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Borrower Equity and the SBA 7(a) Loan: What You Need to Know
Do you need money for your small business, but haven’t been able to get the funds you need from conventional sources because you’re short on equity or collateral? An SBA 7(a) loan may be the answer to getting the cash injection you need to start or expand your business.
Do you need money for your small business, but haven’t been able to get the funds you need from conventional sources because you’re short on equity or collateral? An SBA 7(a) loan may be the answer to getting the cash injection you need to start or expand your business. Note, however, that SBA lenders still test you for creditworthiness -- which includes SBA borrower equity requirements. But with a little preparation, you’ll be one step closer to signing a loan agreement under this government-sponsored program.
The SBA 7(a) Loan Program Can Help When Others Have Said No
No one likes to hear the word “no” when they’re asking for something they really want. Even if you are prepared for the possibility that a lender may turn down your loan request, it still stings.
In that moment, it can make you feel the same as when you were a little kid and you’ve just been told you can’t play in somebody else’s sandbox. Why does the other kid get to make all the rules?
The good news is that we’ve moved beyond that stage and there’s room to play in the SBA 7(a) loan program sandbox. The SBA doesn’t lend money to business owners; instead, it gives the government’s guarantee to commercial loans, up to a set limit. With this guarantee in place, you may be able to access the funding you need.
There are still rules about how to qualify, though. Let’s dive in.
Creditworthiness Test for SBA Loans
When you apply for an SBA loan, the lender is going to consider your general creditworthiness to determine whether you qualify for the loan. Let’s see what the lender is looking for when considering an application.
Management Experience
You (and your business partners, if it applies) don’t need to have an MBA to show a lender you have the chops to run a flourishing business. You will, however, need to show a combination of management experience and a working knowledge of the business you want to or have started.
Ability to Repay Your SBA Loan
Do you have the means to repay the loan? The lender is going to want details about your cash flow. Can you afford to pay your suppliers, staff, your draw, other financial responsibilities, and the extra responsibility of the proposed loan?
You can show the lender that you can carry the loan payments by showing your sales records from previous months or years, as well as your projections.
SBA Borrower Equity Requirements
Lenders may be in the business of lending money, but they want to manage the amount of risk they take on in the process. Before you can get approved for an SBA 7(a) loan, you’ll need to meet the borrower equity requirements by showing the lender that you have invested a certain percentage of your own money in your venture.
SBA Loan Requirements for New and Existing Businesses
The expectations about how much you would need to put into your business vary, depending on whether you are looking to borrow funds for a startup or an established company.
If you are starting a new business or buying an existing one, the lender wants to see an investment of $1 (cash or business assets) for each $3 borrowed.
For an existing business, the lender wants to see a maximum of $4 of debt to $1 of net worth.
What is the minimum amount of borrower equity required for an SBA 7(a) loan?
For a new business or an existing business being purchased, the lender wants to see an investment of $1 (cash or business assets) for each $3 borrowed. For an existing business, the lender wants to see a maximum of $4 of debt to $1 of net worth.
For a more detailed look at specific loan terms and rates, see our SBA 7(a) loan fact sheet.
What are the advantages of having a higher borrower equity for an SBA 7(a) loan?
Having a higher borrower equity for an SBA 7(a) loan can be beneficial in several ways. First, it can help you qualify for a loan, as lenders may be more likely to approve your loan if you have invested a certain percentage of your own money in your venture. Second, it can help you get a lower interest rate, as lenders may be more likely to offer you a lower rate if you have a higher equity stake in the business. Finally, it can help you get a larger loan amount, as lenders may be more likely to offer you a larger loan if you have a higher equity stake in the business.
For more information, please see this guide from the Office of the Comptroller of the Currency.
What are the risks of having a lower borrower equity for an SBA 7(a) loan?
Having a lower borrower equity for an SBA 7(a) loan can increase the risk of default for the lender. This is because the lender is taking on more risk by providing a loan with less of the borrower's own money invested. The SBA requires that borrowers have at least 10% equity in their business, but lenders may require more. If the borrower has less than 10% equity, the lender may require additional collateral or a personal guarantee from the borrower. This means that if the borrower defaults on the loan, the lender can go after the borrower's personal assets to recoup the money.
What are the different types of collateral that can be used to secure an SBA 7(a) loan?
What are the different types of lenders that offer SBA 7(a) loans?
The SBA 7(a) loan is offered through traditional lending institutions, such as banks, credit unions, and other financial institutions. The SBA also works with non-traditional lenders, such as online lenders, to provide 7(a) loans. The SBA also works with Certified Development Companies (CDCs) to provide loans through the SBA 504 loan program.
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For a more detailed look at specific loan terms and rates, see our SBA 7(a) loan fact sheet.