All SBA loan borrowers want to know 1) will my loan request be approved and 2) what documents do I need to provide my SBA bank? We put together this quick guide to inform and better prepare you for the SBA loan application process. Note that our quick guide isn’t an exhaustive list of criteria or required documents but rather anecdotal based on our conversations with both SBA borrowers and lenders. Obviously, the best source of information is the SBA bank you select and the SBA itself.
Individual Credit Score (aka “FICO” score)
SBA banks are slightly different in terms of what FICO score they will accept and occasionally alter their minimums. However, we can make a blanket statement that scores in the 500s will not be approved for SBA loans; mid-600s or higher are current minimums; 700s plus are excellent credit scores.
All SBA banks will run a credit score on any owners who own 20% or more of the business. If one 50% owner has a credit score of 780 and the other a credit score of 580, the loan would not be approved since both are not in the mid-600s or higher.
Currently our lending partners are requiring minimum credit scores of 650 – 680.
Business Credit Score (FICO SBSS)
Most entrepreneurs have never heard of FICO Small Business Scoring Service (“SBSS”) or a “liquid business credit” score, but each business has one. SBA banks and the SBA itself will look at a company’s SBSS score to pre-screen the application. A business credit score is closely tied to one’s individual FICO score as SBSS draws data from both business and personal finances.
FICO SBSS scores range from 0 – 300. The SBA wants to see a minimum score of 140, whereas many SBA banks (including our SBA lending partners) want to see a minimum liquid business credit score of 150 – 160. For larger loans – $1M or greater – an SBA lender may not consider SBSS at all and instead focus more attention and due diligence efforts on the finances of the business. The credit agencies and some credit agency services will provide a borrower’s FICO SSBS score, usually for a fee between $50 – $100.
The SBSS score was created in 2012 and is relied upon to make quick decisions for SBA Express loans, which take much less time to process than non-Express loans. The SBA Express loan has traditionally been for loans up to $350,000, but recently Congress increased the Express loan maximum to $1,000,000 until December 31, 2020.
Debt Service Ratio – Business
After credit scores SBA bankers focus on a company’s ability to make its debt payments. Banks will want to see that a company is generating enough cash flow on a monthly basis to service the debt, i.e., make principal and interest payments (“debt service”) on all outstanding debt. Banks will want to see monthly cash flow divided by monthly debt service equal to one or higher. A debt service ratio of under one is unlikely to receive funding as it indicates the borrower is unable to pay back the loan and the interest. Ideally, banks want to see a debt service ratio of 1.10 – 1.25 or higher.
Debt Service Ratio – Business and Individual
SBA banks will also calculate a monthly debt service ratio that combines business and personal cash flows and debt payments of the owners. This ratio will also need to be one or higher.
SBA lenders are not required to take collateral for loans up to $25,000. For $25,000 – $350,000, the lender must follow its collateral policies for non-SBA-guaranteed commercial loans. At a minimum, the lender must take a first lien on assets financed with loan proceeds and the SBA bank must take a lien on all the applicant’s fixed assets including real estate. A lender is not required to take a lien against applicant’s real estate when the equity is less than 25% of the fair market value. The lender may limit the lien taken against real estate to the loan amount. In general, the higher the loan amount, the greater the collateral requirements. Owners will also be required to personally guarantee their SBA loan.
Recent personal or business bankruptcies are barriers to obtaining an SBA loan. Some banks will want to see no bankruptcies for three years while others will be wanting five years without bankruptcies.
Active lawsuits or open judgments
Since active lawsuits or open judgments against the business and/or its owners may have a material impact on the company’s ability to service its debts, bankers will want to understand any legal issues as part of the application process. One mistake some borrowers make is not disclosing these issues. Failure to disclose material information on a bank application will undoubtedly result in the loan request being denied.
Tax or other liens
Any tax or other liens filed on the business or your personal assets need to be disclosed. As with legal issues, the existence of tax liens may not disqualify a borrower so long as the liens can be paid off with the proceeds from the SBA loan. Banks do not like to make loans on assets where there is a lien as those liens are a higher priority to the bank’s claim to the assets in the event of a liquidation.
The SBA precludes certain types of businesses from participating in traditional SBA 7(a) loans including:
Non-profit business and religious institutions
Primarily engaged in lending
Passive rental income businesses
Life insurance company (life insurance agents, however, may be eligible).
Speculative businesses (such as a shopping center developer, oil wildcatting, R&D, bitcoin trading)
Every SBA bank is a little different in terms of their document requests, so the best source of what documents are needed is obviously the bank where you are applying. However, in general most banks will require some form of the following at a minimum:
1) Borrower Information Form
- SBA Form 1919 is required on all SBA loans.
2) Personal Financial Statement (for all 20%+ owners)
- Banks have their own personal financial statement form or may use SBA Form 413.
3) Individual Tax Returns – Last 2 or 3 years
- You may be asked for copies of actual returns and a tax transcript from the IRS that is requested via IRS Form 4506-T.
4) Bank Application Form
- Every SBA bank has its own unique application form
5) Business Tax Returns – Last 2 or 3 years
6) Business Financial Statements – Last 2 or 3 years plus interim year to date
7) Business Asset List
8) Business Debt Schedule
9) Business bank statements – Last 3 months
10) Acquisition documents (if buying a business) – Purchase Agreement or LOI
11) Use of Proceeds
12) Resumes/bios of owners
An interest rate for an SBA loan will be higher than your home mortgage or a traditional commercial loan. Why? Because an SBA loan is a higher risk for the bank. Here is a chart that shows the average interest rate for all SBA loans the past few years that have terms of at least 84 months and a minimum loan amount of $250,000 along with the statutory maximum rate an SBA bank can charge for a loan:
Since early 2019, interest rates on SBA loans have fallen, and the rate most borrowers will pay in today’s market for a $250,000+ SBA loan is between 5.5% – 7.5%. Obviously not as low as one’s home mortgage, but business loans are never as low as home loans given the risks involved (there is a direct correlation between risk and interest rate).