By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
Bottom line, virtually all small businesses are technically SBA loan eligible (See list of SBA requirements below). But many small business owners still get declined, why? It is because these borrowers do not fit the banks underwriting standards. As frustrating and confusing as this may seem, it is the reality of the situation.
It’s important to understand that the SBA does not, and has never lent any money themselves. Banks do. The SBA acts like an insurance company for banks that actually lend. So again, banks and other SBA lenders actually lend money and you the borrower, have to meet their credit standards, just like with any loan. The SBA does back these loans with a guarantee for the banks, in case of borrower default, but the bank is the lender and it is still very much on the “hook”. The SBA is rough on banks that have a high percentage of defaulted loans. This is no cake walk for banks, they are under a lot of pressure to fund quality loans. If their default rates are high, they can be “kicked out” of the program or suffer fees and other penalties.
So what are the main reasons that banks deem borrowers as “Uncredit worthy”? It goes back to basic underwriting standards. Here are the main reasons for decline:
- Lack of collateral
- Lack of experience
- Lack of decent historical cash flow
- Low credit scores
- Lack of post close liquidity.
Transactions that are not backed by commercial real estate and where the borrowers have at least 3 years experiance and hard to get done. Also, businesses that have declining gross sales over the last few years without any signs of improvements are going to have a difficult time as well.
SBA Loan Requirements and Qualifications
Here are the generic requirements that the SBA itself dictates:
- The small business seeking SBA financing must be a for-profit, non-publicly traded company.
- Tangible business net worth (including affiliates) not to exceed $15 million.
- Average net income of the business not to exceed $5 million over the previous two years.
- Ownership must be comprised of 51% U.S. citizens or resident aliens (Legal Permanent Residents).
- Business must occupy a minimum of 51% of the building. I.e. you can rent out up to 49% of the subject property, but no more.
- Passive holders of real estate and/or personal property. I.e. no pure investors.
- Lending institutions are not eligible (mortgage brokers and correspondent lenders are eligible).
- Life insurance companies are not SBA loan eligible (however, franchised agents are eligible).
- Businesses located in a foreign country or owned by aliens do not meet the requirements.
- Businesses selling products/services through a pyramid plan.
- Any and all illegal businesses.
- No gambling concerns.
- Businesses which restrict patronage.
- Government owned entities are not SBA loan eligible.
- Businesses engaged in promoting religion are not meet the SBA loan requirements.
- Businesses owned by persons of poor character. This has a lot to do with personal credit scores and credit history.
- Businesses providing prurient sexual material are not allowed.
- Businesses that have previously defaulted on a Federal loan.
- Businesses engaged in political or lobbying activities are not SBA loan eligible.
This is essentially it. If your business is not on this list than you are most likely eligible for an SBA loan. Now the real work begins and that’s figuring out if you can meet the underwriting standards of the funding lender/bank.