Small Business Administration SBA 7(a) loans are known as the “gold standard” for entrepreneurs who want to consolidate high-interest debt, buy equipment, hire employees and more.
If you qualify, SBA loans have some of the lowest rates in the marketplace and a 10-year loan term with very low monthly payments.
However, when you think of an “SBA loan application,” you might shudder. Meeting the requirements along with gathering and submitting documents can sound overwhelming. But that isn’t necessarily true these days. The emergence of online SBA marketplaces has reduced the SBA loan process by as much as 90% allowing small businesses to get funded in as fast as seven days after their application is completed. This has created better experiences for small businesses.
With a strong credit score, organization and the right lender, you can take your business to the next level with the loan proceeds from a low-cost SBA loan. We’ve outlined the business requirements and documents generally needed to qualify for an SBA 7(a) loan below.
Your Company Must be Classified as a “Small Business”
Your enterprise must meet the industry size standards established by the SBA to classify as a “small business.” Small businesses are determined by the average number of employees over the past 12 months, or the average annual receipts from the previous three years. Visit the SBA website for more details on the classification of your specific industry.
Your Business Must Be in an Approved Industry
Small businesses from a broad range of industries can be approved for an SBA loan. Rather than listing what businesses are approved, the Small Business Administration lists those industries that are excluded, such as:
- Life insurance
- Religious teaching
- Primarily political and lobbying activities
- Oil wildcatting
- Mortgage servicing
- Real estate development
- Bail bond
- Pawn or private clubs
For the detailed list of ineligible businesses, head to the SBA’s website.
Your Business Must Operate Primarily in the U.S.
The SBA website reports that businesses seeking an SBA loan must operate primarily within the U.S. or make a significant contribution to the U.S. economy through the payment of taxes or use of American products, materials or labor.
Additional SBA Lending Requirements
Below are general requirements for an SBA 7(a) loan. Be sure to check with a lender before you apply, since each bank layers its own credit criteria on top of the SBA requirements.
For an SBA 7(a) Working Capital or Debt Refinance Loan:
- Time in business must be above 2 years
- Business owner’s FICO score must be strong
- Permanent Resident who is at least 21-years old
- No outstanding tax liens
- No bankruptcies or foreclosures in the past 3 years
- No recent charge-offs or settlements
- Current on government-related loans
- Independently owned and operated
- For-profit businesses only
SBA loan eligibility requirements to apply for Commercial Real Estate Loan vary but the real estate must be majority owner-occupied, and an excellent credit score is still crucial.
Producing financial paperwork is a necessary part of every small business loan process. To qualify for an SBA 7(a) loan several business and financial documents are required.
Getting organized and following a simple checklist of can help to get your ducks in a row and speed up the process. Here’s a list of documents and information to have on hand when applying for the SBA 7(a) loan program.
Keep in mind that lenders might have different requirements. For example, many banks require a written business plan; SmartBiz Loans bank partners do not.
Business Plan: As mentioned above, not every lender requires this document. If you need help preparing a business plan, there are free or low-cost resources available. Check out your local SBDC (Small Business Development Center). The centers offer a variety of resources that can help guide you.
Personal and Business Credit History Reports: Your credit history is KEY. You won’t get past pre-approval if you have low scores. A good strategy is to obtain a free personal credit report from all three major consumer credit rating agencies – Equifax, Experian and TransUnion. If there are inaccuracies in your credit reports, try to resolve them before getting started. Review your business credit score as well.
Note that a credit inquiry might impact your scores. Find out if your lender performs a “soft pull” of credit like SmartBiz. A soft pull won’t impact your credit score. A “hard pull” of credit will happen when your loan application proceeds to funding. This does appear as an inquiry on your credit report.
Income Tax Returns: Most lenders require the previous 2-3 years of business income tax returns. Work with your accountant to make sure you’ve filed the necessary returns and have copies ready to submit.
Financial Statements: Owners with more than a 20% stake in a business are often required to provide signed financial statements. These have three components 1) Profits and loss statements. 2) Cash flow statements 3) Balance sheets. Working with your bookkeeper, accountant or another financial professional is a very good idea here.
Collateral: Requirements for collateral vary – some bank loan programs don’t require it, others do. Have a document prepared that describes personal or business property that can be used to secure a loan.
Legal Documents: Each borrower’s situation is unique. Depending on loan requirements, lenders may require you to produce one of more legal documents. Legal documents may include business licenses and registrations, Articles of Incorporation, copies of contracts you have with any third parties, franchise agreements, and commercial lease agreements.
Insurance Requirements: Insurance is critical for a small business. Specific insurance can mean the difference between successfully running your business and possibly taking an enormous financial hit. Requirements can be slightly different for each bank and borrowers. Check with your loan officer or relationship manager to determine if you have the right policies in place. Insurance requirements can include, workers’ compensation insurance, flood insurance, real estate insurance and life insurance. Other possible requirements include liability and product liability insurance, host liquor liability insurance, malpractice insurance along with state specific insurance requirements.
- Nail down exactly why you need the money and determine how this loan will help your business before you look for a lender.
- Have a specific loan amount in mind. You can work with your accountant to determine the right amount to help grow your business. Look at your business plan for help in this area as well.
- Work with your financial advisor/accountant when gathering financial documents.
- Find a lender that is 100% transparent about rates, fees and other costs associated with the loan.
- Look for verified customer reviews on platforms like Trustpilot or Google Reviews.
- Choose a lender that offers top-notch customer service to answer questions and give guidance as you move through the loan process.
- Seek funds before you need them. Your business plan and cash flow analysis can let you know just when funds will be the most helpful, so you’ll have plenty of time to prepare and find the right lender.
At SmartBiz Loans, we hear words like “relief” and “excitement” when our customers receive low-cost funds from an SBA loan. Although SBA loans can be time and paperwork intensive, they are well worth the effort, and you’re already one step ahead of the game by reviewing these requirements. Best of luck on your entrepreneurial journey!