Blog

Whether you’re starting a new business or trying to scale an existing one, sometimes you need to borrow money to set the wheels in motion. 

A business loan can help in areas ranging from funding purchase orders to hiring employees to building out manufacturing capacity. And one of the best forms of small business financing is an SBA loan. That’s because these loans are backed by the US Small Business Administration (SBA), which often translates to lower interest rates and fees than other loans. However, SBA loan requirements can be more stringent compared to some other startup business loans.

That said, SBA loan requirements are well within reach for many small businesses. But before you get too deep into filling out an SBA loan application, it’s useful to understand general SBA loan requirements for startups (as well as established small businesses) and how eligibility differs among the various types of SBA loans, so you can focus on the financing that makes the most sense for your company.

Let’s take a closer look at how to qualify for an SBA loan. 

General SBA loan eligibility

First things first: It’s important to understand that SBA loans aren’t a monolith. 

For one, there are several different types of SBA loans, such as SBA 7(a) loans, which are the most common but have several subtypes, and SBA 504 loans, which are geared toward fixed assets like real estate or machinery. Depending on which type of SBA loan you’re applying for, the eligibility requirements vary.

Also, SBA loans are not directly issued via the SBA. Instead, SBA-approved lenders, like some banks, issue loans to small businesses that are partially guaranteed by the SBA. So, while the SBA has certain guidelines that these approved lenders must follow—like limiting loan sizes to between $500 and $5.5 million, depending on the type of loan—each lender can also have their own eligibility requirements that might be stricter than the SBA’s overarching guidelines.

That said, before you start applying for SBA loans from SBA-approved lenders, it helps to understand the baseline SBA loan eligibility standards.

Business size and type

As the name suggests, you have to qualify as a small business to receive an SBA loan. The exact business size requirements vary by industry, but a common guideline is having fewer than 500 employees. 

Certain industries have size standards, usually based on annual receipts, which can vary significantly, even among similar sectors. For example, food service contractors can have a maximum of $47 million in annual receipts to qualify as a small business by the SBA, while caterers can have a maximum of $9 million.

You can use the SBA’s online Size Standards Tool to see if you qualify as a small business. 

Also, only certain types of businesses are eligible for SBA loans. While the scope is pretty broad, certain types of businesses are ineligible, such as those primarily engaged in lending, life insurance companies, and those that earn more than one-third of their annual gross revenue from gambling.

For-profit operation

Another baseline requirement for SBA loans is that you have to be a for-profit business. The only exception is that a for-profit subsidiary of a non-profit could still be eligible.

US-based business

Location also matters for SBA loan eligibility. To qualify, your business must physically be located and operate in the US. This extends to both US states and US territories. Also, businesses generally have to either be majority-owned by US citizens or lawful permanent residents.

Credit score minimums

Credit score requirements can vary based on the lender and the type of SBA loan, and it’s possible to still qualify for an SBA loan with bad credit. However, you should check with lenders about what their credit score minimums are, if any, and know that certain types of loans do have floors. For example, SBA 7(a) small loans require a minimum FICO Small Business Scoring Service (SBSS) score of 155.

Owner’s invested equity

The SBA has loosened some requirements around how much equity a business owner has to have in the company to qualify for an SBA loan. But when a complete change of ownership is made, for example, 7(a) loans above $500,000 generally require a 10% equity injection from the owner, though lenders may have their own requirements that differ.

Collateral expectations

Collateral expectations can also vary by lender and SBA loan type, so you may want to do some digging based on what loan you’re interested in applying for.

To give you a general idea of what to expect, though, consider that the SBA does not require collateral for some loans, such as 7(a) small and SBA Express loans of $50,000 or less. Others, however, like 504 loans, generally are secured based on the assets the funds are used to purchase, and thus 504 loans can’t be used for purposes such as working capital.

Down payment considerations

Here too, SBA requirements vary by lender and SBA loan type. In general, though, you can expect lenders to require around a 10% to 20% down payment for the amount you want to borrow.

Although that might seem counterintuitive, putting in some of your own money to then borrow more helps align you with lenders and can make them more comfortable providing you with the loan, since you have something at stake too.

Credit not available elsewhere

This loan requirement is a bit more complicated and something that lenders can help you with, but in general, SBA loans are meant to support small businesses that can’t find high-quality financing elsewhere. 

Thus, you need to be in a position where you can’t obtain reasonable loan terms elsewhere, such as due to poor credit or simply if other lenders have significantly higher interest rates than what an SBA loan offers. However, you don’t necessarily have to apply for other loans first, as your lender may be able to certify that credit is not available elsewhere for your business in terms of satisfying this SBA requirement.

Personal guarantees

Those who own 20% or more of a business obtaining an SBA loan generally have to sign a personal guarantee, meaning they’re personally liable for repaying the loan if the business can not.

Specific requirements by loan type

Different types of SBA loans offer different maximum loan amounts, usage limitations for funds, application processes, etc. As such, the eligibility requirements also differ by loan type. Beyond the baseline requirements like being a for-profit business in the US, some specific requirements by SBA loan type include the following:

7(a) loans

SBA 7(a) loans are the main type of SBA financing, though there are several subtypes of 7(a) loans. For standard 7(a) loans, some specific requirements include:

• Loan size between $500,001 and $5 million 
• Personal credit score of around 640 or higher with a demonstrated ability to reasonably repay the loan are often required; some lenders have higher requirements, such as a 690 or higher personal credit score
• A 10% down payment is often required
• Funds can be used for most purposes, such as working capital, acquiring real estate, purchasing machinery, and debt refinancing

Some SBA 7(a) loan requirements, however, differ based on the subtype and the specific lender. For example, 7(a) small loans are for loan sizes that are $500,000 or less, and for ones that are $50,000 or less, not including International Trade Loans, the SBA does not require collateral, though certain lenders might. Lenders can also make their own creditworthiness determinations for 7(a) small loans without an SBA review.

