What You Need to Know Before Applying for an SBA Loan

07 Apr 2025 What You Need to Know Before Applying for an SBA Loan

For many entrepreneurs, an SBA loan is the gateway to launching or acquiring a business—but it’s not as simple as filling out an application. From choosing the right loan type to preparing a lender-ready financial package, success hinges on preparation and financial clarity.

Whether you’re purchasing an existing business or launching a new venture, knowing what to expect can mean the difference between approval and costly delays.

Understanding SBA loan options

The SBA doesn’t lend directly. Instead, it guarantees loans issued by private lenders—such as banks, credit unions, and nonprofit intermediaries—to reduce risk and increase access to capital. Because loans are delivered through these private institutions, terms, underwriting practices, and processing times can vary depending on the lender, the borrower, and the specific loan structure.

What follows is a general overview of some of the most common SBA loan programs. This isn’t an exhaustive list, and it’s important to note that eligibility or documentation requirements may vary depending on your lender or use of funds. All SBA terms and programs are subject to change. Always check with the SBA or your lender for the latest requirements.

Before evaluating which SBA loan might be right for you, make sure your business meets the core eligibility criteria that apply across most SBA loan programs.

• Size standards: Your business must qualify as a “small business” based on your industry classification under the North American Industry Classification System (NAICS). The SBA uses your six-digit NAICS code to determine size limits, either by annual revenue or employee count.
• Business structure: Your business must be organized for profit and operate in the U.S. or its territories. Nonprofits, certain passive real estate investors, and businesses engaged in illegal activity (even if legal under state law) are ineligible. Franchises and affiliated entities may be eligible but must meet SBA affiliation rules and, in some cases, receive SBA approval.
• Credit elsewhere: SBA applicants must show they are unable to obtain credit on reasonable terms without the SBA guarantee. This does not require a formal loan denial, but lenders must certify that comparable financing is not otherwise available under conventional terms.
• Repayment ability: Applicants must demonstrate they can repay the loan through business cash flow, have a sound purpose for the loan, and are willing to submit personal and business credit histories—even if the business is newly acquired or recently formed.

With these foundational requirements met, the next step is identifying which SBA loan program aligns with your goals.

SBA 7(a) loans

The SBA 7(a) loan program is the most popular and versatile, used for purposes including business acquisitions, working capital, equipment purchases, debt refinancing, and real estate (when it’s a secondary purpose).

There are several subtypes within the 7(a) umbrella:

Standard 7(a)

The standard 7(a) loan can fund up to $5 million. It’s frequently used for business acquisitions, where borrowers are typically required to provide a 10% equity injection, though lenders may require more depending on experience, risk profile, or collateral.

Lenders are generally required to secure loans over $25,000 in accordance with their internal policies, and loans above $350,000 must be collateralized to the maximum extent possible, though a lack of collateral is not an automatic disqualifier.

Loan terms can extend up to 10 years for working capital or equipment and up to 25 years for real estate components.

The SBA guarantees 85% of the loan amount for loans up to $150,000 and 75% for loans above that. This guarantee protects the lender—not the borrower—but makes financing more accessible.

7(a) small loan

The SBA 7(a) Small Loan program offers financing up to $500,000, with a more automated underwriting process. It’s well-suited for smaller expansions, working capital infusions, or modest acquisitions. While structurally similar to the standard 7(a), it features reduced documentation and faster processing.

SBA express loans

SBA express loans are also capped at $500,000 but offer expedited decisions. The SBA provides a response to the lender within 36 hours, which can speed up – but not guarantee – faster funding decisions. These loans are often used for short-term working capital, equipment purchases, or revolving lines of credit, which can have terms of up to 10 years. The trade-off is that the SBA guarantees only 50% of the loan, which may result in more conservative underwriting or higher interest rates.

SBA 504 Loans

If you’re purchasing real estate or major equipment, an SBA 504 loan may offer more favorable terms than a 7(a). This loan is structured in three parts: a private lender covers 50%, a Certified Development Company (CDC) provides 40%, and the borrower contributes 10%. For startups or special-use properties (e.g., hotels, gas stations), the borrower’s contribution may increase to 15–20%.

504 loans can only be used for fixed asset investments—such as buying or renovating owner-occupied real estate or purchasing long-life equipment. They cannot be used for working capital, inventory, or debt refinancing. Terms are typically 10, 20, or 25 years, with fixed interest rates on the CDC portion.

