If you’ve researched the types of available small business loans, you probably have discovered that loans backed by the US Small Business Administration are some of the best and most highly coveted. Well, the TL;DR of it is, unfortunately, hard. However, if you decide to learn about getting a Small Business Administration loan, they tend to carry the lowest interest rates and longest repayment terms available while offering to fund for amounts more substantial than borrowers might find.
The truth is that competition for these loan products is fierce, and if you choose to apply for an SBA Loan, it can be a challenge. Many business owners who start their financing journey ultimately end up with a different product due to either eligibility requirements or their business financing timeline demands. It’s tough!
Before you apply for an SBA loan, it’s important to understand exactly how hard it is to get a Small Business Administration and how the process works. You should know the requirements. Plus, your likelihood of being approved for this form of small business financing.
What Is an SBA Loan?
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 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 lender’s risk, making it possible to offer the borrower such great terms. And the risk is what amounts to higher rates imposed on the borrower, after all.
As a borrower, taking out an SBA loan virtually ensures the best interest rates on the market, with a repayment period lasting 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.
Why Are SBA Loans Such a Hot Commodity?
SBA loans are the most desired loan product on the market simply because they offer the best repayment terms and accessibility to business owners. And 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.
Let’s Get More Granular, Shall We?
Here’s a little more info to better understand why you’d want an SBA loan over other loan products—and why you’d want to work toward getting a 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:
- Loan amount: $5,000 to $5 million
- Term: 5 to 25 years
- Interest: Starting at 6.5%
Traditional Term Loan
- Loan amount: $25,000 to $500,000
- Term: 1 to 5 years
- Interest: 7% to 30%
And even this comparison is deceptive to some degree because qualifying for the 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.
Who Is a Good Candidate for an SBA Loan?
How hard is it to get one of these Small Business Administrations, 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.
The SBA and their lending partners can choose who they approve to receive a loan.
How Hard Is It to Qualify for an SBA 7(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 Micro-loan and SBA Community Advantage Loan. (Find out more about the three types of SBA loans here.)
Let’s take a look at the eligibility requirements for the SBA’s most popular loan program, the SBA 7(a) loan:
- Time in business
Most SBA loan programs require applicants to be in business for at least two years before applying. 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.
- Annual business revenue
Along those same lines, the SBA 7(a) loan program requires that businesses have 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.
- Personal credit history
When you apply for a 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 a strong personal credit score and no recent foreclosures, bankruptcies, or tax liens on your record.
- Down payment requirement
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.
- Other general eligibility requirements
In addition to these financial requirements for SBA loan eligibility, you must meet a few other legal or logistical requirements to be considered a qualified SBA loan candidate.
Before you apply for an SBA loan, make sure you can also meet these requirements:
- Be a small business as defined by the SBA
- Operate primarily within the US
- Be a for-profit business
- Show a need for the requested funds
- Have used other financial resources, such as personal savings, before seeking a loan
- Not delinquent on any debt payments to the US government
So, How Hard Is it to Get an SBA Loan?
That depends on how closely you meet the eligibility requirements. As you can see, being a good candidate for an SBA loan means having solid cash flow and strong credit history.
What Documents Are Needed for an SBA Loan Application?
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:
- Driver’s license
- Voided business check
- Bank statements
- Balance sheet
- Profit & loss statements
- Business tax return
- Personal tax return
- Business plan
- Business debt schedule
- Personal background and résumé
- Business credit report
- Personal credit report
- Proof of collateral
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 can also decide how much loan your business can afford.
Compared to Other Loans, How Hard Is It to Get a Small Business Administration Loan?
The SBA loan application process is the most difficult compared to other business loans. 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.
A thriving business may struggle to qualify for an SBA loan for many reasons. 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.
Similarly, any blemishes on your personal or business financial history could hurt your qualifications. You 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 a Small Business Administration 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. You’ll never be eligible for an SBA loan if you don’t meet those requirements.
SBA Loan Alternatives to Fund Your Business
If you’re not eligible, since getting a Small Business Administration loan is hard, don’t worry! There are still options available to secure small business financing.
Many other small business loans have more flexible or 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:
- Merchant cash advance
This is 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 make sure it’s the right product for you first.
- Invoice financing
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!
- A business line of credit
Like a credit card, you’ll work with a lender to get the 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.
- Short-term loan
This is also a term loan, with a repayment period that only extends to 18 months max. On a daily or weekly repayment schedule.
- Equipment Financing
An equipment loan will help you buy business equipment right away by using that equipment as collateral. The lender will provide you with the money to secure your equipment, and you’ll pay back the total purchase amount, plus fees, for a set period.
- Term loan
There are other 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 is not as hard to get as a Small Business Administration.
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 well-established and creditworthy businesses. It’ll be slightly more expensive for your business, but it still helps it get the funds it needs, grow, build a good credit history, and build rapport with a lender. And you might be able to work toward graduating with an SBA loan!
It’s Hard to Get an SBA Loan, So…
The reality is that qualifying for a Small Business Administration 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.
BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.