Recently, the SBA in a recent ruling published in the Federal Register discussed the nine lending criteria for assessing SBA 7(a) loans and 504 loans. We have ranked the SBA’s nine lending factors by our view of the most to least important based on interactions with dozens of bankers reviewing hundreds of SBA loan inquiries. Here they are along with our explanation of the factor in layman’s terms noted in parenthesis:
1. Ability to repay the loan with earnings from the business. (Cash flow must by 1.15x loan payments or greater)
2. Past earnings, projected cash flow, and future prospects. (Consistent, durable earnings are important)/
3. Sufficient invested equity to operate on a sound financial basis. (Borrowers, especially acquirors, need to put 10% – 20% into the deal. SBA lenders won’t finance 100% of an acquisition).
4. Character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its associates, and guarantors. (Credit score of 640+ with no bankruptcies).
5. Experience and depth of management. (Direct industry experience preferred. Lacking direct experience, relatable business experience).
6. Strength of the business. (Speculative businesses and startups – less than 3 years in business – are more challenging to finance).
7. Potential for long-term success. (Banker’s assessment of the industry. Some banks love an industry while others hate it).
8. Nature and value of collateral. (Collateral is a nice-to-have but not a must-have. Strong, durable cash flow is a must-have).
9. The effect any affiliates may have on the ultimate repayment ability of the applicant. (Least important and rarely mentioned. (Not an issue we see at SbaLenders.com).