What SBA Seeks In A Loan Application:

By Jim Fletcher, Wenatchee SBDC

First, the Small Business Administration (SBA) is a federal agency and does not make loans, SBA guarantees loans made by financial institutions. Under the guaranty concept, the business applies to their local business lender. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for that portion of the loan guaranteed. However, the borrower remains obligated for the full amount due.  Additional informatioon on SBA loan programs and requirements can be found at http://www.sba.gov/


SBA 7(a) Loan Guaranty Program:  Most SBA business loan guarantees will be one of the various 7(a) guaranteed loan programs depending on the amount to be borrowed. A 7(a) loans can be used for most business purposes, up to a maximum guarantee of $1.5 million, with a typical maturity of 7 to 10 years depending on how funds are used.

504 Loan Program:  The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. Loan made under the 504 program can be A 504 Loan is made by a Certified Development Company who work with the SBA and private-sector lenders to provide financing to small businesses. 

Typically, a 504 project includes a a private-sector lender covering up to 50 percent of the project cost, with the  504 loan from the CDC covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. The advantage of a 504 loan is a longer maturity and a lower interest rate on the 504 portion of the loan. The business/owners must contribute at least ten percent of the project total cost.


SBA Guarantee Eligibility
Repayment ability from cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.

All businesses must: meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Certain variations of SBA’s 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

Maturity  Maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings

Equity Investment  Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis.

Strong equity with a manageable debt level provide financial resiliency to help a firm weather periods of operational adversity.

Determining whether a company's level of debt is appropriate in relation to its equity requires analysis of the company's expected earnings and the viability and variability of these earnings. The stronger the support for projected profits, the greater the likelihood the loan will be approved. Applications with high debt, low equity, and unsupported projections will be denied.

Earnings Requirements  A company must be able to meet all its debt payments, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received.

Applicants should write down all assumptions which went into the estimations of both revenues and expenses and provide these assumptions as part of the application. For new or expanding business with anticipated revenues and expenses exceeding past performance, the necessity for the lender to understand all the assumptions on how these revenues will be generated is paramount to loan approval.

Working Capital  Working capital is defined as the excess of current assets over current liabilities. Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm's ability to meet its trade and short-term debt obligations, as well as to remain financially viable.

Collateral  To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans. However, SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.

For all SBA loans, personal guarantees are required of every owner with at least a 20 percent share of the business , plus others individuals who hold key management positions. Whether or not a guarantee will be secured by personal assets is based on the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed. In the event real estate is to be used as collateral, borrowers should be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate related transactions of $50,000 or more. SBA may require professional appraisals of business and personal assets, plus any necessary survey, and/or feasibility study.

Resource Management  Managerial capacity is an important factor involving education, experience and motivation. A proven positive ability to manage resources is also a large consideration.

Preparing A Loan Application. Obtaining loan approval is easier when the business loan application has been adequately prepared. This usually includes a current business plan, financial history with at least three years of federal income tax returns, personal financial history including credit reports and and credit scores, legal documents such as partnerships, leases, articles of incorporation, market research to support sales projections, sources of owners equity, lists of collateral and any other information the lender may require.