By Bruce Hurta
For a small business owner, it sounds like a good idea to use SBA government-guaranteed financing for their business. What’s not to like about lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans? In fact, the SBA Loan Program can finance a business acquisition, a partner buyout, a real estate purchase for new facilities, new construction, and business expansion. The SBA 7(a) Loan Program is available to small businesses for one or more loans up to $5 million.
Rules for SBA Borrowers
There are, however, businesses that are not eligible for SBA financing according to the rules of the U.S. Small Business Administration. For instance, the business must meet the SBA’s definition of a small business. In general, if it’s not a middle market or public company, the business is considered a small business according to SBA’s size standards. Another qualifier is that the business must be a “for profit” business. Nonprofit businesses are specifically excluded from obtaining SBA loans. The business must not solely promote one religion. This is a government loan program, so there must be a separation of church and state with this requirement. The SBA is also not interested in serving sexually-oriented businesses, so those establishments are not eligible for the SBA loan program either. Likewise, this is also the case for businesses involving gambling. They are not eligible. Finally, businesses which derive their income from speculating in real estate and other financial transactions are ineligible for SBA financing. There are several other special considerations when determining SBA loan eligibility, so the best procedure is to let an experienced SBA lender determine SBA loan eligibility for the applicant.
How Do You intend to Use Your Business Income?
You can see that certain small businesses are deemed ineligible merely by the way they derive the majority of their income. These businesses are ineligible because of their type of business. The other component of eligibility is derived from how the loan proceeds will be used. For instance, a small business that is normally an eligible type of business or industry may want to borrow funds to construct a new business facility. They plan to use half the square footage for their own business and they intend to rent the other half for additional income. Unfortunately, this would be an ineligible use of SBA loan proceeds because funds are being used to finance real estate investment (speculative) activity when renting out part of the space. An experienced SBA lender will tell the applicant that in this case, the SBA understands the need for additional building space for future expansion. They will allow up to 40% of the square footage to be dedicated to future expansion and rented to a third party in the interim. With a majority of the square footage being immediately used by the small business loan applicant, the loan request becomes eligible.
This article is written to help potential beneficiaries of the SBA 7(a) Government-Guaranteed Loan Program understand that eligibility will be the first hurdle their SBA loan officer must consider. After the eligibility is determined, the loan officer can accept the SBA loan application for underwriting and approval.
You can learn more about SBA lending and small business finance on Bruce’s blog at brucehurta.wordpress.com. For more information about SBA real estate loans for small businesses, contact Bruce Hurta, Business Lending Manager at Members Choice Credit Union at 281-384-2595 or by email at bhurta@mccu.com.
