If you’ve done any research into various small business loan options, you probably have discovered that loans backed by the US Small Business Administration are some of the best—and most highly coveted. But if they offer so many loan products—which they do—how hard is it to get an SBA loan?
Well, the TL;DR of it is, unfortunately, hard. SBA loans tend to carry the lowest interest rates and longest repayment terms available, while also offering funding for amounts more substantial than borrowers might otherwise find.
The truth is that competition for these loan products is fierce, and the SBA application process is exhaustive. Many business owners who start their financing journey with an SBA loan in mind ultimately end up with a different product due to either eligibility requirements or the demands of their business financing timeline. It’s tough!
Before you apply for an SBA loan, it’s important to understand exactly how hard it is to get an SBA loan, and how the process works. You should know the requirements, plus your likelihood of being approved for this form of small business financing.
Before we go through how hard it is to get an SBA loan, this is a pretty good place to start, isn’t it?
An SBA loan is a low-interest, long-term loan guaranteed by the federal government’s Small Business Administration. These loans are highly sought after by small business owners because of their low interest rates and long repayment terms.
Important! The SBA itself doesn’t directly lend money to small businesses. The agency partners with local intermediary lenders to partially guarantee loans offered by these lenders, making them more willing to offer loans to small businesses.
Translation? This partial guarantee means that if the borrower fails to repay the loan, the lender is guaranteed repayment by the SBA. This lowers the risk taken on by the lender, making it possible to offer the borrower such great terms. And risk is what amounts to higher rates imposed on the borrower, after all.
SBA loans are a win-win solution for both the lender and the borrower. As a borrower, taking out an SBA loan virtually ensures the best interest rates on the market, with a repayment period that lasts over a long stretch, which eases the burden.
For the lender, the partial guarantee offered by the Small Business Administration makes funding these loans less inherently risky than they otherwise would be.
SBA loans are the most desired loan product on the market simply because they offer the best combination of repayment terms and accessibility to business owners on the market. And, really, who wouldn’t want that?
SBA loans can be up to $5 million (yeah, really!), with interest rates starting around 6.5%. Repayment terms of five to 25 years make SBA loans easier to fit into the small business budget.
Here’s a little more info to better understand exactly why you’d want an SBA loan over other loan products—and why you’d want to work toward getting an SBA loan if you’re not quite there yet!
Let’s compare the terms of an SBA loan to a traditional term loan commonly available through banks or alternative online lenders:
Traditional Term Loan
So, as you can see, even at the lowest possible interest rate, the traditional term loan is still higher than what is offered for an SBA loan.
And even this comparison is deceptive to some degree, because qualifying for that lowest possible rate on a traditional term loan requires a perfect financial history, high credit score, and high annual revenue—something most business owners simply don’t have.
Simply put, the terms offered by an SBA loan are astonishingly good. When you see them compared to a traditional term loan, it’s easy to see why any business would want an SBA loan over a traditional term loan.
How hard is it to get one of these SBA loans, then? Although some of the SBA loan products are intended to make low-interest loan products more accessible to small business owners than they otherwise would be, it won’t come as a surprise that you still have to meet strict requirements to be considered a good candidate for an SBA loan.
Since every business owner dreams of getting an SBA loan, the SBA and their lending partners can be choosy about who they approve to receive a loan.
There are a few different types of SBA loans that are available to smaller businesses, new businesses, and disadvantaged businesses. These are the SBA Microloan and SBA Community Advantage Loan. (Find out more about the three types of SBA loans here.)
If you fit into one of those categories, you might be eligible for an SBA loan even without meeting the typically strict qualification standards.
To give you a better understanding of how hard it is to get an SBA loan, let’s take a look at the eligibility requirements for the SBA’s most popular loan program, the SBA 7(a) loan:
Most SBA loan programs require that applicants be in business for at least two years before they apply. This means that an SBA 7(a) loan is not the ideal product for startup business owners, as you’ll need to show some revenue history and experience in your business before you’re able to qualify.
Along those same lines, the SBA 7(a) loan program requires that businesses have an annual revenue of $100,000 or higher for the most recent fiscal year. This requirement holds regardless of the size or term of the 7(a) loan you’re applying for.
When you apply for an SBA loan, both the intermediary lender (aka the bank) and the US Small Business Administration will also look to your personal credit history as the borrower to determine your eligibility. It’s important to know that although there is no specific credit score for loan eligibility, you’ll need to have a strong personal credit score, plus have no recent foreclosures, bankruptcies, or tax liens on your record.
