Do I Qualify for an SBA 7(a) Loan?
If you’re thinking about applying for an SBA 7(a) Loan, you’re in good company — the 7(a) is one of the SBA’s most popular programs. It can feel like you’re being held back without access to more working capital, so the SBA offers small business owners (like you!) support when you haven’t been able to find funding elsewhere. Just because you’re lacking cash flow history or a pristine credit score doesn’t mean you must automatically give up on your dreams! If you apply and are approved, the SBA will guarantee (like co-signing) a loan from an SBA-approved lender for up to 90% percent of your loan amount — quite a sweet deal for startups or small businesses if you’re looking to make a leap in your growth.
SBA 7(a) Eligibility Requirements
If you’re looking for support from the SBA, they’ve got some requirements you’ll need to make sure you meet:
You must be officially registered as a for-profit business, and you must be operating legally.
As the business owner, you can’t be on parole.
Your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years
Your net income must be under $5 million (after taxes and not counting carry-over losses), and your tangible net worth must be less than $15 million.
You must show you’re investing your own time and money into the business, having “invested equity.”
Your business must be physically based in the United States, and you must be doing business with the U.S. and its territories.
Your small business must be in an SBA-eligible industry (speculative, illegal and non-profit businesses don’t get to play). Learn more about Eligible and Ineligible Industries for SBA 7(a) Loans
You’ll need to show that you’ve already tried and failed get funds from other financial lenders, fully exhausting non-SBA loan options.
You’ll need to prove you’ve got a sound business purpose for the loan you’re requesting, and that your intended funds usage is approved by the SBA.
You’ll need to prove you’re not delinquent on any existing debts to the U.S. government (taxes, student loans).
Additional Beneficial Business Qualities
In addition to the eligibility requirements, there are a few additional qualities which can increase your likelihood of SBA 7(a) loan approval.
A good credit score - preferably above 680.
A history free from recent bankruptcies, foreclosures, or tax liens.
Having been in business for at least two years.
The ability to provide collateral for loan requests over $25,000.
The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment.
Sufficient cash flow to meet your debt obligations.
Sufficient working capital (once you subtract liabilities from assets).
“Good character” according to the SBA (partially decided based on your track record of managing your resources and day-to-day business affairs).
SBA 7(a) Eligibility by Industry
Even if you already fall under the SBA definition of a small business, your particular industry may have additional industry-specific requirements, which mainly concern number of employees and revenue/receipts. The SBA has two main standards for business size — fewer than 500 employees for manufacturing and mining industries, and under $7.5 million in average annual receipts for non-manufacturing industries. There are of course exceptions, so you’ll want to check with the SBA’s size requirements for your specific industry.
Use of the SBA 7(a) Loan
In order to get approved for an SBA 7(a) loan, you’ll need to prove that your plans for the funds are appropriate. While the specific allowable uses depend on the amount you want to borrow, you can generally use SBA 7(a) funds for operational expenses, refinancing certain high-cost debts, hiring employees, purchasing new inventory or equipment, supporting marketing costs, or even purchasing land and commercial real estate. SBA 7(a) loans are never permitted to reimburse owners for equity, nor to repay delinquent taxes or funds that should be held in trust or escrow.
While the SBA guarantees a large percentage of an SBA 7(a) loan, your lender is still on the line for the remaining percent. The collateral you provide is split between the SBA and your lender; offering collateral instills confidence in recovery should you default. Generally, a lender prefers that you offer something like equipment, real estate, or other high-value assets which they could sell, if needed. If you’ve got sufficient cash flow, the SBA won’t be as concerned with collateral requirements; however, showing the SBA that you’re fully invested in the success of your business (which putting up collateral of your own goes a long way to prove) definitely increases your chances of approval and success.
Personal Credit Requirements
While you’re requesting a loan for your small business, personal credit scores greatly impact your corporate creditworthiness. Paying your bills on time (even early) and holding back from overusing credit cards makes a huge difference. You’ll be in best standing if you’ve got a personal credit score of 680 or higher (although having a lower score doesn’t immediately disqualify you), and your history shows no (or at least no recent) bankruptcies, tax liens, or foreclosures. You’ll be evaluated based on your most recent business income tax return as well as three years of personal tax returns. The number of loan applications you’ve submitted in the past will either be a green light or a red flag.
Guidelines for Startups
Startups are generally seen as risky investments; 50% of small businesses fail within the first five years. SBA 7(a) loans minimize the risk to lenders, so lenders working with the SBA are more likely to give out riskier startup loans. Startups must meet the usual eligibility requirements for SBA 7(a) loan consideration, but since you won’t have cash flow history to prove your ability to repay the loan, you’ll need to prove both industry-specific and business management experience. Your lender and the SBA will also heavily evaluate your business plan, since a track record for your business doesn’t exist. By offering collateral and even some of your own funds, you can convince your lender that your business has potential and you’re personally invested in its success.