Perhaps no loan is more sought-after than the SBA loan. Partially guaranteed by the government, SBA loans are long-term loans that can be used for virtually any purpose. When it comes to rates and terms, it’s hard to find a more favorable loan option.
Because of these advantages, only small business owners who are in very good financial standing can typically qualify.
Here’s everything you need to know about why SBA loans are an ideal funding source for business owners and who qualifies for an SBA loan:
What makes SBA loans so good?
Loans backed by the SBA offer a range of loan sizes, long repayment terms, and most importantly, low-interest rates.
Compared to short-term funding options, such as invoice financing or a business line of credit, your APR is generally much lower. Compared to even traditional term loans, which have interest rates ranging from 7–30 percent, SBA loans are much more affordable (interest rates currently start from 6.7 percent).
On top of that, the amount you can get ranges from $5,000–$5 million, ensuring you can take exactly what your business needs. The money can be used for virtually any business need, from seasonal inventory and payroll to marketing campaigns and office space. You can even refinance debt with an SBA loan.
What are the qualifications for an SBA Loan?
SBA loans typically range from 5–25 years, with the application process taking at least three weeks. Requirements are strict and you may have to provide collateral to secure the loan.
Generally, you need to meet the following criteria:
- At least two years in business
- A credit score of 620 or higher
- More than $100,000 in annual revenue
In short, providers of SBA loans are looking for business owners with strong borrowing histories. For more favorable rates and terms, a credit score of 680 or higher is needed. If your credit is poor, it’s going to be tough getting a loan through a lender that works with the SBA.
Annual revenue is also heavily scrutinized, as it shows your cash flow and ability to make payments. You need at least $100,000 or more to qualify.
The application process is also long, typically requiring you to submit a business plan along with numerous financial documents, including but not limited to:
- Personal and business tax returns
- Profit and loss statements
- Bank statements
- Balance sheet
- What types of businesses get the most SBA loans?
- No matter your industry, you can generally qualify for an SBA loan. But some types of businesses do tend to get more funding on an annual basis.
According to 2016 data from the SBA, the following types of businesses get the most SBA loans in terms of a number of loans:
- Restaurants (full and limited service)
- Medical offices
- Beauty salons
- Gas stations (with convenience stores)
- General contractors
- Landscaping services
As you can see, the SBA connects business owners with loans across a wide range of fields. The most common businesses that get SBA loans play a major role in the economy and employ many workers in the US. It only makes sense that they would get the most loans from the SBA, as these types of businesses are most common in general.
When it comes the total amount of money lent, companies in industries with high operating expenses, like hotels, childcare, and food processing, tend to get the biggest loans. That’s because owners in these fields couldn’t run their business properly without lots of capital.
Getting an SBA loan
Don’t expect to be able to get an SBA loan just after opening your doors for business. Smart use of other affordable financing options, such as a zero percent intro APR business credit card and a personal loan for business, can help you with cash flow needs for the first few years.
When you do apply for an SBA loan, what matters most is your credit score, business revenues (and profitability), and how long you’ve been in business.
With sound money management and a good early growth strategy, you can put yourself in a position to qualify for a great SBA loan in two or so years. Then, you’ll be ready to grow your business even more.