SBA 7(a) Paperwork Explained: Form 1920
The SBA Form 1920 is the SBA lender’s application for loan guaranty. In simple terms, this is where your lender formally asks the SBA to back your loan. Although you (the borrower) don't have to fill this form out yourself, if you'd like to take a look, here's the SBA's official form 1920:
On this form, the lender must provide information about the terms of the loan, how the funds will be used, and more. This form helps the SBA make the final decision about whether to guaranty your loan, and about how the loan paperwork will be processed.
Even though you aren’t personally responsible for this form, getting cozy with the details of this form can help you understand how the SBA decides whether to approve your proposal or not.
What are the Different Processing Methods and Options for Form 1920?
Your lender will be required to denote how they processed your loan on Form 1920. This is largely determined by the type and use of the loan. The methods include:
- Non-delegated processing. This is where your lender submits the loan to an outside underwriting party.
- Delegated processing. This is where your lender underwrites the loan in-house.
Your lender will also have to share which of the many SBA loan options you were processed for. The options include:
- 7(a) Small Loan: For applicants seeking $350,000 or less, and who have a qualifying credit score
- CAPlines program: A loan to meet short-term working capital or operating needs
- SBA Express: For loans between $100,000 and $350,000
- Export Express: Export loan of up to $500,000
- Export Working Capital Program (EWCP) Loan: Provides advances for up to $5 million to fund export transactions
- Other: Occasionally, the SBA will feature other specialized loan programs or pilot programs. If the loan option will not fit into any of the above categories, lenders should check this box and provide an explanation of what the option entails.
What business information is required on the form 1920?
Form 1920 requires lenders to provide information about the applicant’s business, including whether your business is a startup (not yet open), a new business (open two years or less), an existing business, or a business undergoing a change of ownership.
The dates that the business was established and that the current ownership was established are both required (even if these are the same date). Information about whether the business is urban or rural, number of employees, and number of jobs created or retained due to the loan is also required.
The lender will also need to include the applicant’s personal information, such as legal name, street address, and tax ID number.
What if there is a co-applicant?
If there is a co-applicant for the loan, the lender will need to specify the co-applicant’s name, street address, relationship to the business seeking the loan, and business tax ID.
What if there’s been a change in ownership?
Even if a business is changing ownership from one existing owner to another existing owner, it is said to be undergoing a change of ownership. If the SBA loan will be used to help a business change owners, it is still eligible for the SBA loan if the following apply:
- The change will promote the sound development of the business
- The change is between existing owners where 100% of the business will be owned by the new owner, or the small business owner is purchasing 100% of a business
- The loan proceeds will not finance more than the business’s value
There are a few more details within a change of ownership that can impact how your loan is processed. Here they are:
- If the business value includes intangible assets (such as client lists or trademarks) in excess of $500,000, the applicant will need to contribute at least 25% equity. If this requirement isn’t met, this will affect the way the loan application is processed.
- If the loan proceeds will be used to pay off 100% of a business’s SBA loan, it may still qualify for SBA backing, but this may affect the way the loan is processed.
- If a business broker will receive a commission from the applicant by the sale of the business, the lender should provide information about the broker firm, representative, and commission on Form 1920. The form will also require information about how much the business is being purchased for, and how much of that amount is being financed with the SBA-backed loan.
- If the value of the business is $250,000 or under and there is no relationship between the buyer and seller, the lender will need to prepare a valuation that supports the amount listed on the form and include it with the loan application paperwork.
- If the value is over $250,000 or there is a close relationship between the buyer and seller, the lender will need to obtain an independent business valuation from a qualified source that supports the amount listed on the form. This valuation should be included with the loan application paperwork.
What lender information will be required?
The SBA requires lenders to provide their own information on Form 1920. Basic information about the institution’s name and address, as well as a contact person’s name, phone number, and email address is required. The form also provides space for an alternate contact, in case the primary contact can’t be reached or is not the person to contact regarding loan processing information.
What do I need to know about the loan structure?