504 loans

SBA 504 loans differ from the 7(a) SBA loan program in several ways. For one, the purpose of 504 loans is specifically for financing major fixed assets. Also, these loans are only issued through Certified Development Companies (CDCs), which are non-profits, as opposed to private lenders that issue 7(a) loans. 

In terms of eligibility, some unique requirements of 504 loans include:

• The business must have a tangible net worth below $15 million
• For two years preceding the 504 loan application, average net income each year needs to be less than $5 million after federal income taxes
• Loans can only be used to finance assets that spur business and job growth, such as purchasing or constructing new buildings or long-term machinery, or improving or modernizing assets like existing facilities; in contrast to 7(a) loans, 504 loan proceeds can’t be used for purposes such as working capital or inventory
• Maximum loan amount of $5.5 million
• While varying by lender and situation, down payment may be higher than 7(a) loans, such as requiring a 20% versus 10% down payment; similarly, credit score requirements may be higher, such as requiring a 680 or higher personal credit score, but this can vary

SBA Express loan

SBA Express loans are a subtype of 7(a) loans, yet these leave a lot more up to the discretion of the lender, as the maximum SBA guarantees for these loans is lower (up to 50% versus up to 75% for standard 7(a) loans). As such, the eligibility requirements vary by lender but generally can be considered to be looser than 7(a) loan requirements. 

Some key considerations for SBA Express loans include:

• Maximum loan size is $500,000
• SBA does not require lenders to take collateral for loans up to $50,000, and while collateral may be required based on a lender’s policy for loans above $50,000, Express loans can’t be denied strictly due to lack of collateral
• Can be a revolving line of credit rather than a traditional loan

SBA CAPLines loan

SBA CAPlines refers to a loan program that provides short-term working capital lines of credit (either revolving or non-revolving) through a few different subtypes. For example, Seasonal CAPLines are used to fund seasonal needs, like higher inventory purchases during holiday periods.

Working Capital CAPlines provide credit to those who aren’t eligible for other long-term credit options, with repayment based on converting short-term assets, such as accounts receivable, into cash. 

The main eligibility criteria for CAPLines is that proceeds are used for short-term operating capital, but not uses like financing a change of ownership. There are also some specific eligibility criteria for different types of CAPLines, such as how Working Capital CAPLines borrowers need accounts receivable and/or inventory to qualify for financing.

To see the full SBA loan requirements specific to the loan you’d like to apply for, you can dive into the SBA’s documentation and speak to an SBA-approved lender for more specific guidance. 

Documents you’ll need

In addition to meeting the aforementioned eligibility requirements, small businesses also need to present several documents as part of an SBA loan application. Some common documents include the following, though remember that there can be variances based on factors like the loan type and lender:

Business plan

Showing lenders your business plan can help you meet criteria like demonstrating a reasonable ability to repay the loan, based on your business plan indicating that you have a path for generating income. The level of detail needed and importance of the business plan can vary by lender and based on factors like the age of your business. Startups, for example, may have limited financial statements and thus the business plan may be weighed more.

The SBA has sample business plans available online that you can review if you’re not sure how to create one. 

Financial statements

Lenders also want to see your company’s financial statements, such as:

• Current income statements and balance sheets
• Fiscal year end income statements and balance sheets for the past three years, if applicable
• Cash flow projections, which typically should show positive cash flow within two years

These financial statements may be needed for specific loan criteria, like 504 loans that show your business does not exceed net worth or net income thresholds, or lenders may simply want to see financial statements as part of assessing your creditworthiness. The stronger your financial statements are, the better loan terms you typically can receive, such as qualifying for lower interest rates.

In addition to these business statements, lenders also generally want to see personal financial statements—including from spouses—of those who own 20% or more of a business to assess your creditworthiness, particularly when owners provide personal guarantees for SBA loans.

Tax returns

Connected to financial statements, applicants also typically need to provide tax returns for the past three years, though startups may still be eligible if they don’t have that history. Here too, you may need to supply both business and personal tax returns, if applicable.

Legal documents

Be prepared to provide legal documentation regarding your business, which can vary based on your business structure but may include documents such as:

• Articles of incorporation or articles of organization
• Partnership agreements
• Business licenses
• Legal judgments for or against your business

Alternatives to SBA business loans

While SBA loans offer several positives, such as often having lower interest rates than non-SBA loans, not everyone qualifies, nor do all businesses want to go through the SBA approval process, which can be cumbersome.

Instead, Shopify store owners can turn to alternatives like a merchant cash advance or working capital loan with Shopify Capital. Rather than having to meet certain SBA lender criteria like minimum credit scores or down payments, your eligibility for Shopify Capital is based on several factors that determine the health of your business, including sales history. There are no limitations on how you can use financing for your business needs.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two 6 month periods. The actual duration may be less than 18 months based on sales.