SBA 7(a) small business loans are increasing in popularity as an alternative to traditional funding for a number of reasons, the most significant of which is that they’re partially guaranteed by the SBA itself.
With this SBA-certified safety net, lenders are far more likely to take a chance on your business and give you the opportunity you’ve been dreaming of to grow.
However, just because this SBA backing takes most of the risk out of the 7(a) loan for investors, doesn’t mean that the SBA is putting their name on just any contract.
The eligibility terms of a 7(a) SBA loan are just about as stringent as any other traditional finance deal, and even if you meet the minimum requirements, there’s still no guarantee that you’ll be offered the 7(a) loan.
Thankfully, the SBA is incredibly transparent about the application process and the prerequisites for application. Much like a job listing, they declare separate lists for essentials and nice-to-haves, so you can get the basics covered, then strengthen your case with their secondary suggestions.
You’ll need to take advantage of all the information offered to you by the SBA, so I’m going to give you a head start right here and do a deep dive on eligibility requirements both essential and deal sweeteners.
When starting this pre-application learning process, bear in mind that the SBA gets thousands of 7(a) applications a year, making it an incredibly competitive lending format.
With such a wealth of applicants, lenders are free to choose only the best of the best, so you need to bring your A-game from the start.
Essential Requirements for the 7(a) SBA Loan
Let’s cover the must-haves first, for without all these essential bases covered, you simply cannot apply for 7(a) funding.
- You must be officially registered as a for-profit business - This is fairly self-explanatory. Non-profits aren’t eligible for the 7(a) loan. That’s not to say that the SBA completely ignores non-profits, they just use a non-profit intermediary to deliver non-profit-specific loans to those that need them.
- You must be defined as a small business in the eyes of the SBA - The SBA has a shifting definition of small business in order to cater to all industries. For instance, their idea of a small agricultural business is different from their idea of a small retailer.
As the business owner, you have to prove to the SBA that your organization exists within the small business parameters of your chosen industry.
The SBA measures the size of a business in three key ways: employee numbers, receipts, and affiliates.
- How many employees on average have you had on paydays spanning the last 12 months? That’s how the SBA will be assessing your eligibility. The accepted rate differs from industry to industry, but the maximum amount of employees any business can have is 499.
- There is no better barometer of the potential of a business than the annual receipts, but they’re also a brilliant way to measure business size. For 7(a) eligibility, your yearly revenue cannot exceed $7,500,000 for the three years prior to application. Otherwise, you won’t be as in need of a loan as some other businesses.
- If you have business affiliates, you must also include their employee numbers and revenue in your calculations. An affiliate business is defined by the SBA as any organization outside the primary business that the owner of said business claims 50% or more ownership over.
It all comes down to control and power — whether you exercise it or not. If you have percentage influence over a peripheral business, it must be part of the eligibility consideration.
This means that if you don’t own 50% or more of another business, but you have the largest majority of shares spread across a number of owners, it’s still technically your affiliate business.
You can check whether your business qualifies as “SBA small” with this handy automatic evaluator.
- The industry your business is part of must be in the SBA accepted industries list - Some industries aren’t compatible with the SBA 7(a) lending format no matter how small they are.
Other lenders, for example, aren’t allowed to apply for a 7(a) loan as their key trading asset is money - this includes bookies and casinos. Businesses that sell things such as rare stamps or coins aren’t eligible either as the value of their assets is purely speculative.
You can check out a full list of ineligible industries and businesses here.
- You must not be breaking the law - This one’s a given. If you want to do business with the SBA, it’s got to be squeaky clean, folks. As a governmental body, the SBA cannot be seen to invest in criminal activity, no matter how lucrative it stands to be.
- Your net income must be under $5,000,000 - The SBA wants to see that you’re not able to fund expansion plans with your own profits from the business.
In fact, another stipulation is that you can prove that you’ve invested your own time and money in your business. The 7(a) is an essential loan, not a supplement.
- You must be operating on home-ground - The 7(a) is for American companies doing business on American soil or that of its territories. If your expansion plans cross international borders, you’re out of luck.
- Before applying for the 7(a), you must have exhausted all other lending options - The SBA wants evidence that you’ve tried other methods of financing your business plans. Evidence might include records of a failed attempt to secure a traditional loan via a bank.
- More proof is required to show how you intend to use the funds of the SBA loan - While part of what makes the 7(a) loan great is how generally it can be applied to business, there are still rules on what you can use it for.
The SBA states that anything under the following umbrellas is an acceptable use of 7(a) funds.
- Commercial Real Estate
- Short- and Long-Term Working Capital
- Refinancing Current Business Debt
- Purchase Furniture, Fixtures, and Supplies
- Finally, you’ll need to prove that you’re not delinquent on any existing debts owed to the US government - Delinquency doesn’t look good when you’re trying to borrow money. It shows that you’ve broken financial promises in the past.
Before we part ways, let’s discuss all the things that are going to give your application a winning edge. Remember when you applied to college? You need to give this application just as much effort.
- A solid credit score - You knew this was going to come up sooner or later. If you’ve managed to hit 680 or above during your time in business, your chances of approval skyrocket.
- An unsullied recent financial past - This ties in with your credit score. If you have any recent bankruptcies, foreclosures, or tax liens, it’s going to make the application process very difficult.
- Two Years of existing as a business entity - Two years of records are considered sufficient evidence of your businesses’ potential. It shows you have staying power, a strong plan, and a bright future.
- Providing collateral for loans over $25,000 - Secured loans put lenders at ease as they’ll be able to recoup their investment should things go poorly. Sufficient collateral also helps to keep interest rates low should your application be successful.
- Making a 10% down payment - If the 7(a) funds are intended for the acquisition of a business, real estate, or business equipment, being able to put a 10% down payment on them shows you’re serious about, personally invested in, and prepared for your planned business venture.
- Prove that you’ll be able to make repayments - As we can’t tell the future, a loan is a gamble, but if you can illustrate beyond a reasonable doubt that you’ll be able to make repayments, your application is far more likely to succeed.
- Sufficient working capital - Showing that your business is in good working shape at the time of application will work wonders on your chances of approval. Your business should be doing well in its current iteration to warrant expansion.
- Good character - This is basically an extension of the credit score assessment. If you can prove that your managerial and business decisions have been responsible, intelligent, and successful up until this point in time, you’re a shoo-in for the 7(a).