SBA Loan Requirements

For the small business owner or upstart entrepreneur looking to purchase a startup, getting that SBA guarantee all depends on whether or not you fit into the requirements that the SBA sets out.

The SBA (Small Business Administration) offers loan guarantees for businesses that they define as small. Because there are several different loan programs, the SBA loan requirements can differ greatly from one loan to the next.

In most cases the first requirement that you must meet is that of the private lender that you are going to for funds. In the case of all SBA loans, the lender must first feel that in order to make the loan they require an SBA guarantee on some percentage of the money. This is usually the case with small businesses that have a steady cash flow but not enough capital to put in as collateral.

Once it has been deemed necessary that the small business is in need of an SBA guarantee, the next hurdle is the SBA's own loan guaranty requirements.

For the SBA loan 7(a), the main requirement for an SBA guaranty is the ability to repay from the cash flow of the business. Good character, management capability, collateral, and the owner's equity contribution are also things that the SBA looks at. All businesses applying for the 7(a) loan must be for profit and meet SBA small business size requirements. The business must also be incapable of providing the funds for the project internally.

In the case of the 504 or CDC loan program, the SBA loan requirements for a small business are somewhat simpler:

• It must be operated for profit
• It must fall within the size standards set by the SBA
• Within the last two years, the net income must not have exceeded $2,500,000 after taxes
• It must not have a net worth in excess of $7,000,000

When applying for the 7(m) microloan, the SBA loan requirements for a guaranty are that the loan is for less than $35,000, and that the money will not be used for real estate or debt refinancing. Other loan requirements not set out by the SBA apply: each individual lending institution sets out its own rules regarding this type of microloan.

Most SBA loan requirements are in place to ensure two things. First is that the borrower will not default on the loan. Second is that small businesses are allowed to take advantage of this program exclusively.

The SBA doesn't want to have to pay out money to private lenders and attempt to get that money from small business owners. Neither does it want what they define as large businesses gaining access to SBA guaranties for loans.