SBA Loans: Understanding the Small Business Administration Loan Programs

SBA Loan Requirements

SBA loan requirements vary based on the lender and the individual loan program. However, regardless of your loan program or SBA lender. You'll need to meet a standard list of eligibility requirements, including:

Business Operations

• Must be a for-profit business, officially registered and operating legally.
• Must be operating in an eligible industry.
• Certain types of businesses are ineligible for SBA loans, including firms involved in lending activities, any business whose principal activity is gambling and churches and other religious organizations.

Location

Must be physically located and doing business, or proposing to do business, in the U.S or its territories.

Investment

As a business owner, you must have invested equity — such as time or money — into the business.

Need for Financing

• Must have tried to find alternative forms of financing before turning to an SBA loan.
• Must be able to demonstrate a need for loan funds.
• Must be able to show the “sound business purpose” for which you plan to use the funds

Business size

Must be a small business, as defined by the SBA. The definition of small varies by industry and is generally stated in the number of employees or average annual receipts. The SBA offers an interactive tool that helps you determine whether you meet this requirement.

Business Character

• Cannot be delinquent on any existing government debt obligations.
• No one with 20% or more ownership in the business can be currently incarcerated, on probation, on parole or a defendant in a criminal proceeding.

SBA Loan Underwriting Requirements

The SBA doesn't set numerical minimums for evaluating your creditworthiness, but lenders are required to analyze your application to make sure you'll be able to repay this government business loan.

Here's what a lender will likely use to evaluate your eligibility for an SBA loan:

Personal credit history

You'll typically need to have good credit — a score of 690 or higher. Again, the SBA does not designate a credit score minimum, so you may have some flexibility depending on your lender and other qualifications.

Business credit history

Similar to your personal credit, you'll want to have a solid business credit history. In many cases, the SBA uses the FICO Small Business Scoring Service, or SBSS, to evaluate your business credit history and prescreen 7(a) loan applications.

Currently, you'll need to receive a score of 155 or higher to pass the prescreen — scores range from 0 to 300. Even if you don't pass the prescreen, a lender can choose to continue with your application. However, lenders may also set their minimum accepted SBSS scores higher than the SBA minimum.

Time in business

Although some lenders will work with newer businesses, most will require that you have two or more years in business.

Business finances

You'll need to show strong annual revenue and cash flow projections. You shouldn't have too much existing debt that you can't afford to take on this additional financing. You'll want to have a debt service coverage ratio (also known as DSCR) — which compares your available operating income to your current debt obligations — of 1.15 or higher.

Collateral

For many SBA loan programs, lenders are required to obtain collateral to fully secure loans, when possible. Acceptable forms of collateral include real estate, equipment and inventory. Lenders cannot, however, deny loan applications solely based on lack of adequate collateral.

SBA loan application requirements

To submit your SBA loan application, you'll be asked to provide extensive documentation. Some of these requirements will vary based on your lender and loan program, but here are the most common documents and forms you'll need to provide:

• SBA Form 1919, Borrower Information Form.
• SBA Form 912, Statement of Personal History.
• Personal financial statement (you can use SBA Form 413).
• SBA Form 148, Unconditional Guarantee (or the lender's equivalent). The SBA requires that anyone with 20% or more ownership in the business provide an unlimited personal guarantee. Owners with less than 20% ownership may provide a full or limited guarantee (SBA Form 148L).
• Business financial statements, such as income statements, balance sheets and cash flow projections.
• Income tax returns.
• Detailed schedule of collateral.
• Existing debt schedule, if applicable.
• Business certificates or licenses.
• Loan application history.
• Resumes for each business owner.
• Business overview and history.
• Business lease.

If you are using your SBA loan to purchase an existing business or purchase real estate, you'll have additional application requirements, such as purchase agreements and appraisals or business valuations.

SBA Program-specific requirements

Some SBA loan programs have unique requirements. The SBA 7(a) loan program covers several different loan types. Requirements are fairly standard across 7(a) loans, with some exceptions. For example, SBA CAPLines of credit must be used for short-term or seasonal working capital needs.

There are four types of credit lines: Seasonal CAPLine, Contract CAPLine, Builders CAPLine and Working CAPLine. Borrowers must meet requirements related to the use of proceeds (e.g., be able to show a pattern of seasonal activity) in addition to the standard 7(a) requirements.

SBA 504/CDC loans can be used only to fund fixed-asset purchases, such as real estate and large equipment. The SBA also requires that any real estate you purchase with this financing is 51% owner-occupied — and 60% owner-occupied for new construction.

SBA microloans, on the other hand, can be used for a variety of purposes, but cannot be used to pay for existing debts or purchase real estate. These smaller loans are issued by intermediaries — like nonprofit community organizations — and may have more flexible eligibility criteria compared with other SBA lenders.