Requirements of an SBA Loan

Basic Requirements of an SBA Loan

Down Payment (By Business Type):

While a down payment is required for every SBA loan, the amount can vary greatly by which type of business you’re funding. If you’re acquiring an existing business or franchise you may have a significant down payment requirement of around 20 percent (a 10% minimum buyer injection might be available for strong buyers pursuing strong business acquisitions).

Personal Guarantee:

Before final loan approval, most banks will require you to sign a personal guarantee. This guarantee is a promise that if the business can’t pay the loan, you will then be personally responsible for payments. This guarantee is binding regardless of entity type, even if your business is structured as an LLC, you will need to sign a personal guarantee.

Owner Guarantee:

A personal guarantee is required from all owners with 20 percent or more ownership. For married couples, each spouse with a five percent or greater owner interest must personally guarantee the loan if the combined interest between the two spouses is 20 percent or more.

Writing a Business Plan:

One extremely important aspect of any SBA loan package is the written business plan. Your business plan, which covers the essential elements of your business, gives lenders insight into your overall business structure as well as revenue projections and market position. If you’re acquiring an existing business, your plan should speak to the last three years of historical performance and how you plan to adjust for any shortcomings.  Your business plan should also detail business activities and actions that would drive realistic revenue and profitability growth.  First year, second year and two-year performance projections that are inclusive of all relevant Profit and Loss Statement and Balance Sheet line items should be presented.

Debt Service Coverage Ratio:

As described in their credit standards for all loans over $350,000, the SBA requires a MINIMUM Debt Service Credit Ratio (DSCR) of 1.15 or greater. Though some banks take slightly varied approaches, the SBA calculates DSCR as Operating Cash Flow/Debt Service. This is calculated on a historical basis for existing businesses and projected for start-up businesses.

Citizenship Requirements:

In order to be approved for SBA lending, at least 51 percent of the business must be owned by a U.S. Citizen (or citizens) or Green Card holder. The SBA will approve funding for businesses with foreign investors, but the maximum is 49 percent ownership for non-citizens.

Franchise Directory:

Aspiring franchise owners may seek financial assistance from the SBA, but only brands on the SBA Franchise Directory will be considered for SBA loan approval. If not on the list, franchisers can submit an application for approval, but individual borrowers will not be approved until the franchise is on the list.

Requirements Vary at Different Banks:

It’s important to note that if you’re planning to submit SBA loan applications at more than one bank (which is time consuming but can help you get better loan terms), the requirements may not be the same at each bank. You may need to tailor your application for each bank you apply to – much like writing a unique cover letter for each job application.

Life Insurance

The SBA program requires each loan applicant to apply for bank assigned life insurance.  This is intended to protect the borrower (and estate) in case they pass away before the loan is paid off. In this circumstance, the life insurance policy would pay off the balance of the loan. The estate executor (named before funding), would then own the business free and clear of the SBA loan.

These bank-assigned policies require the borrower to take a physical exam, performed by a doctor. If applicant fails the physical, they are not excluded from the loan application.  Rather, a letter of denial from the insurance carrier and doctor is provided to the chosen SBA lender and it becomes a record in the lending package, meeting the requirements of SBA.  The SBA program does not discriminate against applicants with pre-existing medical conditions.

SBA Lending Limits:

The most popular SBA lending option, the SBA 7(a) loan, has a lending limit $5 million. The only SBA lending program with a higher limit is the SBA 504, which is specific to owner-occupied real estate. Here’s an overview of the limits for each program:

  • SBA 7(a) Loan: $5 million
  • SBA 504 Loan: $20 million
  • SBA Microloan: $50,000
  • SBA Disaster Loan: $2 million
  • SBA Express Loan: $350,000

What disqualifies you from an SBA loan?

The SBA welcomes aspiring small business owners from all walks of life, and even encourages members of underrepresented groups to take advantage of special funding and business contract opportunities. While your personal history typically doesn’t have a negative impact on loan approval, there are some factors — personal or business — that will disqualify you from being approved for a loan. Anyone who fits any of these descriptors will not be approved for a loan:

  • A criminal charge within the past six months.
  • Currently on probation as the result of a conviction.
  • Awaiting pending legal action including (but not limited to) criminal charges, law suits and divorce proceedings.
  • Not a U.S. citizen or Green Card holder.
  • Opening an ineligible business.

Additional SBA Lending Eligibility Factors

There are some events or situations that may affect your SBA lending eligibility that are less cut-and-dry than others. These factors could impact your loan approval, but the outcome may vary by your individual situation and by lender:

  • Criminal charges within the past six months
    • Lenders may consider the nature of your charges, how long ago they occurred, your work history since then, etc.
  • Collateral
    • If you’re a well-qualified borrower in every aspect other than having significant collateral, you may still be approved for SBA lending.
  • Outside Income
    • If you have zero or little additional income outside of the business you’re hoping to fund, lenders may look more closely at your ability to repay the loan.

Please see my blog “The Five C’s of SBA Loan Eligibility”


For More Information Contact:

Tom Stadler
Sunbelt Finance