SBA Loan 101
What is SBA Loan?
An SBA loan is traditional debt-based financing with advantages for small business owners. These loans provide up to $5 million in small business funding, which can be used for starting a new business or franchise, purchasing an existing business, expanding operations, buying equipment, or used as working capital. Though these loans are approved and funded through individual banks, the SBA guarantees 50 to 90 percent of the loan if it goes into default, which is why lenders are willing to offer favorable terms and conditions to small business owners.
How to qualify for SBA Loan ?
The 5 C’s of SBA Loan Eligibility:
- Capital: down payment crucial for loan approval
- Credit: Most banks will look at both your personal and business FICO score. A 680 personal score and 160 business score are typically the minimum requirements for loan approval
- Capacity: It is your business’s ability to generate income (or cash flow) to repay the borrowed debt
- Character: your business experience — especially in the industry of the business you’re hoping to fund
- Collateral: Your personal property may be used as collateral to secure your loan. For example, the bank may take a lien against your boat or home to use as security if the loan goes into default
Requirements for an SBA Loan:
- Down Payment: While a down payment is required for every SBA loan, the amount can vary greatly by which type of business you’re funding.
- Personal Guarantee: Before final loan approval, most banks will require you to sign a personal guarantee.
- Writing a Business Plan: One extremely important aspect of any SBA loan package is the written business plan. Your business plan, which covers 10 essential elements of your business, gives lenders an insight into your overall business structure as well as revenue projections and market position. If you are funding a start-up, you should
- have detailed insights and research into the current market and well-thought-out financial projections. If you’re acquiring an existing business, your plan should speak to the last five years of performance and how you plan to adjust for any shortcomings.
- Debt Service Coverage Ratio: As described in their credit standards, for all loans over $350,000, the SBA requires a Debt Service Credit Ratio of 1.15 or greater.
- 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 Cardholder.
- 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.
- 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 ban
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?
- 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, lawsuits, and divorce proceedings
- Not a U.S. citizen or Green Cardholder
- Opening an ineligible business