The SBA 7(a) loan may also require that you pay a 10% to 20% down payment and partially collateralize the loan. This requirement depends on the lender and the size of the loan. Whether or not a down payment is required also depends on how you intend to use the loaned funds.
In addition to these financial requirements for SBA loan eligibility, you have to meet a few other legal or logistical requirements in order to be considered a qualified SBA loan candidate.
Before you apply for an SBA loan, make sure you can also meet these requirements:
Clearly, that depends on how closely you meet the eligibility requirements. As you can see, being a good candidate for an SBA loan means that you have solid cash flow and a strong credit history.
If these standards don’t match your current financial standing, expect to have a hard time obtaining an SBA loan.
When you apply for an SBA loan, you need to prove that you meet the eligibility requirements set forth by the SBA and the lending partner. And to prove your business is financially strong and your credit history is credible, you need to provide a lot of documentation.
Each lender has slightly different requirements, but in general they’ll expect you to submit the following documentation with your SBA loan application:
The SBA and the lender partner will want to examine your financial history to assess their risk in funding a loan for your business. By assessing your financial documents, the lender will also be able to decide how much loan your business is able to afford.
Apply for an SBA Loan
When compared to other types of business loans, the SBA loan application process is commonly considered the most difficult. This is true not only because of the eligibility requirements but also because of the sheer length of the application and underwriting process.
Whereas many online alternative lenders can review your loan application and offer cash in hand within just a few days, the SBA loan application process can take weeks or even months to complete before you ever learn whether you’re approved, let alone get direct access to the funds your business needs.
At the same time, obtaining an SBA loan is also very difficult because the eligibility requirements set down by the SBA and their lending partners are extremely high.
There are any number of reasons that a thriving business may struggle to qualify for an SBA loan. For example, if you’re a startup or young business, you have a poor credit score, or you’re not willing to offer collateral or a personal guarantee, you probably won’t qualify for an SBA loan.
Similarly, any blemishes on your personal or business financial history could hurt your qualifications. You also won’t qualify for an SBA loan if you’re not a for-profit business, you need funds for an unauthorized purpose, or if your business operates mostly outside the United States.
Depending on which aspect of your business or financial history has disqualified you for an SBA loan, time and focus on growing your business might improve your situation and eligibility for an SBA loan. However, other disqualifying factors, such as being a for-profit business, won’t change with time. If you don’t meet those requirements, you’ll never be eligible for an SBA loan.
If you’re not eligible, since it’s hard to get an SBA loan, don’t worry! There are still options available to secure small business financing.
Many other types of small business loans have more flexible, or simply different requirements for borrowers. With that in mind, you should consider these other loan types, which are all easier to get, and can certainly help you reach your goals of financing:
These appear in rough order of ease to get, starting with the easiest:
This is basically a lump sum of capital you repay using a portion of your daily credit card transactions. It’s an expensive product, so although easy to qualify for, you should definitely make sure it’s the right product for you first.
Also called “accounts receivable financing,” this type of loan lets you get a fast advance of about 85% of the value of your invoice for a fee. It’s a great pick for small businesses whose capital is tied up in invoices—even large companies do this!
Like a credit card, you’ll work with a lender to get a maximum amount of capital you’re able to draw on. And also like a credit card, you’ll only pay interest on the amount you use.
Like an SBA loan, this is also a term loan, but with a repayment period that only extends to 18 months max, and on a daily or weekly repayment schedule.
An equipment loan will help you buy business equipment right away by using that equipment as collateral. The lender will provide you the money to secure your equipment, and you’ll pay back the total amount of the purchase, plus fees, for a set period of time.
This is where that SBA loan falls. But there are other types of term loans, too, including medium-term loans from alternative lenders. They’ll still provide a traditional lump-sum structure with a longer repayment time that are not as hard to get as an SBA loan.
See Which Loans You Qualify For
Applying for a loan other than an SBA loan isn’t shameful, especially since getting an SBA loan is hard, even for very well-established and creditworthy businesses. It’ll be slightly more expensive for your business, but it still helps your business to get the funds it needs, grow, build good credit history, and build rapport with a lender. And you might be able to work toward graduating into an SBA loan!
The reality is that qualifying for an SBA loan is extremely hard—if only because lenders can set their eligibility requirements high, lending only to the best candidates. Plus, the application process for an SBA loan is longer, requires more documentation, and is more involved than with any other loan.
However, even if you find that an SBA loan isn’t the best fit for your current stage of business, that doesn’t have to hold you back from pursuing the funding your business needs. You can start by seeing what you’re qualified for, and find the best fit for your business now—and build up over time to get yourself into an SBA loan later.
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