Can You Get an SBA Loan With Bad Credit?

Learn how SBA lenders evaluate loan applicants

Frustrated coffee shop owner thinking at counter
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Moyo Studio / Getty Images

Videographer and filmmaker George Williams was feeling a cash crunch. At the height of the pandemic, the owner of Digitoral Media faced canceled events and a dwindling cash flow. Williams applied for a Economic Injury Disaster Loan (EIDL), a source of funding backed by the U.S. Small Business Administration (SBA) that provides economic relief to entrepreneurs and nonprofit organizations that experienced revenue loss during the pandemic. However, while Williams received a grant, his loan application was denied.

The SBA partners with lending institutions to provide loans to small businesses. By guaranteeing and establishing loan guidelines for lenders, small business owners can access capital to purchase equipment and real estate, or use as a line of credit.

Yet, entrepreneurs like Williams have been denied loans offered by the SBA, due to limited or poor credit history.

“Character is important,” said Alex Cohen, CEO of Liberty SBF, a lender partnering with SBA, in a phone interview with The Balance. “Everyone can get into financial trouble. It’s understandable, and you work your way out.”

If you have subpar credit and are facing challenges getting loans, we’ll go over the different options for SBA loans, how to improve your credit, and ultimately qualify.

Key Takeaways

  • By partnering with lenders and community organizations, the Small Business Administration (SBA) can support small business development by ensuring loans to those businesses that would not qualify for traditional loans.
  • Lenders establish their own credit score requirements for being eligible for an SBA loan.
  • SBA loan programs include 7(a), CDC/504, Express, and Microloan.
  • To improve their credit scores, business owners should pay bills on time, maintain healthy debt-to-income ratios, and develop business plans and budgets to maintain fluid cash flow.

Benefits of an SBA Loan for Your Business

Having access to working capital and business lines of credit is often essential for a business to run. However, it can be difficult for small businesses with limited financial histories to receive funding through a bank. The SBA partially guarantees loans and partners with financial institutions to provide small businesses with various loan products to meet their needs. 

“Entrepreneurs need to be well-positioned to launch and grow their businesses,” said Andrew Flamm, regional director of the Pace University Small Business Development Center, via phone to The Balance. “SBA loans provide opportunities to stabilize the business further.”

SBA loans can be beneficial because:

  • They are available to new businesses and startups. Traditional business loans, on the other hand, may require companies to have been in operation for several years and greater collateral.
  • There are longer repayment periods (up to 25 years versus five to 10 years for traditional loans).
  • Applicants can use personal assets as a guarantee on their loans.

SBA loans can be used to purchase:

  • Short-term fixed assets such as equipment
  • Long-term fixed assets such as commercial real estate
  • Working capital to enhance operating capital
  • Refinance existing debt

Lenders in the SBA’s Preferred Lender Program (PLP) do not require the agency’s approval for loan requests, which can expedite the process.

SBA Loan Requirements

To be eligible to begin the application process for an SBA loan, a business must:

  • Operate for profit and legally in the U.S.
  • Have a reasonable amount of owner’s equity to invest
  • Use alternative financing, including personal assets, before seeking financial assistance

How To Qualify for An SBA Loan

SBA lending partners may take the following into consideration when deciding to approve a loan:

  • Repayment history: How are you meeting business expenses, other lines of credit, and your business income? Businesses can share this information through their financial statements.
  • Management: How are you managing your business? What experience do you have operating a business or within the industry?
  • Equity: When evaluating a loan package, lenders analyze a business’s debt-service coverage ratio (DSCR), which measures its ability to pay debts on time. What debt does the business currently possess, and how is it being repaid? How much debt can a business take on without damaging its bottom line? What personal assets do business owners possess?
  • Credit history: Personal as well as business credit will be reviewed by lenders. If there is spotty credit history, business owners should explain, showing lenders that this is not a pattern.

“We look at all income and expenses when making a decision,” said Cohen. “Are there investments that generate revenue? Do they have a spouse with income? Does the owner have their own income?”

Travis Rouse, SVP of sales at M&F Bank, told The Balance via phone, “Any loan officer needs to ask, ‘What caused the bad credit?’ ‘Is it an isolated incident or systemic problem?’ ” 

There is no standard minimum credit score requirement shared among SBA-approved lenders. However, according to the FICO Small Business Scoring Service (SBSS), minimum credit scores for SBA programs range from 130 to 155.

SBA Loan Products

There are several types of SBA loans available to small business owners. The most popular loan products include:

SBA 7(a) Loan

The 7(a) loan is the SBA’s primary lending program. This loan can be used for short- and long-term working capital, refinance a business’s current debt, and purchase supplies. When lenders consider a loan application, they evaluate how a business generates income, credit history, and where the business is located.

