SBA Loan Requirements: Does Your Business Qualify?

by Kieran Daly
December 1, 2023
SBA Loan Requirements: Does Your  Business Qualify?

The SBA loan program, administered by the U.S. Small Business Administration, is one of the most popular sources of funding for companies across the country. The SBA loan requirements you have to meet to qualify for financing depend on the type of loan you’re applying for.

In this article, we’ll explain everything about what you need to qualify for an SBA loan from eligibility requirements right through to the application process.

We’ll cover:

  • What the SBA and lenders want to see from a borrower

  • The documentation required when making an SBA loan application

  • The qualifying requirements you need to be aware of for the common types of SBA loans

Who Qualifies for an SBA Loan?

To qualify for an SBA loan, your company must meet five specific SBA loan requirements which may vary according to the type of business financing you're seeking.

1. Business Profile

You must run a for-profit business based in the United States.

The SBA doesn’t specify that you should have been in business for a minimum length of time. However, loans are offered in partnership with private lenders, and they may have their own restrictions with regard to how long you’ve been in operation.

2. Business Size Standards

One key SBA loan requirement is the size of the business you run since these loans are only for small businesses.

The SBA’s definition of what counts as a small business varies based on the type of business. Depending on your industry, the SBA will look at your number of employees or annual revenue.

For example, a roofing contractor is considered a small business if its revenues don’t exceed $19 million, while a winery is considered a small business if it employs fewer than 1,000 people.

3. Credit History

Your personal credit score and business credit score will be considered along with your business history.

On SBA 7(a) loans, the SBA checks you against the FICO Small Business Scoring Service, so it can evaluate how well your business handles money. They may also use this to screen your initial application prior to making a full application. They will look for a minimum score of around 140.

You’ll also need to have a good personal credit history. Most lenders will look for a minimum score between 650 and 700.

4. Collateral

Collateral is something of value that you pledge to secure a loan. It could include assets like accounts receivable, inventory, real estate, and machinery and equipment.

If you default on your SBA loan, your lender may seize your collateral and sell it in an attempt to repay your outstanding balance.

5. Personal Guarantee

On some types of SBA loans, you may need to provide the lender with a personal guarantee in addition to collateral.

With a personal guarantee, if you default on your loan and the sale of your collateral does not cover the outstanding balance, you’ll be personally responsible for all or a portion of the rest.

Documentation You’ll Need When Applying for an SBA Loan

Depending on the type of loan you apply for, you may need to include one or both of the following to meet SBA loan requirements.

Business Plan

A detailed business plan may be required with your application. It should include an explanation of why you’re borrowing the money and what opportunities it will unlock for your company.

Supporting Documentation

When you apply for a loan, you may need to provide supporting information to the lender so they can verify that you comply with SBA loan requirements and aren’t a high-risk borrower. For example, you may need to provide the following documents:

  • Appraisals (when purchasing real estate)

  • Business financial statements, such as income statements, balance sheets, and cash flow projections

  • Existing business debt schedule, if applicable

  • Personal financial statements, such as income tax returns and bank statements

  • Schedule of collateral you're offering

To ensure your application is processed as quickly as possible, check with your lender about what documentation they require so you have it ready when you apply.

Individual SBA Loan Requirements for Popular Loan Types

In addition to the general SBA qualifications, each type of SBA loan has individual requirements to be aware of.

1. SBA 7(a) Loan Requirements

The SBA 7(a) loan program offers a variety of loan types to borrowers. But in general, you will need to show your loan is going to be used for one or more of the following purposes:

  • Buying, refinancing, or making improvements to buildings or real estate

  • Working capital

  • Debt refinancing

  • Machinery and equipment, furniture, or supply purchases 

  • Changing ownership of your business

You’ll also need to submit a SBA Form 1919 and to prove you haven’t been able to receive financing with reasonable terms from non-government lending sources.

In addition to these general requirements, each SBA 7(a) loan type may have additional requirements. Let’s look at a few of the common 7(a) loan types.

Standard SBA 7(a) Loans

For a Standard SBA 7(a) loan, your collateral will be any assets covered by the loan and any fixed assets you have as a borrower up to the value of the loan you’re taking out.

As for a down payment, the SBA requires a 10% down payment if the loan amount is for more than $500,000 and if it’s being used to buy a business. Otherwise, the lender can set their own down payment as long as they follow the same requirements as they do for any non-SBA loans they offer.

SBA 7(a) Small Loans

With an SBA 7(a) Small loan, collateral isn’t required if the loan amount is less than $50,000. For amounts larger than that, the lender will follow the same collateral policies it has set for non-SBA loans of a similar size.

Similarly, the lender will have its own down payment requirements.

SBA Express Loans

The collateral and down payment requirements for SBA Express loans is the same as the SBA 7(a) Small loans. No collateral is required if the loan amount is less than $50,000. For amounts above $50,000, the lender will require the same collateral as if you’d approached it directly not using the SBA loan program.

Any down payment requirements are determined by the lender’s standard policies.

2. SBA 504 Loan Requirements

To start, you must meet the following criteria:

  • Your tangible net worth should be no more than $15 million

  • Your average net income should be less than $5 million after paying federal taxes over the previous two years

Next, SBA 504 loans are restricted by what they can be used for. They can be used to:

  • Purchase land on which you will renovate an existing or construct a new building.

  • Improve the area on the land and around the building, including landscaping, parking, and utility connections

  • Pay for long-term equipment and machinery for use in your business

After the completion of your project, your business must occupy at least 51% of a renovated building or 61% of a new building. Any purchased equipment should have an operating life of at least10 years.

You can’t borrow money using a 504 loan to speculate on or invest in rental real estate.

In addition, your loan must in some way promote job creation, job retention, or local economic prospects.For every $90,000 you borrow, you must retain or create a job. For manufacturers, the figure is $140,000.

Finally, borrowers are required to contribute at least a 10% down payment for a 504 loan and secure the loan with collateral, which may include both business and personal assets.

3. SBA Microloans Requirements

Unlike other types of SBA loans, nonprofits, and community organizations can apply for funding via an SBA Microloan.

Microloans can be used for equipment and machinery, fixtures and fitting, inventory, supplies, and working capital. You can’t use an SBA Microloan to settle existing debts or to buy real estate.

To apply for an SBA Microloan, contact a locally approved intermediary. These partner lenders will set their own loan requirements and will usually require collateral and a personal guarantee. There is no down payment requirement on an SBA Microloan.

4. SBA Disaster Loans

SBA Disaster Loans offer funding for businesses in distress at low-interest rates.

You can borrow money for the following purposes:

  • Repair damage to your home or business property

  • Improve your home or business property to protect against future disasters

  • Working capital to survive a disaster until you’re able to resume normal operations

  • A key member of staff has been called to active duty as they are a military reservist

Maximum loan amount, collateral needed, and repayment terms vary according to the reason you wish to take out the loan. There is no down payment requirement on an SBA Disaster Loan.

What Are the Alternatives to SBA Loans?

You’re more likely to be approved by private lenders when you apply through the SBA loan program, thanks to the backing and guarantees provided by the Small Business Administration. There is a wide suite of options for company owners to choose from whether they wish to buy equipment, machinery, and real estate or expand their businesses abroad.

With the exception of the SBA Express Loans, it can take a few weeks to get your money through, and the SBA loan requirements can be extensive. So what if you need funding faster?

You can apply for one of Backd’s funding options:

Apply in just three minutes today to get the financing you need in as little as 24 hours.

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