Last updated on June 26th, 2023
You must fulfill the following criteria to get help from the Small Business Administration:
- You must be a for-profit company that is fully registered and functioning lawfully.
- As a business owner, you cannot be on parole.
- Your company must have had fewer than 500 workers and annual sales of less than $7.5 million in the previous three years.
- You must have a net worth of less than $15 million and a net income of less than $5 million in order to qualify (after taxes and excluding carry-over losses).
- You must demonstrate that you are putting your own time and money in the company, which is referred to as “invested equity.”
- Your company must have a physical presence in the United States and do business with its citizens and territories.
- Your small company must operate in an industry that has been certified by the SBA (speculative, illegal, or non-profit enterprises are not eligible). Learn which industries are eligible for SBA 7(a) loans and which are not.
- You must demonstrate that you have exhausted all non-SBA loan alternatives and that you have attempted and failed to get funds from other lenders.
- You must show that the loan you are seeking is for a legitimate business purpose and that the SBA has authorized your planned use of the funds.
- You’ll have to prove that you owe the US government no money (taxes, student loans).
Other Advantageous Business Features
Aside from meeting the qualifying standards, there are a few other factors that might help you get an SBA 7(a) loan.
- Having a credit score of at least 680 is recommended.
- On your credit report, there should be no recent bankruptcies, foreclosures, or tax liens.
- A minimum of two years of experience in the sector is necessary.
- The ability to offer security for loans of more than $25,000
- If you want to use the money to buy a company, commercial real estate, or business-related equipment, you’ll need to be able to put down a 10% down payment.
- You’ll be able to pay all of your bills.
- Working capital is sufficient (once you subtract liabilities from assets).
- According to the SBA, your track record plays a role in determining whether or not you have “good character.”
INDUSTRIAL ELIGIBILITY SBA 7 (A)
INDUSTRIAL Even if you fit the SBA’s definition of a small business, your industry may have its own set of requirements, which are mostly based on the number of employees and revenue/receipts. According to the SBA, manufacturing and mining companies must employ less than 500 people, while non-manufacturing enterprises must generate less than $7.5 million in annual sales. Of course, there are exceptions, so check with the SBA to see what size limitations apply to your industry.
APPLICATION FOR SBA 7(A) LOAN
You must demonstrate that your intentions for the money are solid in order to be authorized for an SBA 7(a) loan. SBA 7(a) funding may be used for a variety of purposes, including operating expenditures, refinancing certain high-cost loans, recruiting new employees, acquiring new inventory or equipment, supporting marketing costs, and even purchasing land and commercial real estate. Owners’ equity, unpaid taxes, and monies that should be held in trust or escrow are not eligible for SBA 7(a) loans.
REQUIREMENTS FOR COLLATERAL WORK
Even while the SBA guarantees the vast majority of SBA 7(a) loans, your lender is still responsible for the remaining 1%. The SBA and your lender will split the collateral you give; providing collateral assures that you will be compensated if you fail. A lender prefers that you supply high-value assets that they can sell if necessary, such as machinery, real estate, or other high-value assets. The SBA will be less concerned about collateral requirements if you have significant cash flow; nonetheless, demonstrating to the SBA that you’re totally involved in the success of your company (which putting up collateral helps to verify) boosts your chances of approval and success.
REQUIREMENTS FOR PERSONAL CREDIT
Your personal creditworthiness has a significant influence on your company creditworthiness when applying for a loan for your small business. You may save a lot of money if you pay your bills on time (even early) and don’t misuse your credit cards. If you have a personal credit score of 680 or above (though a lower score won’t automatically disqualify you), and your credit history indicates no (or at least no recent) bankruptcies, tax liens, or foreclosures, you’ll be in the strongest position. To assess your eligibility, your most recent company income tax return, as well as three years’ worth of personal tax returns, will be considered. The amount of loan applications you’ve already filed will either be a positive or negative factor.
STRATEGIES FOR STARTUPS
Startups are often seen as high-risk ventures, with 50% of new enterprises failing within the first five years. SBA-approved lenders are more ready to give riskier startup loans because SBA 7(a) loans reduce lender risk. Startups must fulfill the regular SBA 7(a) loan eligibility requirements, but they must also demonstrate industry-specific and business management skills since they will not have a cash flow history to back up their capacity to repay the loan. Because you don’t have a track record for your firm, your lender and the SBA will evaluate your business plan. You may persuade your lender that your firm has promise and that you’re emotionally involved in its success by providing collateral and perhaps a part of your own finances.