6 Requirements to Qualify Your Small Business for SBA Loans

Do you need more ways to finance your business? The U.S. Small Business Administration (SBA) offers loan programs specifically designed for small business owners.

Rather than directly giving you a small business loan, the SBA makes financing more available to you by giving you a seal of approval to take to a third-party lender. The SBA is like a cosigner that establishes less risk for a commercial loan.

Requirements to qualify your business for SBA loans

The SBA helps many small businesses by approving more than 50,000 general SBA loans each year. There are many questions to answer before approaching lenders. See if you qualify for an SBA loan with these six requirements.

1. You are a for-profit business in the U.S.

Let’s start with the simplest rule. Is the purpose of your business to earn your living? Is your business located in the United States?

If you answered “yes” to both questions, you just took your first step on the path to eligibility for SBA loans. Keep in mind that not all guidelines are this easy to check off your list.

2. You have size on your side

You must be a small business to get an SBA loan. The SBA sets standards for every industry that determine if your business is small. Some industries measure a business’s size by annual income while others look at the number of workers employed.

Usually, a manufacturing company is small if it has less than 500 employees. A non-manufacturing company with less than $7.5 million in average annual receipts is considered small. Some industries may have exceptions to these rules, so check with the SBA’s Table of Small Business Size Standards.

3. You were denied private financing

Your business must be turned down for private financing before you are approved for an SBA loan. This means you must show that you were denied a loan from the bank.

While it can be hard for small businesses to get private funding, you must make an attempt before SBA loans become an option. This rule helps show that you need a small business loan and have gone through alternative options for funding.

4. You have owner’s equity in your business

You must prove that you invested in your business before you can qualify for an SBA loan. Owner’s equity refers to the value of your assets after you subtract your liabilities. This number shows the SBA (and the bank) your business’s net worth.

Usually, businesses with less than $7 million in tangible net worth and less than $2.5 million in net income are eligible for SBA loans.

5. Your credit is in check

The SBA does not approve small business loans to those with existing debt obligations. Lenders will investigate your financial history using your credit score. Both your personal credit history and your business credit history are factors in your eligibility for a loan.

6. You can pay the loan

Though the SBA repays up to 85% of defaulted SBA loans, the government sets guidelines so a default is less likely to occur. You need to show your accounting records to prove you will be able to make loan payments.

You business’s financial reports must show a history of positive payments and an ability to manage debt. The SBA also expects you to present a business plan and financial projections to prove your company will generate steady cash flow in the future.

SBA loans for your small business

There are more requirements for an SBA loan than the six listed here. Guidelines also do not stop with the SBA. After you earn approval from the government, you need to meet the lender’s qualifications and apply for a commercial small business loan.

Like any big commitment in life, it makes sense to build a relationship with your lender before taking the plunge into partnership. Start shopping around early with lenders that accept SBA loans. Look at rates, terms, and fees offered and talk with financial professionals to find an option that fits best with your needs.

SBA loans are just one of many financing options for small business owners. If you decide to apply for an SBA loan, be sure to explore all your options within the SBA loan program. When it comes to financing, choose opportunities that make the most sense for your small business.

You need accurate accounting books to get approved for an SBA loan. Use our online small business accounting software for an easy way to keep your books in order. Try a free trial today!

This article has been updated from its original publication date of January 28, 2016.

This is not intended as legal advice; for more information, please click here.

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