Small Business Administration (SBA) loans can be a great option for a business loan. SBA loans are good for businesses that are just starting out and lack extensive financial history or a lot of collateral.
SBA loan funds come from banks, credit unions and other third parties, but they’re guaranteed by the government, meaning less risk for the lenders — and better terms for the borrower.
Some SBA terms are less onerous requirements for equity and collateral than many commercial loans. For example, the SBA doesn’t require that you fully collateralize an SBA loan (they will accept all the collateral you have).
There are a few things to keep in mind when considering applying for an SBA loan.
The Top 5 Criteria to Meet
- Be a small business! There is a handy chart that defines the size limits for businesses on the SBA website, found here.
- Be a for-profit that is NOT focused on politics, spreading religion or anything the government might term of an indecent sexual nature.
- Operate your business in the US or US territories.
- Invest some equity in the business before asking for a loan.
- If you are behind on your taxes, pay off your taxes before applying.
Much like a regular commercial bank loan, applying for an SBA loan will require all the supporting documents you would expect for a bank loan. So before applying, get all your paperwork together — especially the time-consuming items, like a detailed business plan that explains what you plan to do with the loan.
There are a few restrictions to consider when it comes to planning the use of an SBA loan. While most uses, such as buying more inventory, paying salaries, buying real estate, or even buying another business to help expand your own are all permitted, there are some uses that are off limits. Make sure to check out our Guide to SBA Loans for more on restrictions and requirements.
Situations in Which You Won’t Qualify
- If you need the loan in order to fund an investment, for example buying a house that you plan to fix up and flip, you should consider an alternative source of funds.
- If your business gets a third or more of its revenue from legal gambling or limits membership for any reason other than capacity.
- SBA loans also can’t be used to reimburse a business owner for money they invested previously in the business.
One last consideration when evaluating an SBA loan as an option is the size of the loan you will need. While SBA loans can be up to a maximum of $5 million, the average loan awarded tends to be much smaller, around $370,000.
So if it sounds like an SBA loan would work for your needs, it’s time to start gathering all your paperwork, getting your credit statements in order, collecting your tax returns for the past few years, and filling out an application.