Given that the vast majority of small businesses are looking for loans below a threshold that is generally profitable for big banks, one place they should turn is the Small Business Administration (SBA). The SBA is charged by the federal government with promoting and assisting small businesses in America.

If you're an entrepreneur, be it a startup founder or small business owner, capital can mean the difference between staying afloat or sinking into failure.

Unfortunately, banks are lending less and less to small businesses compared to a decade ago, the result of decreased profitability stemming from increased underwriting costs and new legislation following the 2008 recession.

Why Should I Learn How to Qualify for an SBA Loan?

Given that the vast majority of small businesses are looking for loans below a threshold that is generally profitable for big banks, one place they should turn is the Small Business Administration (SBA). The SBA is charged by the federal government with promoting and assisting small businesses in America.

The SBA is a government body, which means that it doesn't lend out any of its own money to cash-strapped entrepreneurs and businesses. Instead, the SBA partners with private lenders, underwriting their loans and taking on some of the risk in case the borrower defaults. Take the 7(a) loan program: The SBA will underwrite the bulk of the loan, guaranteeing up to 85 percent of loans up to $150,000 and 75 percent of loans over $150,000.

In return, the SBA charges a small percentage-based guaranty fee that varies depending on the size of the loan. For instance, a 7(a) loan of $150,000 will accrue a 2 percent fee of $2,550 — a much smaller number than similar loans provided by for-profit lenders. Additionally, there are limits on what a lender can charge as well, such as "reasonable" packaging fees that don't exceed other comparable commercial loans.

What Are the Different Types of SBA Loans?

Before we get into the requirements of the application process, let's discuss some of the important traits and characteristics of the SBA's three most popular loan programs: the 7(a) loan program, the CDC/504 program and the Microloan program.

7(a) Loans

By far the most common SBA loan type, 7(a) programs are popular for their versatility and affordability. Unlike the CDC/504 program, which is restricted to property and real estate uses, 7(a) loans can be used for a wide variety of purposes, from short-term working capital (hiring extra seasonal workers or shoring up funds for a contract) to long-term expenses (such as buying inventory or covering an operating expense like marketing or payroll).

In terms of size, 7(a) loans top out at $5 million. More importantly, because the SBA is not a for-profit entity, the terms and rates are extremely favorable to the borrower. The average interest rate is anywhere from 6 to 13 percent, a pittance compared to the high rates of other for-profit entities, like alternative lenders.

CDC/504 Loans

Another common type of loan, the CDC/504 category is much more limited than the 7(a) program in scope. 504 loans are used for real estate and property-related purposes, such as buying land and facilities or machinery and production equipment, and improving existing buildings or building new ones. The 504 program has strict clauses against speculation: Real estate investors cannot use 504 loans to finance their purchases or equity in development or construction projects.

Additionally, 504 loans are financed not by one entity, but three:

  • A bank, which usually backs 50 percent of the loan
  • A certified development corporation, which backs 40 percent
  • The borrower, who pays 10 percent

As a result, interest rates (when combined and averaged) generally come out to about 5 to 6 percent. Because Certified Development Companies (CDC) are created to promote the economic health and revitalization of specific areas, businesses must prove that they will either bring certain benefits to an area, such as local jobs, or qualify for specific categories, like a minority-owned business.


Free of fees because of their small size, microloans are loans for businesses with capital needs of less than $50,000. While other loans, like the 7(a) program or 504 program, are offered in conjunction with banks and CDCs, microloans are generally provided by small, nonprofit institutions that specialize in small funding.

In this case, the SBA takes a more direct role, even providing funds to these local organizations to fund businesses in their community. Think of microloans as an American equivalent to development loans, often given to entrepreneurs in developing countries.

Overall, the restrictions on a microloan are much lighter than those on a 504 loan. While microloans can't be used to purchase real estate, they can still be used for a number of other startup costs, including working capital, furniture and machinery.

What Are the Requirements?

Though there are three different types of SBA loans, the basic requirements for the SBA application process with your local lender are quite similar. Because SBA loans are insured by the government, the application process is incredibly detailed, requiring lots of documentation.

As you go through the application process, keep in mind that SBA-approved lenders are trying to paint a picture of your business, your finances and your past in order to predict your future behavior. For instance, how do you intend to use the loan? Are you capable of paying back the loan in a timely manner? Do you have any debts that can get in the way of your repayment? How do you run your business?

Application Materials

Personal Background Documents

These are documents that provide information about yourself including addresses, educational level, credit score and other personal information. You must also include your resume, which should list out the jobs and the experiences that you have had.

Though there are some key differences between a resume for the SBA and a resume for a personal loan or job application, the underlying principle remains the same: Demonstrate your expertise and establish experience in your chosen field, as well as your trustworthiness in repaying any and all capital. Your resume is essential to your success, so be sure to format and proofread this document (or consider hiring a professional to do so).

Business Plan

A well-written business plan is an essential part of the SBA loan process, whatever program you may be applying for. As a result, it's in your interest to make this document as thorough and comprehensive as possible, including sections on market analysis, marketing sales, revenue forecasts and organization and description.

Generally speaking, there are five areas that bankers will want you to address in your business plan: cash flow, which is important to both business health as well as your ability to repay the loan promptly; collateral, which is equipment or assets that you pledge in case you can't repay the loan; co-signers, who would be responsible for repayment in the event that you cannot repay; marketing plans, which will help pull in customers and boost your cash flow; and finally, management, specifically your record of experience and good work in similar entrepreneurial ventures.

Business and Personal Credit Reports

Bear in mind that the personal credit score requirements for SBA loans are relatively high for a loan.

Tax Returns

Personal and business tax returns, like the rest of the documents listed here, provide some insight into whether you are a credit risk, specifically whether you'll be able to repay your loans in a responsible manner. Your personal tax return will stand as proof of your income, whereas your business tax return is an indicator of the overall health of your enterprise.

Financial Statements

For the most part, your financial statements will be straightforward records and projections. You'll likely have to include a profit and loss statement, which will summarize the gains and losses for your business over the course of a year (or a fiscal quarter).


Having collateral at stake is still an important part of the loan process. Though the amount of collateral will vary based on your risk level (as perceived by banks), this practice is more of a motivator than anything else. Research (and prior business experience) has found that loss aversion is a powerful psychological force. As a result, business owners will likely work twice as hard when something is on the line.


Sit back and wait. Though the underwriting process for a SBA-approved loan is usually somewhat longer than, say, an online business loan, thorough risk assessments are necessary. After all, the SBA is guaranteeing a portion of this loan, which means that risks need to be carefully assessed before any money makes its way to the borrower.

All the same, if you pass this stage, your application should be approved, and you will be good to go. Now that you know how to qualify for an SBA loan, good luck!

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The information provided here is for general informational purposes only and not legal, insurance, financial or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of a professional who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.

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