One questions that many small business owners often ask is whether it is possible to get an SBA loan with bad credit. For the most part, it is extremely difficult for a small business owner with past poor credit history to be approved for such a loan. Let’s explore SBA loan programs, their loan approval qualifications, credit requirements, collateral requirements, and the most frequent issues facing a business owner with bad credit who might consider a SBA 7(a).
What is The Small Business Administration (SBA)?
The Small Business Administration (SBA) is a “federal agency that was created to assist small businesses and protect the interests of small business concerns in order to preserve free competitive enterprise and strengthen the overall economy”. In summary the SBA’s mission is to help businesses start, build, and grow in order to stimulate the economy by creating jobs.
The SBA’s authority is dictated by the Small Business Act of 1953. One of the provisions of this Act, empowers the SBA to deliver and guarantee business loans made by traditional lenders to qualified small business. Additionally, the SBA provides lending assistance benefits to borrowers by making funds available and assisting with long-term financing. Under the SBA 7(a) loan program, borrowers can be eligible for up to $5 million in SBA-backed financing.
What is the Most Popular SBA Loan for those with Bad Credit?
The Small Business Administration SBA 7(a) Loan is the most popular loan program option available to borrows with bad credit history. Under the 7(a) Loan Program, the SBA will guarantee lenders up to 85% for loans up to $150,000 and up to 75% for loans exceeding that amount up to $5,000,000. SBA will collect a guaranty fee from the lender which is used to reimburse lenders for borrowers who may default on repayment.
Through SBA’s 7(a) financing can be guaranteed for a variety of business purposes, such as working capital, inventory, machinery and equipment, property improvements, the purchase of land and buildings, as well as debt refinancing.
Loan terms can range for up to 10 years for working capital, or equipment. Real estate and other fixed assets can hold terms of over 30 years. It is also important to note that the SBA requires all lenders to secure collateral including personal assets if the business doesn’t have assets to secure the loan. In short, the SBA makes the lender verify that the borrower has equity, and a vested interest for the business to succeed and pay them back.
What are the Eligibility Requirements for a SBA Loan Borrower?
To qualify for a SBA loan with bad credit the borrower must first show good character, credit, management, and ability to repay, and must be an eligible type of business. In general, the business must meet the following criteria to be eligible for a SBA 7(a) business loan:
1) Attempt to Use Alternative Financial Sources Before Seeking a SBA Loan
All small business owner who wish to apply for a SBA 7(a) Loan must first prove they tried to acquire funds first from alternative lending sources. This includes applications to private lenders for merchant cash advances, business lines of credit, and/or ACH loan programs, as well as P2P lending or a loan from family or friends.
2) Qualify as a “Small Business” under SBA Size Requirements
One of the requirements listed on the SBA Eligibility Questionnaire For Standard Guaranty is the borrower must be a “small business concern.” The SBA considers a business to be of “small business concern” if it has a net profit operating income (after-taxes and averaged over a two-year period) of less than $5 million and a net worth of less than $15 million.
3) Agree to a Personal Credit Check & Credit Analysis
A strong personal and business credit score is another qualification for a SBA loan with bad credit. The minimum FICO credit score that is accepted for an applicant is typically 680 or above which makes getting this type of loan nearly impossible for those with bad credit.
In Addition, in order to qualify for an SBA loan, a borrower must show that they are creditworthy, contribute a small portion of the equity, and be able to prove that there is a reasonable assurance of that they can repay the business loan. To both the bank and the SBA, the determining factor to be base repayment assurance is the the cash flow of the business, not the value of collateral secured. The lender is required to adequately analyze the borrower’s creditworthiness which includes character, reputation, and credit history; experience and depth of management skills of his business type; strength and health of business; past earnings and including profit and loss, and projected cash flow for the loan payback period.
4) Agree to a Business Credit Check & Credit Analysis
If you’re already in business, you might need to provide a business credit score in your loan application. There are 3 business credit reporting agencies: D&B, Experian, and Equifax. Just as you should with a personal credit report, make sure that all the information you get back on your business credit report is completely accurate. Don’t panic if you get a small number on your business’s credit report—the scale is different than your personal credit report scale! Business credit scores range from 1 – 100, and anything 80 or above is considered good.
5) Prove How The Loan Will be Used and Why the Money Is Needed
Small business borrowers may use SBA Loan proceeds for a variety of sound business purposes, including starting a new business or assisting in the operating, acquisition, or expansion of an existing business. The specific uses that the borrower may use an SBA 7(a) loan for include: Acquire land and/or purchase, construct or renovate buildings; Improve a site (e.g. grading, streets, parking, landscaping), up to 5% for community improvements; Acquire and install fixed assets such a capital equipment or heavy machinery; Purchase inventory, business supplies, and/or raw materials; Working capital; Refinancing; Business refinancing and; Business Acquisition.
What Is Required to Complete SBA Loan Application?
Here is a list of the requirements that must be submitted with a SBA 7(a) loan application:
1) Business Plan
When applying for a SBA loan with bad credit, your business plan will give you a chance to show your lender that investing in your business’s future is a good decisions even if you’ve had a few credit blemishes in your past. The business plan is a requirement if you are planning to apply for an SBA 7(a) loan or other commercial loans from traditional lenders. In short, your business plan should provide the lenders with detailed information on all aspects of the business’s past and current operations and provide projections for the future. The rule of thumb when writing a concise and information filled business plan is to use what is called the “Keyword” approach to include relevant information about the following: Who; What; Where; When; Why; How; and How Much.
