While the Small Business Administration (SBA) may not be a lender, it partners with lenders to help give small businesses more access to funding. The SBA sets the guidelines and guarantees a portion of the funds to its lending partners if a borrower defaults. In return, lenders are able to offer competitive rates and terms, flexible requirements, and lower down payments to businesses.
According to the Small Business Credit Survey, 34% of SBA loan applications were approved in 2023. That’s slightly lower than the 38% approval rate for traditional business loans and significantly less than the 46% approval rate for business lines of credit. In this article, we’ll explore how to get an SBA loan, how it differs from a business line of credit, and how you can use both SBA loans and lines of credit to maximize your working capital.
How does an SBA loan work?
In 1953, the Small Business Act created the United States Small Business Administration (SBA) to “aid, counsel, assist, and protect the interests of small businesses.” As we explained above, SBA loans are offered by SBA partners, not the SBA itself. These lenders are provided a guarantee of repayment in return for offering better terms and conditions to small businesses in need of funding.
Approval criteria for SBA loans are stricter than those for traditional business loans. For example, most SBA loans require a minimum credit score of 650. Alternative and online lenders may approve an applicant with a score as low as 500. The trade-off is typically the interest rate, which will be much higher for the lower credit score borrower.
What is an SBA 7(a) loan?
SBA 7(a) loans are the most common type of SBA loan. The name comes from Section 7A of the Small Business Act. You can apply for an SBA 7(a) from any participating SBA lender. Most of them have an online application, and the maximum amount you can apply for is $5 million. If you need more than that, the SBA has another loan category called 504 loans.
The SBA guarantees the lender that up to 85% of the loan will be repaid if it’s for less than $150,000. Loans over that amount are guaranteed up to 75% of the total. Most SBA loans require a down payment of 10% to 30%, depending on your business’s creditworthiness and cash flow. Once approved, your business can use the money for anything you’d like.
How does a business line of credit work?
While a loan is a set amount of money borrowed as a lump sum and paid back in fixed monthly installments, a business line of credit (LOC) works differently. If your business is approved to borrow up to a certain amount, you are not obligated to take it all at once. With a line of credit, you’re able to draw money in smaller increments as needed, which makes it a more flexible funding option than a traditional loan.
Revolving credit lines replenish as you make repayments, meaning you can draw from them again after you pay the balance down. A typical line of credit for a business could be for as much as $250,000. Businesses can set up a line of credit quickly, and there are usually no prepayment penalties for paying them back early. That makes a line of credit ideal for short-term financing.
3 ways a line of credit can work with your SBA loan
You don’t always need to choose between an SBA loan and a business line of credit. In fact, many small businesses can benefit from having both simultaneously. When used properly, the two types of funding can work well together.
1. Use line of credit funds to cover your SBA down payment
SBA lenders usually require a down payment of 10% to 30%, based on your business credit score and creditworthiness. If you have a business line of credit, there’s no need to use business or personal funds to pay the SBA loan down payment. Instead, you can draw the down payment amount from your line of credit.
2. Get access to capital while you wait for your loan
Combining your SBA loan with a business line of credit adds a complementary source of funds to cover financing gaps and supplement cash flow. Getting the funds could take 7 to 90 days after your SBA loan is approved, but a line of credit can be tapped immediately. If you’re able to access line of credit funds quickly, you can use that money to bridge the gap for your business and act as a backup funding source in case you don’t get approved for the SBA loan.
Did you know?
With the Bluevine Line of Credit, you can access your funds instantly when you pair it with a Bluevine Business Checking account.
3. Stay prepared for anything
A business line of credit can be useful during busy or slow seasons. Also, if your SBA loan application isn’t approved, you’ll still have your credit line to increase your cash flow as needed. Think of a line of credit as a revolving “emergency fund” that you can draw from when you need access to capital. As a small business owner, it’s always good to be prepared for the unexpected.
How to get an SBA loan
The first thing you’ll need to do before applying for an SBA loan is make sure you qualify. Check to see if your personal credit score is 650 or above. If your business has a credit score, check that and pay down other debt if possible so you can build business credit. That will put you in the best position to get approved for an SBA loan. You can search online for SBA lenders in your area.
Next, gather the documentation you need, including:
- Legal identification (driver’s license/passport)
- Proof of ownership and/or incorporation documents
- Company financial records up to three years
Choosing a lender can be done by comparing rates and terms, reading customer reviews, and asking about other services besides loans the lender offers. You should also look for a lender whose platform integrates with your expense management and accounting software. Some may even have better cash flow management tools than what you’re currently using.
How to get a business line of credit
The process of getting a business line of credit can be even easier than getting an SBA loan. Before you apply, check the lender’s line of credit requirements to see if your business qualifies.
Common requirements and restrictions include:
- Business is a corporation or LLC
- Minimum amount of time in business
- In good standing with Secretary of State
- No recent bankruptcies
- Minimum monthly revenue
- Minimum personal credit score
- Restrictions on specific states and industries
Make the most of your SBA loan with a business line of credit—and access your approved draws instantly with Bluevine Business Checking.
FAQs
If your business meets the qualifications, SBA loans should not be hard to get. For example, you’ll likely need a personal credit score of at least 650 and a business showing positive cash flow to meet the requirements. For context, 34% of SBA loan applications were approved in 2023, which is slightly lower than the 38% approval rate for traditional business loans and significantly less than the 46% approval rate for business lines of credit.
A typical line of credit for a business could be for as much as $250,000. Approval amounts depend on your business’s creditworthiness, as determined by the lender. Each individual draw from your line of credit may be subject to approval.
Yes, small businesses can have both an SBA loan and a line of credit at the same time.
A business line of credit is money your business can borrow as needed from a revolving line that replenishes as you make repayments. Each draw from your credit line is repaid on its own schedule. A business loan is money borrowed in a lump sum and that you pay back in fixed monthly installments.