The SBA requires lenders to fill out plenty of information about the loan structure, including how much money the applicant is requesting, the percent of guarantee, the term of the repayment plan (in months), and the payment amount. The lender will also need to specify information about the rates. Rate information can be provided for the full amount of the loan, or lenders can separate this information into rates for the guaranteed portion and rates for the un-guaranteed portion. The form requires lenders to specify whether the rate is fixed or variable, how often the rate will adjust, and the date the first adjustment will occur. Lenders should also check the box for the applicable base rate. Base rate options include:
- Prime: based largely on Federal Reserve
- SBA LIBOR: based on the London money market
- SBA Peg Rate: weighted average of rates the Federal government pays for loans with maturity similar to the average SBA loan
- Fixed Base Rate: a fixed interest rate based on market conditions
- Other: Check this box if the base rate types above do not apply to this loan. You will need to explain the base rate option in a separate box on the form.
What about how the money will be used?
Form 1920 requires lenders to break the dollar amount of the loan into the purposes for which it will be used. Options include:
- Land acquisition (with or without improvements)
- New construction, expansion, or renovations
- Leasehold improvements to property owned by others
- Machinery & equipment
- Furniture & fixtures
- Inventory purchase
- Working capital
- Acquiring a business (as an asset or with ownership interest)
- To pay off an SBA loan (specify SID, other lender, or both)
- To pay off notes payable (specify SID, other lender, or both)
- To pay accounts payable
- To pay the SBA guarantee fee
- Other reasons: Form 1920 provides two “other” spaces in this section, where lenders can specify uses for the loan money that don’t fall into the above categories.
After filling in dollar amounts for each category, lenders should total all the categories to equal the full amount of the loan. In addition, if more than $10,000 of the loan proceeds will be used for construction or renovation, the lender will need to submit a completed SBA Form 601 with the loan application paperwork.
What if the applicant got help filling out the paperwork?
If the loan applicant paid a fee to the lender, or any third party, for assistance with the paperwork for this loan, that should be disclosed on Form 1920, and Form 159 7(a) should be completed and submitted as part of the loan application paperwork.
What eligibility requirements are included?
Form 1920 includes general SBA loan eligibility requirement questions. To be eligible for the SBA loan, the applying business must:
- Be an operating business (with the exception of eligible passive companies)
- Be organized for profit
- Be located in the United States (or in its territories or possessions)
- Be a small business
- Be able to demonstrate the need for the credit for which they’re applying
- Have products and/or services that are available to the general public
In addition, the lender must certify that the applicant can’t get the credit for which they’re applying anywhere except through the SBA-backed loan program. This means that the file the lender will submit to the SBA should include documents that prove this fact.
Form 1920 also requires lenders to ensure that the business applying for the loan is not disqualified. Ineligible businesses include:
- A nonprofit
- A financial business that primarily lends money (although independent agents may be eligible)
- A passive business that does not actively use or occupy the assets acquired or improved with the loan proceeds (exceptions include motels, RV parks, campgrounds, or marinas, and business engaged in sub-dividing real property for resale)
- A business located in a foreign country or owned by illegal aliens
- A pyramid sale distribution plan
- A business involved in illegal activity
- A business engaged in teaching, coaching, counseling, or indoctrinating religious beliefs. If this business doesn’t fall into this category but the applicant appears to be connected with a religious organization, the lender must submit SBA Form 1971 with the application paperwork.
- A consumer or marketing cooperative
- A business that earns at least 1/3rd of its revenue from packaging SBA loans
- A business that derives at least 5% of its revenue from sexual displays or activity
- A business engaged primarily in political or lobbying activities
- A speculative business
- A business that derives at least 1/3rd of its revenue from gambling
- A private club
- A government-owed entity (businesses owned or controlled by the Native American Tribe may be eligible)
What if the business is a Qualified Employee Trust?
A Qualified Employee Trust (or similar trust) may be eligible, but the following have to be true:
- The applicant meets the requirements and conditions for an Employee Stock Ownership Plan (ESOP) and the small business will provide the funds to repay the loan and provide collateral
- The loan will help grow the owner’s small business or will purchase ownership or voting control of the employer
- The loan proceeds will be used to purchase qualified employer securities, or a controlling interest (at least 51%) in the employer
What determines business size?
It's important that your business qualifies as a small business in the eyes of the SBA. If the applicant is a business acquiring another business, or if the business has affiliates, this could affect whether the SBA sees the resulting company as “small.” For the purposes of Form 1920, the size of the business should include any businesses being acquired, and affiliates should be specified on the form.
