SBA 7(a) loans can be an incredibly effective tool for banks and credit unions to provide capital to small businesses. However, the regulations surrounding eligibility can be difficult to understand for even the most experienced commercial lender. The 7(a) program provides a deficiency guarantee of up to 90% (generally 75%), but many factors impact whether or not this guarantee is honored. SBA loan eligibility is one of most common reasons for the SBA to repair or deny a guarantee.
This blog discusses the 5 key requirements for SBA loan eligibility in order to determine eligibility as quickly as possible. The chart below summarizes some of the key terms within each of these 5 components of eligibility:
A lender should first evaluate the eligibility of the owners or guarantors. There are three main considerations:
- At least 51% of the ownership must be either US Citizens or Legal Permanent Residents.
- Guarantors are ineligible if responsible for a loss on prior government guaranteed debt.
- All guarantors must be of good character as defined by the SBA. This typically means that they have shown responsible credit history and no or minimal legal issues.
Borrower eligibility can be initially evaluated by looking at three main criteria:
- The borrower must be a for profit entity located in the United States.
- The business itself must be an active business by SBA standards. Generally, that means that the business must provide a service or product beyond being a landlord.
- The borrower must be considered “small” (< $5MM in after tax net profit and < $15MM of tangible net worth).
Most active (non-passive), legal businesses are eligible, however, it is important to review the ineligible industries which include:
- Lenders or Investment firms
- Businesses promoting specific religious beliefs
- Pyramid sales plans
- Businesses with more than 33% of revenue from gambling
- Private Clubs
For the detailed list of ineligible businesses, refer to the SBA’s website.
Structures can become more complicated quickly when dealing with holding companies or multiple legal entities. A good rule of thumb is any entity using funds (or obligated a note being refinanced) must be included as a borrower. Any owner of 20% or more of the borrower must be a guarantor. Each entity or guarantor added must also be reviewed for eligibility.
Use of Proceeds
The rules can differ for each use of proceeds. While there is some nuance in determining the eligibility of use of proceeds, there are several ineligible uses including buying less than 100% of a business and refinancing any shareholder debt. The SBA SOP does a good job of explaining the rules, but because of the length, it can be cumbersome to refer to for an initial review.
Examining eligibility as a 5-step process can help ensure you are able to make an efficient eligibility determination based on the available information. While these rules will allow a lender to quickly eliminate ineligible candidates, a deeper understanding of the SOP is important to ensure that all rules are followed.
About Windsor Advantage, LLC
Windsor Advantage is a lender service provider that provides a comprehensive outsourced SBA and USDA loan department to lenders nationwide. With more than 150 years of collective government guaranteed lending experience, cutting edge systems and rigid controls, Windsor Advantage is uniquely qualified to support its clients to develop and implement a thoughtful and profitable SBA 7(a) loan program.
Since 2010, Windsor has processed more than $1.5 billion in government guaranteed loans and currently services a portfolio of more than $1.2 billion in loans for more than 75 banks across the U.S. Windsor Advantage is based in Chicago, with offices in Indianapolis, and Charleston. For questions please contact (312) 248-8530.
About the Author: Will manages Windsor’s credit and structuring department. This includes interfacing with lenders and other referral sources to ensure eligibility and the most efficient structure for each transaction. Will has helped fund over $600 million in SBA loans. Prior to joining Windsor, Will was an analyst at Bank of America Merrill Lynch.