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SBA 7a Loan Requirements
Written By: Misha M., CFA

SBA loans can be a great asset for business owners and entrepreneurs seeking for capital to start or operate their enterprises. They offer a multitude of benefits including competitive interest rates, quick funding options, and generous maturity options. But in order to have your application approved, you must meet the SBA 7(a) loan requirements.

Below are the SBA 7(a) loan requirements you must meet in order for your application to be considered:

Operate for a Profit

While it might seem obvious, your business must be for profit in order to be considered for an SBA 7(a) loan. This means that non-profit businesses are ineligible for SBA 7(a) loans and must seek other forms of funding.

Be Considered a Small Business

There are two primary considerations that the Small Business Administration uses to determine whether a business is considered “small” and eligible for an SBA 7(a) loan.

First is the average annual receipts of a business. This is your business’s total income (or gross income) plus the cost of goods sold. The SBA considers any business under $41.5 million in average annual receipts small.

Additionally, headcount, or the number of employees, is used to determine if your business is considered small. This is calculated by averaging the number of employees per pay period in the last 12 months. The SBA considers any business with under 1,501 employees a small business.

This is defined by the SBA and is subject to change. You can use this tool developed by the SBA to determine if your business qualifies as a small business, or you can get in touch with Llama Loan to check your eligibility today.

Operate in the United States

To be eligible for an SBA loan, your business must operate in the United States or its territories.

Have Reasonable Equity in the Business

To qualify for an SBA 7(a) loan, you must have equity, such as your own money or time, that is invested in the business. 

Use SBA Funding as a Secondary Resource

SBA loans are not meant to be used as a first resort. You must first seek funding elsewhere before turning to an SBA loan.

Be Capable of Demonstrating a Need for the Loan

Your business will need to demonstrate a reasonable need for the capital secured through your loan. There are many use cases for SBA loans – but lenders would like to see a calculated plan for how you plan to use the funds to ensure you can return their investment. 

Use the Loan for a Legitimate Business Purpose

You must use the capital for “sound business expenses.” SBA 7(a) loans can be used to fund numerous activities and startup costs including, but not limited to:

  • Short- and long-term working capital
  • Equipment
  • Commercial real estate projects directly pertaining to the business
  • Business mergers and acquisitions
  • Debt refinancing 

Because lenders take on some risk when funding SBA loans, having a plan for the capital is critical to increasing your approval odds.

Not Have Outstanding Debts with the US Government

Those who are delinquent or have outstanding debts with the US government are not eligible. Additionally, businesses in which owners with greater than 20% of equity in the business and are incarcerated, on parole, on probation, or are a defendant in a criminal hearing will not be eligible.  

Personal Guarantee

Most SBA 7(a) loans will require any business owner with greater than 20% equity in the business to sign a personal guarantee. 

This is a legal agreement that holds business owners personally responsible for the debts assumed through an SBA loan in the case that the business defaults on the loan. It allows the lender the ability to seize personal assets (including cash, automobiles, and other assets) to repay the debts of the business.

While this isn’t a strict requirement set by the SBA, most lenders will require it.

Not Be an Ineligible Business

Certain businesses are strictly prohibited from being granted an SBA loan. Some examples include, but are not limited to:

  • Real estate investment firms
  • Dealers or rare coins and stamps
  • Banks
  • Insurance companies
  • Pyramid sales plans
  • Gambling-related businesses
  • Any business involved in illegal activities

Business Documentation

When applying for an SBA loan of any kind, you will need to provide all applicable documentation for loan officers to review. This will include items like your business’s financial statements, licenses and certificates, personal and business tax returns, lease agreements, and more. You can view the complete list of documents needed here.

Additional Requirements

Because SBA loans are made by lenders and not the SBA themselves, there are some additional considerations that can increase your chances of approval.

Specifically, lenders will take a look at your business and personal credit, the duration of your business, your finances, and the assets the business possesses. 

While there is no minimum credit score guidance provided by the SBA, lenders want to see that you are a trusted borrower. Having a minimum credit score in the mid to high 600s will likely increase your approval odds.

Special Considerations

There are some other special considerations that the SBA takes for specific circumstances. For example, franchises are eligible in some cases, but not if the franchisor retains the power to control the operations of the business. You can view all special considerations set by the SBA here.

Closing Thoughts

SBA loans can be a fantastic option to obtain funding for your business. But with an approval rating of just under 50%, meeting the requirements is a necessity to have your application reviewed. 

By ensuring you meet the SBA loan requirements, you can better your chances of getting approved and securing the capital you need for your business.

Key Takeaways

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The main requirements to secure an SBA 7(a) loan include being a small business, operating in the United States, having reasonable equity in the business, using SBA financing as a secondary resource, and demonstrating a legitimate need for the financing.

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A detailed list of the requirements can be found on the SBA’s website here.

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