To help determine the business size, SBA Form 1920 asks questions including:
- Average annual receipts over the past three years (per IRS)
- Number of employees
- Tangible net worth: cannot be in excess of $15 million
- Average net income after taxes for the past two years: cannot exceed $5 million
- Whether the size of the applicant’s business (and its affiliates) meets the size standard for the applicant’s industry
What about applicants with a criminal history?
If the applicant indicated a criminal history on Form 1919, the lender needs to make sure the loan is still eligible through the SBA. To be eligible for the SBA loan:
- The applicant should have answered “yes” to question 17 on SBA form 1919.
- If the applicant answered “yes” to question 19 on Form 1919, the lender needs to verify that the applicant is not currently on probation or parole.
In addition, one of the following must be true:
- The lender has supporting information and court documentation indicating that all crimes were misdemeanors fully dispositioned by the court at least 6 months ago, no crimes were committed against minors, and SBA form 912 is included in the application paperwork.
- The SBA has already cleared the character issues on Form 1919, and the lender has submitted Form 912 to the SBA field office that serves the same territory where the applicant is located.
- The loan is being processed on a delegated basis, Form 912 has been submitted to SBA headquarters, and the lender has received clearance of the character issues from the SBA field office.
What are the citizenship requirements?
Since the SBA is a United States-based program, it makes sense that a borrower should involve U.S. citizens. However, the SBA only requires that the small business applying for the loan is 51% owned and controlled by U.S. citizens, or people who meet one of these requirements:
- Someone who has Lawful Permanent Resident status (the lender must verify this with the USCIS), will control the management and daily operations, and owns at least 51% of the business.
- Someone who has alien status other than LPR (verified with the USCIS), with management provided by a US citizen or LPR for at least one year and will continue indefinitely. This also requires that the applicant pledged collateral for the loan that is located within the United States.
Can a passive company get an SBA 7(a) loan?
Form 2020 contains questions relating to passive companies. Some passive companies are eligible for SBA-backed loans, but the following must be true:
- The Eligible Passive Company (EPC) will use the loan proceeds to acquire, lease, and/or improve property (including eligible refinancing) that it leases 100% to one or more Operating Company (OC).
- The OC is an eligible small business, and loan proceeds would be eligible for SBA backing if the OC were obtaining the financing directly.
- The EPC (with the exception of a trust) and the OC each are “small” under SBA’s size standards.
- The EPC’s business type is eligible for SBA backing
- The lease between the EPC and OC will be in writing
- The lease between the EPC and OC will be in effect at least as long as the term of the SBA loan
- The lease will be subordinated to SBA’s lien on the property, and the rents will be assigned as collateral for the loan.
- The OC will be a guarantor or a co-borrower.
- Each 20% or more owner of the EPC and each 20% or more owner of the OC will guarantee the loan.
- The aggregated amount of the SBA portions for this application and for all outstanding loans to the EPC, the OC, and their affiliates does not exceed $3,750,000.
- Neither the EPC nor the OC is a trust
What if the SBA loan applicant has Federal debt?
If the applicant is currently delinquent on a Federal loan (including student loans and FHA loans), or has ever defaulted on such a loan, they are not eligible for an SBA-backed loan unless these circumstances are waived by the SBA for good cause.
Do requirements change if the SBA loan is a CAPLine?
If you're trying to get a CAPLine revolving line of credit, there are additional requirements, depending on how the money is going to be used.
- For seasonal activity: The business must have been in operation for at least 12 calendar months and able to demonstrate a definite pattern of seasonal activity.
- For builders: The applicant must be a construction contractor or homebuilder and demonstrate the ability to profit and operate reliably. You must also be able to demonstrate prior prompt payments to suppliers and subcontractors, and the prior successful performance have been of comparable type and size to the proposed project.
- For contract: The applicant has demonstrated the ability to operate profitably based on completion of similar contracts, bids, and cost projections in the past.
- For working capital: The applicant should be able to show that they generate accounts receivable and/or has inventory.
What if the loan will be used to finance a new building?
If some of the loan proceeds will be used to purchase (or refinance) a building, the following conditions must apply in order for the loan to be eligible:
- If the building will contain rental space, the applicant must permanently occupy at least 60% of the rentable property for the term of the loan and plan to occupy within 10 years all of the rentable property not leased long term.