Additional information on what your business plan should include for submission during the SBA loan application process can be found here.
2) Financial Statements
The Small Business Administration will require the submission of a number of financial documents if you are applying for a SBA Loan with Bad Credit.
When applying for your SBA loan, you should be prepared to submit the following:
- Balance Sheets: A balance sheet will provide the lender a peek into the financial health of the business, as well as give insight into how your business operates. The balance sheet should include how much money the business has, what the business may owe, and show lenders how you manage assets and liabilities. Your assets are anything of value that is owed or due to the business, calculated by the sum of the business’s cash on-hand, accounts receivables, inventory, and fixed assets including land, buildings, equipment, etc.). The liabilities include anything the business owes such as accounts payable, accrued expenses, and long-term debt.
- Profit & Loss Statements: A profit & loss statement is commonly also call a statement of income. It shows the lender the business’s revenues and expenses. A profit and loss statement statement shows where the business’s money comes from and goes to. The lender is looking to see that the business cash flow is steady and will be able to continue to make loan payments if revenue falls short on some months, or if any unexpected costs come up.
- Business Debt Schedule: A business debt schedule is simply a list debts the business currently owes. A business debt schedule is intended to keep the business owner’s finances organized and help monitor financial health.
- Collateral: Collateral valuation is a requirement for most SBA loan. The business owner should be prepared to document any collateral that they are willing to offer if you default on your loan. This may include real estate, and other hard business assets such as equipment or inventory. If you are applying for a SBA loan with bad credit, the lender will most likely consider you a high risk borrower and they’ll probably ask for a substantial amount of collateral to secure your loan.
- Insurance: The SBA will also require that any collateral that the business owner puts up be properly insured such as hazard insurance. Life insurance is actually considered collateral to the SBA as well. Since in most cases of SBA 7(a) loans are issued to a single borrower, the lender will require proof of an adequate life insurance policy. In addition to the most common insurance requirements listed above, the lender may also require other insurance such as liability insurance, disability insurance, and worker’s compensation insurance.
- Legal Documents: The SBA will most likely require additional legal documents, but this will vary from loan to loan. Some of the most common requested legal documents including business licenses, articles of incorporation, contracts with third parties (like clients or suppliers), franchise agreements, and/or leases for commercial real estate or business equipment. In nearly all SBA loan requirements, the business owner will need to also provide personal and business income tax returns.
Top Reasons Of Why You Can’t Get a SBA Loan with Bad Credit
1) Bad Credit History
The SBA doesn’t have a minimum personal credit requirement, but its lenders still expect good to excellent credit which means your FICO score must be above 680. Good credit scores generally shows that the business owner has an established history of paying his or her bills on time and the likely hood that he will be able to repay the business loan requested. Bad credit history is the #1 reason that many small business owners can’t get a SBA loan with bad credit.
2) No Collateral to Put Down to Secure the Loan
Do not expect to receive 100% financing for SBA 7(a) loans. Consider it this way: If you were purchasing a new vehicle, you will most likely have to put down a cash deposit. SBA 7(a) loans also work the under the same principle. The bank provides the majority of financing for your loan, but you must demonstrate that you are vested into this transaction by putting up some cash and/or business or personal assets proving that both you and the bank are in it together. Some small business owners also find that they have personal assets that can be used to borrow against, but they don’t want to secure their loan using them. According to the SBA, a loan request will be denied if the borrower’s personal and business resources are found to be excessive, the business will have to use those resources in lieu of part or all of the requested loan proceeds.
3) SBA Sees Your “Character” As Bad
Your personal and business finances are not the only items being scrutinized by traditional bank lenders if you are applying for SBA loan with bad credit. In order to be eligible for an SBA loan, you will be required to prove that you and your business show “good character”. The SBA will ask you to provide a Statement of Personal History which includes disclosing all criminal background history including current and past criminal proceedings, felony arrests and convictions.
You may review the Statement of Personal History document needed here.
4) Failure to Provide Adequate Business Plan to Prove How Loan Will Be Used
As stated earlier, the SBA will require you to provide a detailed business plan including how you will use these funds requested from the loan. Many small business owners will find this part of the application process to be extremely time consuming and cumbersome. The reason for this is because they either don’t have the experience and knowledge to create these documents or they lack the time necessary to put forth into the creation of these complex documents. This is also one of the top reasons that small business owners will turn to alternative lenders over traditional lending institutions. Generally, most private funding sources such as an alternative lender are most concerned about the health of the business sales which is how they determine your ability to pay the funding back. The majority of alternative lenders do not require a business plan or proof of how you will allocate the financing they provide, so long as the business owner declares that the funding is only being used for business purposes only.
The Final Answer to Can I Get a SBA Loan with Bad Credit
To be direct, the answer to the question of “Can I get a SBA Loan with Bad Credit” is most likely “No.” Based on the requirements that are needed for eligibility, and approval, most banks will not provide financing to small business owners through the SBA 7(a) Loan or any other traditional loan program if you have past bad credit history and cannot meet all of the other strict requirements.