SBA Eligibility

The vast majority of American businesses are eligible for SBA loans. The rules on eligibility are found in a government publication known as the Lender and Development Company Loan Programs.

This 380 page rule book has a very complex outline and the legalese can be daunting. So we have put together below a simple outline of some of the most pertinent rules. However, the actual government regulations are available for you to read on line as a PDF file: SOP 50.10

These rules are generally very logical and practical. The SBA designed them to protect our taxpayer dollars from misuse and to make sure the funds go to businesses that need the money. Sometimes the regulations are complex and subject to differing interpretations. Many rules have exceptions, which are not always commented on below. If you are not certain of your eligibility or believe you are ineligible after reading this simple summary, give us a call.

General Rules

SBA real estate loans can only be used to finance properties occupied by an eligible business.
SBA loans must always be personally guaranteed. Those who own 20% or more of the property or 20% or more of the business must guarantee. Lesser owners may also be required to guarantee.
The eligible tenant must always guarantee the loan.
Under certain circumstances, other businesses owned by the owners must also guarantee the loan.
The property owners (borrowers) do not have to be owners of the business.
The eligible business must master lease the entire building but may sublease to other tenants.
The lease term of the eligible business, including options to extend, must at least equal the length of the loan.
Loan proceeds can only be used to improve (i.e. do tenant improvements) to a space occupied by the eligible business. Improvements to a space being leased to another company must be paid for by the owner out of pocket.

You can rarely use an SBA loan to refinance. The one common exception happens when the SBA replaces a short term loan done to expedite a quick closing deadline, such as a seller carry back note or a bank “bridge” loan. The only other time you should probably consider it is if the debt being refinanced has a balloon due within twelve months. Cash out refinancing can never be done.

To Be Eligible, a Business …

Must occupy 51% of the building (If you use loan funds for construction, the percentage is higher)
Must meet the occupancy requirement within a year of the close of escrow
Cannot be a non-profit (some exceptions)
Cannot be a passive business (not allowed: parking lot businesses, apartment ownership, long stay mobile home parks, most executive suites, etc.)
Must be “small” by SBA definition (see below)
Must be an American company (e.g. incorporated in America) and must do business primarily in America. Businesses owned by foreign nationals or foreign entities must be guaranteed by an owner or manager that has citizenship or Legal Permanent Resident status.
Cannot be a lender
Cannot sell through multi-level marketing (the sales approach used by Amway).
Cannot restrict patronage (e.g. no women-only gyms)
Cannot promote religion
Cannot be in speculative endeavors (e.g. commodity futures, spec home building)

To Be Eligible, the Individual Borrowers …

Must have a down payment, usually 10% of the total cost.
Cannot have excessive liquid resources (generally, after putting in the down payment cannot have more liquid assets than the purchase plus tenant improvements)
Must pass a review of any criminal background
Cannot have defaulted on any government backed loan (including government guaranteed student loans)
Cannot own businesses that are too large in the aggregate (see below)
Cannot exceed the maximum limit on SBA dollars borrowed ($2,000,000 except for manufacturing businesses which can borrow up to $4,000,000)
Must be a US citizen or have documented Permanent Legal Resident status.

Size Standards

To qualify for a SBA loan, a business must be “small.” The government doesn’t want to help a business gain an unfair competitive advantage. They also don’t want to help businesses large enough to help themselves. So the SBA has set up a way to determine if a business fits under the maximum “size standard.” To make sure your business is "small," click on this link: SBA size standards.

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