- Community improvements must not exceed 5% of the loan amount.
- If refinancing a construction loan, the construction loan must not be with the same lender. If this is the case, the loan may not be processed under delegated authority.
- Loan proceeds will not be used to remodel or convert any rental space in the property.
- If the business plans to lease space to another company, the following must be true:
- The applicant (or Operating Companies) will occupy at least 51% of the rentable property.
- Loan proceeds will not be used to remodel or convert any rental space in the property
- If the business plans to improve a leased building, the building must be occupied 100% by the business applying for the loan.
What about export loan programs?
Special considerations have to be made for businesses in exporting. If the business is an exporter, lenders will be required to include the projected amount of export sales supported by the SBA loan.
Export Express Loans
For export express loans, the applicant must meet these requirements:
- In operation (not necessarily in exporting) for at least 12 full months. (If this requirement isn’t met, the business may still be eligible for this program with clearly demonstrated exportation expertise)
- The loan proceeds will allow the business to enter a new export market or expand an existing export market.
- Loan proceeds will be used for an export development activity
- If proceeds are being used to finance indirect exports, the SBA will require certification from the applicant’s domestic customer (typically in the form of a letter, invoice, order or contract) that the goods or services are in fact being exported.
- Proceeds will not be used to finance overseas operations, except for the marketing and/or distribution of products/services exported from the U.S.
- If the proceeds are being used to finance specific export transactions, the lender must verify that U.S. companies are authorized to conduct business with the proposed country(ies) to which the goods or services will be shipped and has reviewed the Ex-Im Bank Country Limitation Schedule (CLS)
- The Export Express loan will not refinance an existing SBA-guaranteed loan.
Export Working Capital
For the Export Working Capital (EWCAP) program, the following requirements must be met:
- In business for at least 12 months
- The EMC or ETC will take title to the goods or services being exported, and the EMC or ETC has no bank ownership.
What if I’m refinancing debt with an SBA 7(a) loan?
If a business will use the SBA loan to refinance debt, the lender must include a complete business debt schedule with the loan application paperwork. Each debt listed must also include supporting documentation. In addition, the debt consolidation must improve the business’s cash flow by at least 10% (with some exceptions), and the applicant must demonstrate that the existing debt no longer meets the business’s needs. The following must also be true:
- The loan proceeds will not pay a creditor in a position to sustain a loss, causing a shift to SBA of all or part of a potential loss from an existing debt.
- The application is being processed under SBA Express and the transaction is the purchase of an existing business that has an existing SBA loan that is not with the requesting SBA Express lender.
- The application is a Working Capital CAPLine, the debt is an existing SBA-guaranteed line of credit that is not with the requesting lender, and all other requirements of debt refinancing in SOP 50 10 are met.
- The debt is an existing SBA-guaranteed loan that is not same institution debt, and there is evidence that the lender currently holding the debt is unwilling or unable to modify the current payment terms or provide an increase or a second loan.
- If the debt is from the same institution where the applicant is applying for the SBA loan, one of the following conditions must be met:
- This application is being processed under SBA Express, the debt has been current for at least the last 36 months, and the new loan will not reduce the lender’s existing credit exposure to the borrower.
- This application is being processed under an SBA preferred lending partner and the debt is either an interim loan that has been made for other than real estate construction purposes and was approved by the lender within 90 days prior to the issuance of a PLP loan number, or the debt is a construction loan that has not been disbursed.
- This application is being processed under 7(a) Small Loan or Standard 7(a), and the lender has provided a transcript of account for the past 36 months or the life of the loan, whichever is less, and the lender has explained any late payments and/or late charges that have occurred during the last 36 months.
- The loan is being processed under the CA Pilot Program and the lender has provided a transcript showing due dates and 6 months of timely payments for the most recent six-month period.
- The application is being processed under 7(a) Small Loan, Standard 7(a) or the CA Pilot Program, the debt is an existing SBA-guaranteed loan from the same institution that has been sold on the secondary market, and the investor is unwilling to agree to modified terms.
SBA Form 1920 allows lenders to ensure the loan will be eligible for backing by the SBA. Working closely with your lender to ensure all necessary documents are in place will help processing go as smoothly as possible. If you have any questions, don't hesitate to ask our team at SBA7a.loans.