Personal Finances

SBA Loan Eligibility: How to Find Out if You’re Qualified

Yes, it’s true. Most businesses eventually fail. 

20% of new businesses fail during their first year. By the end of the fifth year, half of all businesses will have closed up shop.

There are countless reasons that businesses fail. Some are beyond the control of the business owner.

But one of the most common issues is the inability to manage cash flow. And this is something every business owner can learn to master.

By getting the right type of loan at the right time, you can ensure you have the funds to make it through each month. SBA loan eligibility will determine if your business qualifies for funds from the Small Business Administration.

So, what are the types of small business loans, and what factors determine small business loan eligibility? Keep reading below to find out now. 

What Is an SBA Loan?

SBA loans for businesses are similar to FHA mortgages or VA loans. None of these organizations actually issue loans. Rather, they guarantee loans.

So, the SBA guarantees loans made to small businesses. But the actual loans are made by participating lenders, which are usually business-friendly local banks. 

The government wants to promote a healthy economy across the US, and the establishment of the SBA and the loans it guarantees help to do that. So these are government-backed loans.

That means that the lender is ultimately protected. If you fail to make payments, the government will ensure the lender gets paid back. But the SBA will have strict requirements for you to limit or eliminate the risk. 

Types of SBA Loans

Depending on what you need the money for, there are different types of SBA loans. You can use some for real estate, others inventory, and others for general working capital. Here are some of the more common SBA loans. 

SBA Microloans

SBA microloans can be issued for up to $50,000. That makes them ideal for new businesses.

They can be used for various expenses, from working capital to inventory, as well as equipment and machinery, which are long-term expenses. 

SBA Express Loans

If you need more than $50,000, you’ll likely apply for an SBA Express Loan. These have a maximum loan amount of $500,000.

The loans are known to issue quickly, making them ideal for businesses in a pinch, or those with a good opportunity they need to capitalize on. They can be used for working capital, inventory, equipment, and real estate. 

SBA 7(A) Loans

If you need more than $500,000, you can apply for an SBA 7(A) Loan which has a maximum loan amount of $5 million. You can use these for anything, but they aren’t intended for real estate.

SBA 504 Loans

If you’re looking to finance long-term assets, such as heavy machinery, equipment, or real estate then 504 loans will be your best bet. They have a maximum loan amount of $5.5 million and will offer favorable terms for long-term loans. 

SBA Loan Eligibility

Wondering how to get a small business loan from the SBA?

To start, your business must operate on a for-profit basis. Your company must be legally registered.

You need to have a physical location in the US or are planning to acquire a physical location in the US. 

Loans are intended for those who have already started their business. The owner(s) should have already invested either time or money into the business before applying for an SBA loan. Lenders usually want to see a business history of two to three years before getting an SBA loan. 

And you need to ensure it’s a small business. The definitions for small businesses differ depending on your industry but are usually described by the number of employees and/or annual revenue. 

SBA Loan Restrictions

Your business needs to be in a qualifying industry in order to secure funds from the SBA.

Businesses that cannot qualify are those that participate in gambling, lending activities, or are a type of church or religious organization. 

SBA Loan Financing Needs

Before you can apply for an SBA loan, you need to prove that you’ve tried acquiring funds from alternative sources. SBA loans are meant to be a last resort, not a first resort.

So, you should apply for loans from banks, credit unions, or business-specific lenders before applying to the SBA. 

You also need to show that you have a valid need for the funds. The use of the funds should be in line with sound business principles. AKA, you probably can’t tell them you’re going to throw a huge party and hope it generates new business. 

SBA Loan Underwriting

SBA lenders need to follow strict underwriting requirements in order to issue a loan. 

For one, you’ll need to have a strong personal and business credit history. These two factors are very important, so take time to work on your score if you can.

In most cases, you’ll also need collateral for the loan. This can be real estate, machinery, or other assets owned by the business. 

Alternative Ways to Fund Your Business

If you’re stuck trying to acquire funds for your business, the SBA isn’t your only option. There are many alternative sources for finding funds, especially if you already have assets such as a home.

Business owners that already own homes often take out a home equity line of credit (HELOC), effectively borrowing from themselves.

Because the loan is secured by the property, and borrowed against the current equity in the home, it’s a lower-risk loan for lenders. That leads to favorable terms and rates.

And you can use the funds from a HELOC for anything you want, including business expenses. 

Some people also wonder if they can use a bridge loan for their business expenses, but it’s not so simple. Check out this post to learn the differences between a bridge loan vs HELOC

SBA Loans: Your Last Lifeline

SBA loan eligibility can be complicated. But most loans, especially for businesses, are complicated. SBA loans are a last resort option for new business owners.

Though, if you can qualify, they can become a lifeline in times of need.

Looking for more business tips like this? Visit our blog now to keep reading. 


About Author