If you don't qualify for an SBA loan, consider alternative financing options.

The Small Business Administration (SBA) is a federal agency that assists businesses in obtaining funding and offers additional resources such as education. Notably, the SBA provides small business loans through various programs, including the 7(a) loan program, which offers standard loans of up to $5 million and small loans of up to $500,000.

Not all businesses are eligible for an SBA 7(a) loan. To determine if you qualify and what to do if you don't but still require funding for your business, here's how to proceed.

What is an SBA loan?

An SBA loan is a loan provided by a participating lender through an SBA program. The SBA does not lend money directly but manages a network of small business lenders who offer funding.

The SBA guarantees funding for lenders who participate in the loan program, meaning that if the borrower defaults, the SBA will reimburse the lender. This reduces the risk for lenders, making it beneficial for them to offer funding through this program, even though the SBA is involved in the review process.

How do you qualify for an SBA loan?

To be eligible for the SBA 7(a) loan program, your business must meet the SBA's requirements.

• You must have an active, for-profit business located in the United States.
• To be classified as a "small business" by the SBA, your company must have a maximum of 500 employees and an average annual income that doesn't exceed $7.5 million.
• Your business cannot be classified as an ineligible business, which includes nonprofits, banks, finance companies, life insurance companies, businesses involved in illegal activities, private clubs, government-owned entities (except those controlled by a Native American tribe), and businesses that derive more than one-third of their revenue from legal gambling activities.
• Your business must have healthy credit and the ability to repay the funding.
• Your business is unable to obtain favorable funding terms from non-government sources.

The SBA's 7(a) loan program may have additional restrictions imposed by lenders, such as specific credit score or annual revenue requirements.

SBA loan alternatives

Qualifying for a small business loan through the SBA's 7(a) loan program can be challenging due to the strict requirements. However, if you do not meet all the criteria and are ineligible for an SBA loan, there are other funding options available for your small business.

If you have bad credit

While the SBA doesn't set specific credit score requirements, lenders within their loan program may have minimum credit score requirements. If you don't meet these requirements, you may want to consider a small business loan for bad credit.

OnDeck is a lender that offers loans to businesses with lower credit scores, requiring a minimum FICO® score of 625 for loans up to $250,000. However, there is one condition: the business must have been active for at least one year and generate at least $100,000 in annual revenue.

Kiva, a nonprofit organization, provides crowdfunded microloans to small businesses without a credit score requirement. These microloans can be used to finance promising businesses and come with a maximum amount of $15,000. Additionally, the microloans have 0% interest and businesses have up to three years to repay their loan.

If you haven't launched your business yet

To qualify for a SBA 7(a) loan, some lenders may require your business to meet certain revenue or time-in-business criteria, which can be challenging if you haven't yet launched. However, you can consider starting a crowdfunding campaign on a platform like Kickstarter or Indiegogo to raise funds for your business.

You can set a fundraising goal with these platforms and receive small donations from users without having to pay the money back. However, if you reach your goal, the platforms will charge a 5% fee on your proceeds. If you don't reach your goal, you won't be charged a fee.

If you run a nonprofit

Although nonprofits are not eligible for the SBA 7(a) loan program, there are grants available specifically for nonprofits. However, the grant application process can sometimes be tedious, and funding times can vary depending on the issuing organization.

To find nonprofit grants, check grants.gov to get started.

Why trust CNBC Select?

Our goal at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make informed decisions with their money. Each article is meticulously crafted by our team of expert writers and editors, who possess extensive knowledge of small business loan products. Although CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content independently, without any input from our commercial team or external third parties. We uphold the highest journalistic standards and ethics in everything we do.

Stay up to date with CNBC Select's comprehensive coverage of credit cards, banking, and money by following us on TikTok, Facebook, Instagram, and Twitter.