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How Do I Know If My Startup Business Qualifies for SBA Loans?

Starting your own business can be an exciting yet daunting task. As you work to get your company up and running, you’ll likely need access to capital and financing options to help cover various expenses along the way. One potential source of financing for startups is loans backed by the Small Business Administration (SBA). But how do you know if your fledgling startup actually qualifies for this type of funding assistance? Let‘s break it down.

What Are SBA Loans?

SBA loans are loans made by banks and other lenders that are partially guaranteed by the U.S. Small Business Administration. This government guarantee encourages lenders to make financing available to small businesses that may not otherwise qualify for conventional loans.There are several types of SBA loan programs available, including the popular 7(a) and 504 loans. The specific requirements, loan amounts, and use of funds vary by program. But in general, SBA loans can offer favorable terms to borrowers, like low interest rates and long repayment periods. The catch is that getting approved can be challenging if you don’t meet all the eligibility criteria.

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SBA Loan Eligibility Criteria

When reviewing SBA loan applications, lenders want to see that your business is likely to succeed and that you’ll be able to repay the loan. The SBA has specific guidelines on what makes a startup eligible. Here are some of the key criteria to be aware of:

Your Business Must Be “For-Profit”

One of the first eligibility factors is that your business must be structured as a <u>for-profit entity</u>. Certain legal entities like partnerships, limited liability companies (LLCs), S-corps and C-corps are acceptable. But nonprofits and charitable organizations do not qualify for SBA loans.

You Must Be Based in the U.S.

To apply for an SBA loan, your business must be located and primarily operate in the United States or its territories. While international companies can get financing through other programs, SBA loans are intended to support the domestic economy.

Your Business Must Meet “Small” Size Standards

Despite the name, the SBA doesn’t only assist tiny “mom and pop” type operations. However, your business must fall below certain size thresholds for your industry to be eligible. The specific employee count and annual revenue limits depend on your NAICS industry classification. For example, a manufacturing business can have up to 1,500 employees, while a software publisher can earn up to $41.5 million in annual sales.

You Must Have Invested Your Own Money

Skin in the game is required when seeking an SBA loan. The owners must have already invested some of their own money into the startup. This shows the lender you are committed to and believe in the success of your business. There are no hard rules on how much is needed. But typically 5-20% or more of total funding is expected to come from the owners first.

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Your Personal Credit History Will Be Checked

For startup businesses with no operating history or financial track record, SBA loan decisions rely heavily on the <u>personal credit scores</u> and financial strength of the owners. Expect your personal finances and credit reports to be thoroughly reviewed. Minimum credit scores vary by lender but are typically 680 and higher.

You Must Be an Eligible “Small Business” Owner

The SBA has rules on who is considered an eligible small business owner for loan qualification purposes. The owners must be U.S. citizens or legal permanent residents. There are also restrictions if you are currently on parole or probation. The SBA will also check if you owe any back taxes or have defaulted on other government loans in the past.

Steps to Take When Applying for an SBA Loan

If your early-stage venture meets the SBA requirements, then you’ll be ready to start the loan process. Here are some key steps to help secure financing:

  • Pick the right SBA loan program – The 7(a) and 504 loans are the most common for startups. But others like microloans or Community Advantage loans may also fit.
  • Find an SBA approved lender – You apply directly through banks, credit unions, and other approved lending partners. The SBA has an online Lender Match tool to help find options.
  • Make sure your business plan is solid – Thoroughly explain your startup’s concept, financial projections, management team, target market, and other vital details in your business plan.
  • Get your financial records in order – Provide tax returns, personal financial statements, business bank statements, profit and loss statements, and anything else required.
  • Offer collateral – Have assets like real estate, equipment, savings accounts or investments ready to secure the loan if possible.
  • Be ready to guarantee the loan – As owners, you will likely need to personally guarantee repayment of the borrowed amount.
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Final Thoughts

Applying for financing is often one of the first major hurdles for aspiring business owners ready to take the entrepreneurial leap. While SBA loans have strict eligibility requirements, they can provide invaluable funding with favorable terms for those who qualify. Do your homework on the SBA criteria and put together the strongest loan application possible to set your startup on the path to success. Let me know if any other questions come up along your journey!

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