Express Loan

If a business wants fast approval on a loan, the SBA Express Loan could be a good fit. Only financial institutions participating in the Preferred Lender Program (PLP) can disburse these loans. Express Loans use the same guidelines as 7(a) and funds can be used similarly. Loans are available for up to $350,000 and can be approved within 36 hours of receipt.

CDC/504

The CDC/504 Loan Program is offered through certified development companies (CDCs) partnering with the SBA. This loan product offers fixed-rate financing of up to $5 million for purchasing existing real estate or land, construction for new buildings, and long-term equipment. Business owners can also use this loan to improve existing facilities, landscaping, and parking lots. The purpose of the 504 loan is to promote economic growth within communities.

To be eligible for a 504 loan, your business must meet all general SBA requirements, and have a net worth of less than $15 million and an income of less than $5 million two years before applying.

504 Loans can’t be used for working capital or inventory, to repay or refinance debt, or speculation or investment in rental real estate.

Microloan

The SBA Microloan program provides up to $50,000 and can be ideal for entrepreneurs and startups. These programs are managed through local SBA intermediaries such as business development centers. SBA microloans can be used to purchase inventory, equipment, supplies, as well as working capital. Microloans can’[t be used to refinance debt or buy real estate.

How To Get an SBA Loan With Bad Credit

While each lender may have their own specific minimum credit score requirements—although a 650 FICO score or higher can increase your chances of approval— there are some ways entrepreneurs with less-than-stellar credit can be approved for a loan.

Cohen and Rouse note that while bad credit will determine a small business’s application, it is not the only metric used to determine approval or denial. Lenders also evaluate:

  • Historical cash flow
  • Borrower’s net worth and liquidity
  • Additional guarantors

Apply With Several Lenders

Since SBA loans are available through a variety of lenders, there may be different requirements. Therefore, small businesses should apply to multiple lenders to be approved for a loan.

Small businesses can use the SBA lender match tool to identify financial institutions and organizations to support their business needs.

Apply for SBA Loans With Less Strict Requirements

In addition to traditional SBA lenders, the SBA partners with lenders with less-rigid credit requirements. SBA’s Microloan program, for example, is offered through community-based organizations that aim to support the growth of local small businesses.

In addition to microloans, lenders may specialize in subprime SBA loans. However, as with most loans, the lower the credit score, the higher the interest rate is for borrowers. If you decide to pursue a subprime SBA loan, Flamm said you have to understand the risks involved. “You have to make a decision based on your understanding of the interest and loan terms,” he said. “How will it impact your financial projections? Can you pay it off?”

Flamm advised entrepreneurs to meet with a business advisor before pursuing any loan, to ensure they are making a decision that will allow them to meet their financial obligations and continue to run their business.

Work on Improving Your Credit Score

For small businesses with a low credit score, here are some ways to improve it:

  • Pay bills on time
  • Maintain a healthy debt-to-income ratio and DSCR
  • Develop a business plan and budget to maintain a fluid cash flow

Begin working on improving your credit now. The sooner you begin the process, the sooner your credit score will improve, and lenders will be interested in working with you and providing competitive interest rates.

“Our bankers are trained to understand and counsel borrowers,” said Rouse. “We have encouraged applicants to come back in six to 12 months after their payment issues have been resolved.”Finally, local branches of business mentorship organizations such as SCORE and SBDC will support you in developing the ability to manage your business’s income and expenses effectively.

For filmmaker Williams, after initially being denied a loan, he began working with a CPA to streamline his finances, repay his outstanding bills, and got a secured credit card. A year later, Williams’s credit has significantly improved and he is ready to apply for another loan.

“No one is going to loan you money if you’re broke,” he said. “How will you repay?”

Frequently Asked Questions (FAQs)

How do I apply for an SBA loan?

You can determine your eligibility for an SBA loan by using the lender match tool. Once you have completed a business plan that includes financial statements and projections, you can begin the application process. Choose a loan product and apply to various lenders so you get a competitive loan and interest rate.

How do I check the status of my SBA loan?

To check the loan status of an EIDL, for example, you can use the SBA’s login portal. For other loans offered through the SBA, such as 7(a), Express, CDC/504, and Microloan programs, contact the lending institutions that submitted applications for the status of your loan.

How long does it take to get an SBA loan after approval?

The time period of SBA loans varies based on the loan product. SBA Express Loans are approved within 36 hours of the application being processed. On average, EIDL can take 21 to 30 days, while traditional SBA loans can take two to three months for approval.