SBA loans are not government backed “hard money” loans.
Even though the program is meant to help more small businesses get financing, it does have rigorous requirements for qualifying—including a good credit score.
Where does the U.S. Small Business Administration draw the line on SBA loan credit score minimum? And what other requirements will make or break a small business’s ability to secure an SBA loan? It’s a little more complicated than you might think, but keep reading and we’ll break it all down for you.
The Small Business Administration does not set hard-line minimums when it comes to qualifying for a loan. Rather, the bank you work with to secure the loan will assess your creditworthiness based on a number of factors and decide whether or not you qualify for the loan from there. That said, it will be very difficult to qualify for an SBA loan if you have a credit score below 620, and most lenders want to see a credit score between 700-800.
Here’s the deal:
If you are seeking a SBA loan, you are still using bank money, and banks have fairly conservative requirements. For example, if you are seeking a $1,000,000 SBA 504 loan, the bank has $500,000 of their own capital at risk. Banks are risk averse and, despite the SBA support, normal bank policy still applies including credit score and business cash flow requirements. The SBA actually has explicit rules stating that banks cannot use the SBA to bolster approval rates of a loans with substandard credit requirements.
The same goes for the SBA 7(a) loan program – the originating bank funds the entire loan with their own capital. The SBA then offers a “guarantee” back to the bank of up to 75% of the funding balance. This is an insurance policy of sorts, but it is not guaranteed. If the bank improperly underwrites or documents a bad loan, they lose all their capital in an event of a default and the guarantee is not paid.
What else is required of you to qualify?
As mentioned, securing an SBA loan is no walk in the park. While the most important factor will be your credit score, a lot of businesses—including small or newer businesses—can qualify for an SBA loan. The second most important factor is to be prepared: SBA loans require a lot of time, energy, attention, and documentation. You can’t just apply to and receive the funding in a matter of days.
In order to qualify as a small business, your company needs to meet the government’s definition of a small business. What’s the government’s definition of a small business? What technically qualifies as “small?” It depends on your industry. The SBA provides exhaustive resources to help you figure out how to classify your business’s size based on your industry. In general, your business is typically considered “small” if you have under 500 employees—though there are exceptions. But keep in mind that some industry size requirements are based on average annual receipts.
Remember that every bank has its own SBA loan credit score minimum and other requirements. And even though you might qualify in the eyes of the government, the lender you choose might not see it that way. So, it’s important to shop around and compare what you can get from different institutions. To do that, you certainly want to be very prepared with all the right documentation.
Be ready to apply:
Beyond meeting the SBA loan credit score minimums, qualifying for an SBA loan is not complex —you’re going to need to physically show that you qualify.
And these are the exact documents that’ll be required of you if you apply for an SBA loan. You don’t want to forget any of them!
- Personal background and résumé: Give lenders and idea of who you are and how your previous work experience makes you qualified to run your business. They also want to know logistical stuff like addresses, other names you’ve used, educational background, and any criminal history.
- Business plan and use of loan: You’ll want to show lenders that you know where the business going and how the funding you need fits into it. Be very detailed and include marketing strategies and management structures.
- Personal and business credit report: After reading this entire article, this must seem pretty obvious! You need to obtain your credit scores from one of the institutions that measures the scores.
- Personal and business income tax returns: This is where lenders scrutinize your financial history. Be ready to have two to three years worth of tax returns.
- Financial statements: These are just for your business. Make sure you have these ready:
- Balance sheets: A bare bones measure of what you have and what you owe.
- Profit and loss statements: One step further, these statements demonstrate your monthly income and expenses.
- Business debt schedule: Outlines all the debt your business currently owes.
- Collateral: You likely need this if other areas of your application are weaker (like your credit score). Have your assets evaluated and assessed, and make it clear to the lender what you’re willing to give up should you default on your loan.
- Legal documents: Formal documentation that you are in fact a registered business and can run your business legally where it is located within the United States. This includes all licenses and leases.
While SBA loans are tough to qualify for, and it can sometimes feel hard to nail down exactly what you need in order to qualify, you should now have a sense of what SBA loans require.
Work with a qualified small business lending specialist to see what kind of loan is right for you!