SBA Loans: What They Are and How to Qualify

There comes a time in most small business owners’ lives when they need to borrow money to grow the business. At these times, one option that should be considered is a U.S. Small Business Administration (SBA) loan. Here’s what small business owners need to know about SBA loans to determine if they are the right fit.

What is an SBA loan?

An SBA loan is a loan specially geared towards small business owners who may not qualify for a traditional commercial loan. SBA loans are partially guaranteed by the U.S. Small Business Administration, which partners with banks across the country to provide these types of loans that help Americans start, build and grow businesses.

What are the types of SBA loans?

There are two main types of SBA loans:

— 7(a) Term Loan: This is a bank or credit union loan that is partially guaranteed by the SBA. It can provide up to $5 million to fund equipment, real estate, inventory and working capital, and up to $350,000 in revolving lines of credit to fund ongoing operations.

— 504 Loan: This is a participation loan with a bank or credit union and the SBA that is used to fund fixed assets, including large equipment and new facilities, with a cost of up to $12.5 million. Down payments range from 10 percent to 20 percent. Terms extend 20 years and interest rates are typically below market rates.

What are the benefits of an SBA loan?

— Less upfront cash – SBA loans require 10-20 percent down versus 25-35 percent for traditional loans.

— Competitive interest rates that are comparable to or lower than conventional commercial loans.

— Flexible repayment terms customized to your needs.

— Borrowers can sometimes avoid balloon payments that conventional loans may require.

— Higher-risk borrowers may be able to obtain financing.

Do I qualify for an SBA loan?

Businesses may qualify for SBA loans by meeting at least one of the four criteria: size, revenue, net worth or net income. Size and revenue guidelines vary based on industry type, as determined by North American Industry Classification System (NAICS) codes. If a company does not qualify under NAICS size and revenue guidelines, it may qualify with a net worth less than $15 million or a 3-year average net income of $5 million or less.

While many banks are willing to take a little extra risk on government-backed SBA loans, borrowers must still meet the following qualifications, known as the 4 C’s of lending:

Cash flow

The debt coverage ratio (DCR) is used to measure cash flow and evaluate whether a business can afford its debt payments. DCR is determined by dividing net cash flow from operating income by debt. Typically, lenders require a DCR of 1.25 or higher.

Other ways lenders evaluate cash flow is by examining your company’s profit and loss statement or its statement of cash flows. In the P&L, earnings before interest, taxes, depreciation and amortization (EBITDA) is the key figure. In the statement of cash flows, the key figure is cash flow from operating activities. These evaluations consider all of your debt obligations and help a lender determine your ability to repay the debt.


As a small business owner, you are the business, so both your business and personal credit reports will be used to determine your ability to fulfill financial obligations. While SBA loans can overcome certain shortfalls in loan credit applications, good personal and business credit is a necessity. On your business credit report, lenders will look at information regarding classification (based on size and creditor payment history), outstanding liens and pending lawsuits.

In addition to checking your credit history, lenders will review your company’s financial statements for the past few years and compare your company’s various financial ratios with industry averages.


Cash or other tangible assets, such as property, inventory or equipment, will be used as collateral for your SBA loan. An SBA loan can be as high as 90 percent of the collateral value.


The first three C’s revolve around hard-and-fast numbers, but lenders also consider a non-financial factor when qualifying potential borrowers: character. This includes your business philosophy, past experience, business savvy, education and work ethic. If you are lacking in the other C’s, this is your opportunity to shine.

How do I apply for an SBA loan?

Look for a bank that is an SBA Preferred Lender, which may be able to approve your loan faster than  non-preferred lenders (days versus weeks). Request an SBA loan application, which includes sections for the company’s present and historical financial info, details on the business model, background on principals, IRS request for tax transcripts and a personal history form to verify legal residence and check for criminal background.

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