a repayment term of up to six years.
The SBA doesn’t directly fund these small-business loans but instead works with lenders to provide funding and loan guarantees to help companies gain access to funding.
SBA loan rates are often lower than rates on loans without the SBA’s partial guarantee. The loans typically require lower down payments, and repayment periods tend to be longer. These features make the loans more affordable for business owners.
However, the SBA charges a fee for its loan guarantee, the costs of which are often passed on to borrowers. It also charges a prepayment penalty on loans with repayment terms of 15 years or longer.
2. Run a for-profit business in the U.S.
To be eligible for an SBA loan, you must run a for-profit business that’s registered in the United States. Your business also must be physically located within the U.S., and it must conduct operations within the U.S. or its territories.
Your company can’t be engaged in speculation, investing, or lending, and you must not be in the rental real estate business.
3. Invest equity in your business
To be eligible for SBA loans, you must have invested your own money in the business. Specific equity requirements vary depending upon whether your company is new or established:
- If you’re buying a business or your company is a new business, you should have invested $1 in cash or business assets for each $3 you hope to borrow.
- For established businesses, the company should have no more than $4 in total debt for each dollar of net worth.
While loan approval might require you to put up personal assets to serve as collateral to qualify for a loan — such as taking out a second mortgage on a personal residence — it doesn’t count to fulfill the equity requirement. Only personal assets invested in your business satisfy this requirement.
4. Exhaust your other borrowing options
You won’t be eligible for an SBA loan if you could secure funds for your company from other sources.
For example, if a financial institution would lend you money under similar terms as an SBA loan or you have the money to personally invest in your business without undue financial hardship, you might not be eligible for an SBA loan.
5. Secure a good credit score
When you apply for an SBA loan, your company’s credit score matters. Businesses are assigned a credit score through the FICO Small Business Scoring Service (SBSS), and this score is used to prescreen applicants. Your personal credit score also can impact eligibility for an SBA loan.
FICO scores for small businesses range from 0 to 300. While the minimum score to qualify for an SBA loan is 140, most lenders won’t approve a loan unless your score is 160 or higher.
It can take years to build a credit score for your business, but a history of paying suppliers on time is helpful in earning the score you need. While your personal credit is also a factor, without establishing separate business credit, the highest SBSS score you can get is 140.
6. Find an SBA lender
To apply for an SBA loan, you’ll need to find a lender that offers loans guaranteed by the Small Business Administration. The SBA has a Lender Match tool available on its website. To use it, you’ll need to input the following information:
- Your full name and contact info
- The name and contact info of your business
- A description of what your company does and the industry your business operates in
- The amount of experience you have
- The amount of funding you need
- How you’ll use the money
- Information on whether you have a business plan and financial projections, whether you’re a veteran, whether you have collateral, and whether your business is generating revenue
You’ll receive an email to verify your account and get matched up with lenders. You can then move forward in the process of applying for a loan with those providers.
7. Prepare your application documents
While individual lenders typically have their own loan requirements, there are some documents you’ll likely need when applying for any SBA loan:
- Cash flow projections for a new business or a balance sheet and profit-loss statement for an existing business. Your projections or financial information should demonstrate your ability to meet business expenses and repay the loan.
- Personal and business tax returns to verify your income and financial information.
- Business documents, such as articles of incorporation, business licenses, and commercial leases.
- Proof of your skills. You should be prepared to demonstrate that you have experience in the type of business you’ll be operating as well as management-level experience.
- A detailed estimate of funding needs, such as information on project costs or capital requirements, and details on your current level of funding.
- A list of collateral. You’ll need to pledge personal or business property to guarantee the loan.
- A personal financial statement. You and any other company owners should provide detailed information about your personal liabilities and assets as well as your sources of income.
- A detailed business plan. The SBA has a tool on its website to help you build a business plan if you don’t have one yet.
The more comprehensive and detailed you can make your application materials, the greater the chance of your loan being approved.
8. Submit your loan application
You’ll provide your loan application and business information directly to your lender, which will transmit the materials to the SBA to request a loan guarantee.
You’ll then wait to hear from your lender about whether your SBA loan is approved and what the final terms of your loan will be.
9. Put up collateral
The SBA typically requires collateral to secure the loans it guarantees. Company assets should first be offered as collateral, but if the company doesn’t have enough assets, personal assets can serve as collateral as well. In these cases, a lien would be placed on personal assets, such as your house.
By putting up business and personal assets as collateral, you take on a considerable risk. If you can’t repay the loan, your company or personal property could be lost. Before you decide to take on this liability, make sure you’re confident in your plan to use the borrowed funds to make your company profitable.
Should you take out SBA loans?
While you now know how to get an SBA loan approved, you also should consider other ways to secure funding, such as taking out personal loans or soliciting investors.
Compare loan terms, such as interest rates and collateral requirements, and consider the level of risk you’re comfortable with to make the most informed choice for your situation.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.72% – 16.99%1||$5,000 - $100,000|
|7.54% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|