If you qualify, there’s no better lending source or interest rate than the SBA, but the research process has probably been frustrating. Lenders don’t post minimum criteria for fear of discouraging a potential applicant, and no two sources list the same “requirements.”
First, let’s cut through some noise—SBA loans are not a good fit for pre-revenue startups. The most critical criteria are your industry experience, “debt service coverage ratio,” and personal financial position. In other words, can your business support this debt and if something goes wrong, can you personally afford to pay back the loan?
In this article, we’ll cover the most critical application requirements and everything an SBA loan officer might ask you to provide.
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Top Indicators of a Successful Application
The number of documents you might be asked to submit as part of an SBA application is overwhelming, so we did the research and uncovered the three most important predictors of approval.
Business Cash Flow
Lenders want to see a strong “debt service coverage ratio,” which measures a company’s cash flow against its current debt obligations. The specific benchmark will vary from lender to lender, but the minimum you can expect is 1.25.
| Debt Service Coverage Ratio = Monthly Net Operating Income / Monthly Debt Service Payments |
For example, a business in good standing:
- Might have an annual net operating income of $36,000 a year ($3000/month) and total debt obligation of $6000 a year ($500/month)
- DSCR = 6
- They have $30,000 a year in profit – plenty of room for a new loan
While a business that’s unlikely to receive an SBA loan:
- May have an annual net operating income of $36,000 a year ($3000/month) and total debt obligation of $32,000 a year ($2,667/month)
- DSCR = 1.125
- They only have $4,000 a year in profit to work with for a new loan
Industry Experience
Lenders want to see clear evidence of industry expertise. While businesses of any age can receive an SBA loan, most have operated for at least two years.
You can improve your chances of success by submitting a well-written business plan, a detailed market analysis, and evidence of success in the field. Resumes, awards, letters of recommendation from industry professionals, and case studies detailing your contributions can strengthen your application.
Personal Financial Strength
All SBA loans require personal guarantees. To that end, the stronger your personal finances, the better your chance of success.
Evaluating financial strength is contextual. For instance, a high income could compensate for a poor credit score. Additionally, no two lenders have the same standards, so no explicit minimum requirements exist.
As a benchmark, one lender reported looking for post-close liquidity of at least 3 months of personal expenses and credit scores of 680 or more.
Small Business Loan Requirements
Now that you’ve decided you have a reasonable chance of success, it’s time to prepare for an application. And even if you aren’t a perfect candidate, we still recommend contacting an SBA lender where a motivated loan officer can coach you through the process.
Down Payment
The maximum amount you can borrow without a down payment is $50,000 through the SBA express loan program. If you need more, you will likely be asked to pay 10% to 30% down, depending on your lender and specific circumstances.
Collateral
The SBA doesn’t require collateral for loans under $50,000.
For loans above $500,000, the SBA requires lenders to take liens on a borrower’s home if there is a collateral shortfall with business assets and the borrower has over 25% or more equity in their home. If you have less than 25% equity, the bank may still issue a lien but isn’t required to.
For loans that need collateral, the SBA guidelines indicate that lenders:
- Can impose collateral requirements that are on par with non-SBA products.
- Should try to collateralize loans with assets valued equal to the entire loan amount.
- That loans may not be declined solely because of inadequate collateral.
Business Characteristics
To qualify, your business must be:
- Currently in operation
- Operate for-profit
- Be headquartered in the US
- Employ less than 500 people
- Have less than $7.5 million annual revenue
- Unable to obtain the desired credit through other avenues
Documentation
This step will differ from lender to lender, but in general, you may need some or all of the following:
- Requested funding, justification, and plan for use
- Personal and business credit histories
- Financial projections for at least two years
- Collateral documentation
- Resume for all individuals in management positions
- Balance sheet
- Statement of how long you’ve been in business
- P&L Statements
- Business debt schedule
- Personal and business tax returns
- Permission for the bank to run a credit check
- One year’s business and personal bank statements
- A signed personal guarantee
- Proof of incorporation
How to Obtain a Small Business Loan With Indinero’s Help
There’s only so much preparation you can do before contacting a lender. Once you’re reasonably sure you can qualify and have your documents more or less assembled, it’s time to reach out to an SBA-approved loan partner.
A loan officer will start with a general consultation. Afterward, they’ll give you a list of necessary application materials. Depending on how quickly you return those documents, you could complete the process and have money in your account within three months.
Of all the documents they will request, the most critical factor a lender evaluates is your business cash flow.
However, disorganized or incomplete financial records can undermine your application. This is where indinero can help.
We’re a Y-combinator-funded accounting firm dedicated to making bookkeeping and accounting seamless for startup founders. When the time is right, reach out, and we’ll help you do the work to streamline your bookkeeping process, prepare financial statements, and reach your business fundraising and growth goals.
