The Small Business Administration (SBA) loans are a funding option backed by the US federal government to support small businesses and reduce the risk for lenders.

The SBA business loans are an alternative to traditional bank loans. If you are having a hard time getting funding from common lenders, consider applying for an SBA loan.

But before starting your SBA loan application process, you must know what disqualifies you from receiving it. Whether you are looking to grow or acquire a business, discover if you meet the requirements to get this type of loan or if you should consider alternative financing.

Related: How To Get A Loan To Buy A Business: All You Need To Know

SBA loans: What are they & who can get them?

The SBA offers different loans, but there are three main options that small businesses can access. Here are the most important details to identify the best loan for you.

1. 7(a) loans

How do 7(a) loans work?

The SBA does not provide the loan directly. Instead, it functions as a guarantee program from the SBA that gives you access to different lenders.

The 7a loan program includes several use cases of loans for small businesses, from refinancing debt to purchasing equipment, changing ownership, or even for multiple purposes. Because of the various uses you can give to SBA loans, the amounts, terms, and conditions to get one may vary.

Who is eligible for a 7(a) loan?

SBA loan eligibility requirements are pretty straightforward for business owners. According to the terms and conditions, your company must:

• Be an operating business
• Operate for profit
• Be located in the US
• Be small, according to the SBA Size Requirements
• Not be a type of ineligible business
• Not be able to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources
• Be creditworthy and demonstrate a reasonable ability to repay the loan

Tip: The SBA has a 'calculator' to see if you qualify as a small business: Small Business Size Standards

Amount: Between US $500,000 to $5 million

Guaranty: It can range from 50% up to 90%, depending on the type of loan, and amount.

Collateral: It depends on the 7(a) loan type and the amount of the financing.

2. 504 Program

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How do the 504 loans work?

The 504 loans offer long-term funding under fixed interest. The SBA lenders for this program can be banks or credit unions, but the financing is accessible through Certified Development Companies (CDCs); these are community-based nonprofit SBA partners who promote and encourage economic development and growth in their communities. CDC entities are certified and regulated by the Small Business Administration.

With the loan, businesses can acquire, develop, or build facilities and get equipment (with a 10-year minimum life span).

The money from this program can't be used for inventory, refinancing or repaying debt, speculation or investment in rental real estate, financing working capital related to AI, intellectual property, or costs from consulting services.

Who is eligible for a 504 loan?

The 504 loans target for-profit businesses from the US or its possessions with a net worth of less than $15 million. Besides, for the two years preceding the application process, the company should have had an average net income of less than $5 million after federal taxes.

Other requirements are having a business plan, qualified management expertise, the means to repay the loan, and being aligned with the SBA size guidelines.

Amount: Up to $5 million

Guarantee: Partially guaranteed by the SBA since they will guarantee the portion of the loan provided by the CDC.

Collateral: Depends on the lender's policies, but generally, the assets purchased with the loan money will serve as collateral. When the loan is for a special-purpose property such as restaurants, schools, or hospitals, lenders and the SBA may ask for extra collateral, such as a 5% in equity or a 15% down payment (instead of the usual 10%).

3. Microloan program

How do microloans work?

The Microloan program grants funding up to US $50,000 through SBA intermediaries. The program is managed by nonprofits that receive funds from the SBA. These community-based organizations are experienced in lending, management, and providing technical assistance.

Who can access microloans?

Microloans from the SBA are designed for small businesses and some not-for-profit childcare centers looking to start operations or expand.

Amount: Up to $50,000, but the average loan is $13,000.

Guarantee: Each SBA lender has its requirements for the business owner's guarantee.

Collateral: Just as with the guarantee, it will depend on the lender's conditions and requirements.

What disqualifies you from getting an SBA loan?

The SBA loan approval process is complex, and some factors can block you from accessing one. Here is a list of the most common:

1. Inability to repay the SBA loan

When submitting your application for an SBA loan, you'll have to prove that you can repay the loan. Your business's cash flow should be positive, and you should have a stable income to demonstrate an ability to repay the funding.

2. Bad credit score

A credit score below what's required from the SBA will disqualify your application. Currently, the minimum FICO Small Business Scoring Service (SBSS) score for a 7a loan is 155.

3. Not having a collateral

Although this is not a requirement for all types of loans, and these loans come with a guarantee from the SBA, you may be disqualified for some of them if you don't provide collateral.

Providing collateral mitigates risk for lenders, especially with large amounts. If you default on the loan, the lender can seize the collateral to recoup their losses.

4. Defaulted on a government loan program

If you have previously defaulted on a government loan, such as a student loan or one granted by the Federal Housing Administration, your loan application will likely be disqualified.

6. Business size

SBA loans are for businesses that qualify as small. If your business is outside the category, it won't be considered for financial assistance. Remember to use the SBA tool to help determine if your venture qualifies as a small business.

7. Belonging to an ineligible industry

Some industries are ineligible for SBA loans; consumer and marketing cooperatives, gambling, multi-sales distribution, lending firms, non-profits, pyramid schemes, and real estate investment firms, among others, won't be considered for these government-backed loans.

4 actions to improve your chances of getting an SBA loan

If you notice that you can be disqualified from an SBA loan and don't know how to fix it, here are a few recommendations that can put you back on track for that loan.

1. Turn your business cash flow positive

Although this may sound like an obvious statement, it is a requirement to get an SBA loan. This will prove to SBA lenders that you're capable of repayment. You can add new marketing strategies to promote your business, cut expenses, look for new vendors, and develop partnerships, among other strategic business decisions.

2. Improve your credit score

Lenders will appreciate candidates with a high FICO score (at least above 155 for a 7a Loan). Look for any possible mistakes on your credit reports, pay your bills on time, cover any missed payment, reduce your debt, and if you're having trouble managing your loans, credit cards, and bills you could consult a credit counselor for assistance on what to do in your situation.

3. Use your extra assets for collateral

You can use your extra assets as collateral when applying for an SBA lending program. If not, you can look for another financing option, such as an unsecured business loan, which won't ask for collateral but will come at a higher interest rate.

4. Pay your due amount on a government loan

If you have missed a couple of government loan payments, you can cover the due amount to qualify for an SBA loan. However, if you have defaulted on the government's financial assistance, it will be much harder to qualify.

Look for an alternative financing option

Getting an SBA loan to grow your business or acquire one can be as challenging as going to traditional banks. However, there are alternative lending options.

If you are considering selling your business, an online marketplace like Boopos can be your way out.