What are the Requirements for an SBA Loan?
The requirements for SBA loans differ depending on the specific lender and loan program. While each lender may have its own set of criteria, there are certain fundamental qualifications, established by the U.S. Small Business Administration. These include operating within an eligible industry, demonstrating a good credit history, and showcasing robust financials. Fulfilling these prerequisites is essential for small businesses seeking qualification for SBA loans.
Here's what you should be aware of when it comes to the requirements and application process for SBA loans. These criteria are important to consider:
Business character
It is important that you are not delinquent on any current government debt obligations.
Individuals with 20% or more ownership in the business should not be incarcerated, on probation, on parole, or involved as defendants in any criminal proceedings.
By considering and fulfilling these requirements, you can enhance your chances of obtaining an SBA loan for your business.
General Prerequisites for SBA loans
Irrespective of the lender or loan program you choose, there are standard eligibility requirements to meet:
Business operations
Your business must be a for-profit entity, duly registered, and operating legally.
It should be engaged in an eligible industry. Please note that certain businesses, such as those involved in lending activities, gambling, and religious organizations like churches, are ineligible for SBA loans.
Location
Your business should be physically located and conducting operations, or intending to do so, within the United States or its territories.
Investment
As a business owner, you are expected to have invested your own equity, whether it's in the form of time or money, into the business.
Financing need
Before turning to an SBA loan, you must have made efforts to secure alternative forms of financing.
You should be able to demonstrate a genuine need for the loan funds.
It is essential to establish a "sound business purpose" for the intended use of the loan funds.
Business size
Your business, must qualify as a small business, as defined by the SBA. The specific definition of "small" may vary depending on the industry and is typically based on factors such as the number of employees or average annual receipts. The SBA provides an interactive tool that can help you determine whether your business meets this requirement.
SBA Loan Underwriting Requirements
While the SBA does not establish specific numerical thresholds for assessing creditworthiness, lenders are obligated to evaluate your loan application to ensure your ability to repay this government-backed business loan. Here is what lenders typically consider when determining your eligibility for an SBA loan:
Personal credit history
Having a good credit score, usually 690 or above, is generally expected. It's important to note that the SBA does not specify a minimum credit score, granting some flexibility based on individual lenders and other qualifications.
Business credit history
Similar to personal credit, a strong business credit history is advantageous. The SBA often utilizes the FICO Small Business Scoring Service (SBSS) to assess business credit history and pre-screen applications for 7(a) loans. Currently, a minimum score of 155 is required to pass the pre-screening process, with scores ranging from 0 to 300. Even if you do not pass the pre-screen, a lender may choose to proceed with your application. However, lenders can also establish their own higher minimum SBSS scores.
By understanding these underwriting requirements and striving to meet them, you can increase your chances of qualifying for an SBA loan. Keep in mind that while credit history is important, lenders may also consider additional factors during the evaluation process.
Time in business
While certain lenders may be open to working with newer businesses, the majority will typically require a minimum of two years in operation as a prerequisite.
Business financials
To qualify for an SBA loan, it is essential to demonstrate robust annual revenue and present well-founded cash flow projections. It is important to maintain a manageable level of existing debt that allows for additional financing. A favorable debt service coverage ratio (DSCR), which compares available operating income to current debt obligations, should be 1.15 or higher.
Collateral
For many SBA loan programs, lenders are mandated to seek collateral as a means of fully securing the loans, whenever feasible. Acceptable forms of collateral may include real estate, equipment, and inventory. However, lenders are prohibited from rejecting loan applications solely on the grounds of insufficient collateral.
By addressing these aspects, such as establishing a solid business history, showcasing strong financials, and considering collateral options, you can enhance your eligibility for SBA loans. Remember that different lenders may have additional requirements or considerations beyond these fundamentals.
Requirements for SBA Loan Application
When applying for an SBA loan, you will need to provide a comprehensive set of documents. While specific requirements may vary depending on your chosen lender and loan program, the following are the most common documents and forms you will likely be asked to submit:
SBA Form 1919: Borrower Information Form
SBA Form 912: Statement of Personal History
Personal financial statement (you can utilize SBA Form 413).
