Many small businesses need to borrow money at some point to get off the ground or grow in size and scope. But not every business can apply for a small-business loan. Therefore, it’s important to know exactly who qualifies for the SBA 7(a) loan and what you need to have before attempting to obtain one of these loans from the government. The following guide will help you understand who qualifies for small business loans and how to get one when ready.
Qualification 1: Number of Employees
Generally, your business must employ at least one full-time equivalent (FTE) employee to qualify for a loan. An FTE is determined by taking the total number of hours worked by all employees in a month and dividing it by 60.
Qualification 2: Annual Sales
When you apply for a small business loan, your annual sales level will be a key factor in determining if you qualify. Annual sales figures are usually compared to other companies in your industry in your geographic area.
Some loan programs may also set minimum annual sales thresholds for your industry. SBA 7(A) loans, for example, can be used to finance businesses with annual sales of up to $2 million.
Qualification 3: Years in Business
You must show that you have been in business for at least two years. For some loan programs, including SBA loans, your business may not be required to be operating for at least two years before applying for a loan or grant.
Qualification 4: Ownership Stakeholder
You must be an owner of at least 25% of your business to qualify for a 7(A) loan. Experts typically define this as having legal ownership in your business; if you’re a sole proprietor, you’re probably automatically eligible.
Qualification 5: Collateral
You must have property or other assets to use as collateral if you cannot repay your loan. The SBA website states that this may include personal property, equipment, inventory, accounts receivable, real estate, or any combination of these.
Qualification 6: Financial Standing
An SBA lender will assess your organization’s financial standing to ensure that it has enough money in its accounts to cover business operations. For example, if you are planning on purchasing a building or inventory, the lender will want to know that you have adequate funds for those purchases before approving a loan.
To that end, you need to have enough money in your accounts so that a lender can be assured you can make all of your loan payments.
Qualification 7(a): Profit History
To qualify for a 7(a) loan, you must demonstrate that your company has been profitable for at least two years out of the last three. You must also have experienced credit during that time. Those new to business may need to demonstrate more than two years of profit history.
This guide covered everything you need to know about finding a small business loan. As per the experts at Lantern by SoFi, “Comparing the options can help you figure out what type of loan and what lender best suit your small business needs.” If you’re still unsure what type of loan is best for your needs, talk to your banker or financial advisor.