Requirements for an SBA Loan, What You Will Need

SBA loans are created for small business owners. These loans are competitive in giving financial assistance to small business owners versus larger companies. SBA loans typically range from 2 to 5 years. When applying for loans, businesses will be evaluated on a case-to-case basis based on certain requirements for an SBA loan. Lenders usually follow a specific set of criteria to know if the applicant will be able to pay off the debt within the required time frame.

Types of SBA Loans

Depending on your business needs, you will have a range of SBA loan options to choose from. Each loan is meant for certain needs that will be given to you by the lender. Before delving into the requirements for an SBA loan, below are the four major SBA programs you can consider applying:

SBA 7(a) loan

Whether you need to acquire real estate, purchase equipment, cater for short term and long term capital needs, finance construction or renovation projects or in special cases, refinance an existing debt, an SBA 7(a) loan should be your top choice. While it is the most popular type of SBA loan, it is mostly used for expansion of small businesses that already exist or starting new ones. 

It is a flexible program that allows borrowing of $5 million in capital, not forgetting the low rates and fees you get to enjoy with an SBA 7(a) loan. Low rates between 7% and 9.5% are some of the top reasons why this SBA loan program is one of the most popular. 

CAPLines Lines of Credit

The CAPLines line of credit program is a short term solution for businesses looking to borrow up to $5 million. It has a maximum term of 10 years and is mostly used for replenishment of working capital, filling seasonal gaps in cash flow, short term financing, payment of recurring operation costs, and payment of construction and renovation costs.   

SBA 504/CDC Loan

With this SBA loan type, a bank and a Certified Development Company(CDC) approved by the SBA must be involved in the lending process. Loans range from $125,000 to $20 million but on the downside, tough qualifications are required since the program involves two different lenders. 

The SBA 504/CDC loans are typically used for construction of new buildings, purchase of land or existing buildings, renovation and refurbishment of existing buildings, purchase of long term machinery, and purchase of land or building improvements. 

The CDC loan rates are set by SBA while the banks set their own rates on their loan portion.

SBA Microloan Program

As the name suggests, SBA microloans fall under a small scale when compared to most SBA loan programs. It is a great option if you need working capital, purchase of furniture or fixtures, purchase of inventory and supplies, purchase of machinery or even to start a new business. 

SBA microloan rates are higher than the usual market rates as the borrower profile is riskier, and will be anything ranging from 8% to 15%. It is important to note that non-profit organizations and community lenders are responsible for giving out such loans. 

To make sure that a borrower is eligible for loans, the business usually must have the following credentials:

1.  At least two years in business
2.  A credit score of 620 or higher
3.  More than $100,000 in annual revenue
4. Collateral and guarantees from owners with more than 20 percent of the company shares.
5. A business debt service coverage ratio of 1.25x
6. 10% to 30% down payment

Please note that each type of loan needs to meet a various set of requirements for an SBA loan. If you’re trying to apply for one, know the requirements for an SBA loan as listed below:

For-Profit Business In Eligible Industry

Your business must-have a US-based, for-profit business in an eligible industry. Below are the industries that SBA don’t cater to:

•         Businesses that are engaged in lending
•         Businesses that are involved in political or lobbying efforts
•         Life insurance companies
•         Businesses that make most of its revenue from gambling services
•         Speculative businesses like medical research facilities or shopping center developers
•         Most passive income businesses like a flea market or shopping center

Meet SBA Size Standards

As SBA aims to help small businesses, they’ll want to verify if your company is indeed small. Business size can be measured in three ways:

• Number of employees based on the industry- The number of employees in your company will be used to help determine the size of the firm. 
• Business revenue based on the industry- Your company will be considered small if revenue ranges from a minimum of $0.75 million to $38.5 million. 
• Business net worth- Companies only qualify as big if the net annual income surpases $5million or if they have a net worth of more than $15 million, otherwise, they are considered small. 

Personal Guarantee

Most SBA loans will require a signed personal guarantee which is a promise to pay back the loan. When a personal guarantee is signed, it gives rights to the lender to seize the borrower’s personal assets if the business is unable to repay the loan. Also, it is compulsory for a borrower who owns more than 20% of the company to sign a personal guarantee. In the event of a loan default, the lender first seizes business assets but if unavailable, can further also seize personal assets.

Personal Background and Character

You also need to submit information about your personal background. SBA needs to know about your previous addresses, criminal record, and citizenship status. The risks of small business in paying back loans are higher than larger corporations. Lenders have to verify details to have an informed decision.

Resumes of Company Management

Submitting a resume is also a requirement when applying for SBA loans. This document will help the lenders evaluate how experienced are you in your industry.

