The Small Business Administration (SBA) provides loans for small businesses that otherwise may not qualify for traditional bank funding. There are 7 SBA loan requirements that you must meet to apply for the 7(a) General Small Business Loan, their most popular program.
The key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates. To be eligible for assistance, businesses must meet the following 7 SBA loan requirements:
7 Key SBA Loan Requirements
1. The Business Must Operate For-Profit
The IRS has very specific guidelines as to what differentiates a for-profit business:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can you expect to make a profit in the future from the appreciation of assets used in the activity?
If you can answer in the affirmative to the above questions, you meet the first SBA loan qualification.
2. The Business Must Be Small
The Small Business Administration uses the North American Industry Classification System to determine whether or not your business is considered small. Every industry has different criteria for what constitutes their size.
For example, a soybean farming business is considered small if annual revenue is less than $750,000.00, while an irrigation company is considered small if their annual revenue is under $27.5 million.
3. You Must Do Business Inside the U.S. or Its Territories’ Borders
Your company cannot derive its income from foreign sources, and must be based within the U.S. or its territories.
4. You Must Have Reasonable Investible Equity
The SBA defines this requirement as follows:
Applicants having a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. There will be a careful examination of your business’ debt-to-worth ratio to help all parties understand how much money the lender is being asked to lend (debt) in relation to how much you have invested (worth). Owners invest either assets that are applicable to the operation of the business and/or cash which can be used to acquire such assets. The value of invested assets should be substantiated by invoices or appraisals for start-up businesses, or current financial statements for existing businesses. This value is also known as equity investment.
How the Debt-to-Worth Ratio Affects Your Loan Application
Strong equity with a manageable debt level provides financial resiliency to help your business maintain viability during tough times. In contrast, if your business has minimal or non-existent equity, the risk of default (failure to pay) your debts is increased.
Be certain that your business has reasonable investible equity prior to applying for an SBA loan.
5. You Must Use Personal Resources and Other Sources of Financing First
The SBA wants business owners to have their own personal resources invested in their business prior to applying for a small business loan. The SBA also prefers for businesses to exploit all other sources of financing prior to reaching out to them for a loan, because they want to be certain that all other avenues of funding have been exhausted.
6. You Must Have an Actual Business Purpose for the Loan Proceeds
You need to have an actual and demonstrable business need for the loan. An actual use needs to be articulated to the SBA in order to be approved
7. You Shouldn’t Be Delinquent on Any U.S. Government Debt
This means federal taxes. Be certain that all your taxes have been paid and are up to date.
The SBA is a great source for small business financing. You should learn more about SBA loan requirements prior to applying. Understanding the seven requirement listed above is a great first step to obtaining an SBA loan.