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SBA Loan Requirements

There are many different SBA loan requirements for either of the two primary SBA loan programs (the SBA 504 and the SBA 7a), even though they are not as strict as those for certain other loans. You (the borrower), lenders, and even the project you're going to start must abide by these loan requirements.

General SBA Loan Requirements

The standards for business eligibility are fairly straightforward to fulfill. It should be mentioned, nevertheless, that the program is actually intended for eligible companies who need the SBA's assistance in order to secure financing with reasonable terms. This program might not be for you if you can secure conventional financing on your own with reasonable terms.

There are also the following SBA Loan requirements:

Different lending programs and lenders have different eligibility standards. In general, eligibility is determined by how a business generates income, the nature of its ownership, and the location of the business. Businesses typically need to meet SBA size requirements, be able to repay, and have a valid business purpose. Even those with poor credit can get startup capital. You will get a complete list of your loan's eligibility requirements from your lender.

Typical eligibility requirements for any SBA loan are the following:

  • Your business must be for profit (i.e., not a non-profit)
  • You must do business in the United States
  • You must have invested equity
  • You must have exhausted all other financing methods (i.e., you tried to get a commercial loan and failed)

Further, the eligibility requirements differ slightly depending on whether you are applying for an SBA 504 or SBA 7(a) loan.

SBA 504 Loan Requirements

To qualify for an SBA 504 loan, your company must:

  • Operate a business for-profit in the US or its territories
  • Have a tangible net worth of $15 million or less
  • Have an average net income of less than $5 million after federal income taxes for the prior two years

You must also fall within the SBA size guidelines, possessing competent management competence, a workable business plan, excellent moral character, and the ability to repay the loan are other basic eligibility requirements.

Businesses engaged in passive, speculative, or nonprofit activity are not eligible for SBA 504 loans. Small businesses and lenders are urged to get in touch with a Certified Development Company in their region for more details on eligibility conditions and loan application procedures.

SBA 7a Loan Requirements

Businesses who want to receive SBA 7(a) loan assistance must:

  • Operate a business for-profit in the US or its territories
  • Be regarded as a small business in the SBA's eyes
  • Have invested their own equity into the business
  • Be able to prove that you need a loan
  • Put the money to good use for your business (i.e., you have a solid business plan)
  • Not have any outstanding debts to the United States government that are past due

Some companies might not be eligible for 7(a) loans. See this for more details.

Some other caveats:

  • You are not allowed to carry out any speculative business.
  • You must achieve goals for community development or public policy, or you must fulfill requirements for employment creation.
  • Real estate cannot be bought and then held. Real estate acquired with the loan must be used for commercial purposes.
  • You are not allowed to engage in any loan activities.
  • You cannot have previously missed payments on a government loan.
  • You are not permitted to engage in any kind of lobbying or political action.
  • You are not allowed to engage in any type of gambling or run a casino.
  • The borrowed funds must be used to repay the loan from the project's cash flow.
  • All of the personal backgrounds of the company's principals must be available to the SBA.
  • A business strategy that has been declared realistic is a must.
  • If the building is an existing structure, you must intend to inhabit at least 51 percent of it, and if it is a new construction, at least 61 percent.

It should be noted that many companies that are eligible for 7(a) financing will also be eligible for 504 financing, but not all given the stricter standards of an SBA 504 loan.

Taxes: As the owner or borrower, you have a responsibility to maintain your tax liabilities, which the SBA takes extremely seriously. If the loan is secured by real estate, you must show proof that your real estate taxes have been paid each May and October. This does not apply if the loan just covers equipment or machinery and excludes real estate.

Hazard Insurance: The SBA requires 504 loan holders to show proof of hazard insurance on the company property each year. Keep in mind that the amount of this insurance must match the remaining debt of the SBA loan. The unfortunate news is that this can be costly initially when the loan is originated. However, it does imply that when the loan principal is paid down over time, insurance premiums will decrease.

Documentation of Financial Responsibilities: The SBA also requires evidence that you are meeting your other financial obligations in addition to providing proof that you are paying your real estate taxes. For instance, you must regularly prepare and send the SBA your corporation tax return. This also applies to your yearly financial statements (prepared by an actual accounting professional).

Additional Encumbrances: Have you considered obtaining additional financing by using the SBA 504 loan's collateral as security? You cannot do it without first consulting the SBA, despite the fact that it could be possible. Before adding any new encumbrances to any collateral used to secure the SBA 504 loan, you must first obtain written consent from the Small Business Administration.

Protecting Your Business: Finally, you'll discover that the SBA wants to take precautions to ensure the long-term viability of your company. The loss of a key employee by a company can frequently result in severe financial issues. All of your company's essential personnel must have life insurance, per the SBA requirements, to provide for this possibility.

It should be noted that only the Small Business Administration is subject to these common restrictions and covenants. Others may apply to your circumstances as well, and your lender is likely to impose its own restrictions and limitations as well, such as covenants referencing cash flow coverage and other financial criteria.