To qualify, the borrower must occupy at least 51% of an existing building (or 60% of a new construction project), with plans to occupy 80% over time. Passive real estate investment is not allowed.

SBA Microloans

The SBA Microloan program is designed for startups and very small businesses that may not qualify for larger financing. Loans are capped at $50,000, with the average loan amount around $15,000. They are administered by nonprofit, community-based lenders that receive SBA funding and set their own underwriting criteria. These lenders often serve specific regions or business populations.

Funds can be used for working capital, inventory, equipment, or basic startup expenses—but not for real estate purchases or refinancing. Terms are up to six years, and most lenders require a personal guarantee, some collateral, and a detailed plan for use of funds. Because underwriting is handled locally, requirements may vary between intermediaries.

Can you combine or layer SBA loan types?

In some cases, combining SBA loan types can be a strategic way to match your financing structure to your business goals – particularly if you’re acquiring both a business and the real estate it occupies. However, some lenders may not be willing or able to process concurrent SBA loans, so early coordination is crucial.

For example, if your project totals $2.8 million, with $1.8 million for real estate and $1 million for the business acquisition and working capital, you might use a 504 loan for the property and a 7(a) loan for the business. This allows you to leverage the long-term, fixed-rate terms of the 504 loan for the real estate and the flexibility of the 7(a) loan for inventory, goodwill, and staff-related costs.

Collateral is typically aligned with the loan structure—real estate secures the 504 loan, while business assets and a personal guarantee secure the 7(a).

Keep in mind that combining loans increases the importance of repayment capacity. Lenders will assess your Debt Service Coverage Ratio (DSCR), and a minimum of 1.25 is generally required—meaning the business should generate 25% more in annual cash flow than its combined loan payments.

Also, the total SBA 7(a) loan amount is capped at $5 million. The SBA guarantee can cover up to 75-85% of that, meaning the maximum guaranteed portion is $3.75 million for larger loans.

Key documentation lenders expect

Applying for an SBA loan requires a thorough, well-organized financial package. Here’s what lenders will typically request:

• A well-crafted business plan – lenders want to understand how your business will operate, make money, and why it’s positioned for long-term success.
• Tax returns – typically three years of personal and business tax returns.
• Personal Financial Statement (SBA Form 413) – this document lists all of your assets, liabilities, income, and obligations. It’s typically required for all owners with 20% or more equity.
• Business Financial Statements – for acquisitions of existing businesses, expect to provide the last three years of profit and loss statements, balance sheets, and cash flow statements. Lenders will generally look for a DSCR of 1.25 or higher.
• A Current Debt Schedule – a breakdown of all outstanding business debts, including payment amounts, terms, and remaining balances.
• Loan Application Form (SBA Form 1919) – covers basic information about your ownership structure, affiliates, existing debt, and legal history. This is also generally required for all owners with 20% or more equity.

If you’re buying an existing business, lenders may also request a copy of your purchase agreement or letter of intent, a formal valuation or appraisal, and historical financials and tax returns from the seller.

Due diligence matters

One of the most common reasons SBA loan applications stall—or fail altogether—is incomplete, inconsistent, or poorly prepared documentation. Many borrowers underestimate just how rigorous the review process can be.

A CPA can help structure your loan package in a way that speaks directly to lender expectations. For example, a Quality of Earnings (QoE) review can help confirm that a business’s reported earnings are not only accurate but also sustainable.

Similarly, cash flow projections are critical—especially for startups or businesses undergoing a transition. Lenders typically want to see 12 to 24 months of forecasts that are grounded in realistic assumptions.

And pre-due diligence reviews can uncover financial risks that might otherwise derail a deal. Whether it’s inconsistencies in seller financials, unexplained liabilities, or customer concentration issues, identifying these risks early gives borrowers the opportunity to renegotiate deal terms—or walk away from a transaction that may not be as solid as it seems.

Preparation is a strategy

An SBA loan isn’t just a form to fill out—it’s a comprehensive process that rewards preparation, transparency, and credibility. A CPA can help anticipate lender concerns, ensure you have the right documentation, and increase your chances for funding success.

If you’re planning to start or buy a business, don’t wait until after your loan application is submitted to get expert support. Reach out for more personalized guidance.

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