Business Plan

You also need to secure a copy of your business plan. It’s a great chance to prove to the lender that investing in your small business would be an excellent decision. The following are what your business plan should show:

•         Explanation of your product, service, and value proposition
•         Competition analysis
•         Marketing or advertising strategy
•         A financial projection for the next 3 to 5 years
•         For existing businesses, historical financial statements are also needed
•         Terms of any current debt
•         Use or purpose of loan proceeds

Financial Statements

Financial statements ranging from a personal credit report, business credit report, personal and business income tax returns, business financial statements, business debt schedule, bank statements, and legal documents may be required by the SBA in order to obtain an SBA Loan.

Make sure to keep tabs on what are the documents for an SBA loan. Applying for any type of loan from SBA might be tedious paperwork, but it sure pays off when you’re granted the loan. It’s highly recommended for you to secure a soft copy of these requirements on your computer. Print them out quickly whenever you need them. You can know more about SBA loan requirements by checking out the official website of SBA.

Collateral (Life Insurance)

Depending on the financials of the company and the small business owner, the SBA might require collateral for the loan if anything were to happen to the small business owner.  Some SBA lenders require that the small business owner or key people in the company to obtain life insurance policies on themselves and collaterally assign it to the lender in order to compensate for the SBA loan in the worst case scenario.

Legal Documents

There are several legal documents required to support SBA loan applications. From franchise agreements, to Articles of Incorporation/Organisations, business licenses and registrations, third party contracts, and leases for business equipment or commercial real estate. Make sure to electronically store such documents for easy access anytime you need to print out hard copies or to access them. 

Income Tax Returns

This includes both business and personal income tax returns. Responsibility from the borrower’s side is vital, and that is the major reason why a lender will ask for personal income tax returns. If your income tax record is good then you are safe, but a bad one may make you miss out on your chance for getting an SBA loan. 

Also, business income tax returns are the only way for lenders to verify income from your business. Basically, you will need to show both personal and business income tax return records for the past three years. If they are not satisfied with the provided records, then you may also not be eligible for an SBA loan.

Personal and Business Credit Reports

To qualify for an SBA loan, you need a stellar personal credit report. This acts as an assurance for the lender that you have been able to properly manage your finances and that you are responsible to pay back the loan on time. The minimum recommended credit score is 700 and above, so if yours falls under that, your SBA loan application may not be accepted.

With different credit reporting agencies, the one considered for SBA loans is FICO Small Business Scoring Services. To be on the safe side, you will require a minimum of at least 160 although you may qualify for some SBA loans with an SBSS credit score of 140. 

Apart from the above general SBA loan requirements, there are others which are loan-specific. Below are requirements made specifically for SBA CAPLines and SBA 504/CDC loans;

SBA CAP Lines

• You need to have completed a minimum time of one year in business. 
• To qualify for a seasonal line of credit, you must be able to illustrate a seasonal pattern of business.
• To qualify for a builder’s line of credit you must be a builder.
• To qualify for a contracts line of credit you must have a proven record of bidding and completing contracts.

SBA 504/CDC loan

You need to provide the following;

• Proof of more than 51% owner-occupied on the real estate you purchase. 
• Environment impact statement
• Evidence of meeting public policy

It is important to be prepared to give any information required even for conventional 7(a) loans and SBA microloans even though there are no specific requirements for the two. 

In addition, there are several occasions when you cannot use SBA loan proceeds;

• For floor plan financing
• SBA loan proceeds cannot also be used for business relocation
• To refinance new markets venture capital company debts
• To make distributions, loans or payments to business associates
• To refinance small business investment company debt
• To make payments on past due local, state or federal taxes

What next?

After meeting all the requirements needed for an SBA loan, you ought to move on to the next step. Before you get funding for your SBA loan, you need to make your application and wait for the underwriting process to be completed. Once you forward your application to SBA, they will need to analyse your information and documentation to establish whether you will be able to repay the loan on time.

This is called the underwriting process. Depending on the type of SBA loan you applied for, the underwriting process may take as short as 30 days to as long as 3 months. If the information you provide fits all the requirements, then you will get an SBA loan approval with low rates.

Wrapping up…

Qualifying for an SBA loan doesn’t have to be a hard process. Every requirement is achievable, as long as you are applying for a loan suited to your specific kind of business. Identify what you need and do as much research to understand what is required to make the application. If there is anything you need to work on, take your time and ensure that you do it right. Patience is also key as the earliest you can get an SBA loan is 30 days. Before you know it, your application will be approved and you will be smiling your way to the bank.