SBA Form 148: Unconditional Guarantee (or an equivalent form provided by the lender). The SBA mandates that individuals owning 20% or more of the business must offer an unlimited personal guarantee. Owners with less than 20% ownership may provide a full or limited guarantee (SBA Form 148L).
Business financial statements, including income statements, balance sheets, and cash flow projections.
Income tax returns.
Detailed schedule outlining collateral.
Existing debt schedule, if applicable.
Business certificates or licenses.
Loan application history.
Resumes for each business owner.
Business overview and history.
Business lease agreement.
If the purpose of the SBA loan is to acquire real estate or an existing business, additional application requirements such as purchase agreements, appraisals, or business valuations may be necessary.
It's important to note that while these documents serve as a general guideline, specific lenders might request additional or alternative documentation during the application process. By ensuring you have all the necessary paperwork in order, you can streamline your SBA loan application and increase your chances of securing the funding you need.
It's important to note that these program-specific requirements are a general overview, and each lender may have additional criteria or variations within these programs. Understanding the specific requirements of the SBA loan program you're interested in can help you prepare a successful loan application.
Requirements Specific to each SBA Loan Program
Different SBA loan programs have their own distinct requirements tailored to their specific purposes. Here's an overview of program-specific requirements:
SBA 7(a) loans
The SBA 7(a) loan program encompasses various loan types, generally following standard requirements with a few exceptions. For instance, SBA CAPLines of credit are intended for short-term or seasonal working capital needs. CAPLines include Seasonal CAPLine, Contract CAPLine, Builders CAPLine, and Working CAPLine. Borrowers must fulfill specific requirements related to the use of proceeds, such as demonstrating a pattern of seasonal activity, in addition to meeting the standard 7(a) requirements.
SBA 504 loans
SBA 504/CDC loans are exclusively designed for funding fixed-asset purchases, such as real estate and significant equipment. The SBA mandates that any real estate acquired through this financing must be owner-occupied to a minimum of 51%, and for new construction, it should be owner-occupied to a minimum of 60%. Additionally, to qualify for an SBA 504 loan, you must fulfill job creation or public policy goals outlined by the SBA.
SBA microloans
SBA microloans offer flexibility in their usage, except they cannot be used to pay off existing debts or acquire real estate. These smaller loans, are facilitated by intermediaries, such as nonprofit community organizations, and may have more lenient eligibility criteria compared to other SBA lenders.
SBA disaster loans
SBA disaster loans are specifically available to businesses and individuals impacted by declared disasters. There are four types of disaster loans: Physical damage loans, mitigation assistance, economic injury disaster loans, and military reservist loans. The requirements for SBA disaster loans vary depending on the loan type, but generally, good credit and a strong financial history are crucial for qualification.
Frequently Asked Questions
What are the minimum requirements for obtaining an SBA loan?
To be eligible for an SBA loan, you must meet the minimum requirements established by the U.S. Small Business Administration. These requirements include being a for-profit small business operating within the United States and in an eligible industry, among other criteria. Additionally, you must satisfy the minimum requirements set by your specific lender, which typically involve having good credit and strong financials.
What factors can disqualify you from securing an SBA loan?
There are several factors that can disqualify you from obtaining an SBA loan. If you have a new business or a poor credit history, you may not meet the qualifications for a loan. Insufficient collateral to secure the loan, excessive existing debt, or an inability to demonstrate your capacity to repay the new financing can also lead to disqualification.
What credit score is necessary to qualify for an SBA loan?
Generally, a personal credit score of 690 or higher is considered necessary to obtain an SBA loan. However, it's important to note that certain lenders, such as microlenders or Community Advantage lenders, may be willing to work with businesses that have lower credit scores. These lenders may offer more flexibility in their credit score requirements.
Understanding these frequently asked questions can provide you with valuable insights into the requirements and factors that can impact your eligibility for an SBA loan. Keep in mind that individual lenders may have their own specific criteria and considerations when evaluating loan applications.