SBA Essentials FAQs
SBA ESSENTIALS
FAQ
How much money do I need to put down?
You may hear 10% down, but typically you can expect at least 15% down, factoring in all required fees. This percentage can go up, depending on the type of business and your creditworthiness.
What if I use the equity in my house for the necessary funds?
You can do this, but you will need to be qualified to pay that loan back outside of the new business’ profits or the new owner’s salary at that new business. This can be with real estate income or a spouse’s income.
Does the SBA require me to have life insurance?
Yes. You will need a plan that equals the amount of the loan and lasts the same term. Sometimes applicants don’t qualify for life insurance. At a minimum, the SBA wants you to have applied.
Are there any fees for an SBA loan?
Generally, 3-4% of the total amount borrowed will be paid in fees. These fees are not tax deductible on federal taxes. However, the interest paid on the SBA loan is. The fees will cover such costs as packaging fees, appraisal fees, business valuation, environmental reports, etc.
What are the interest rates on SBA loans?
You can expect to pay whatever the prime rate is at the time plus 2-2.75% on 7a loans and prime plus 1.5-2.0% for real estate SBA loans depending on the creditworthiness of the borrower.
Do I need to personally guarantee the loan?
Yes, regardless of how the business is set up (LLCs included) SBA requires all 20% or more owners (or minority owners that are key to the operation) to personally guarantee the loan.
Do I need to be a US citizen?
51% or more of ownership must belong to a US Citizen or Green Card holder (Permanent Resident Alien). Foreign investors (non-citizens) can be approved if they own 49% or less or have enough real estate collateral located within the United States to fully secure the loan.
Do I need to write a business plan?
Yes. Make sure to do your research and present revenue streams, historical earnings (for an existing company), and action plans for growth or unplanned deficiencies. Show the lender how your business will be structured, including performance projections, and referencing line items from the P&Ls or Balance Sheet.
What is a Debt Coverage Service Ratio (DSCR)?
For SBA loans over $350,000, the DSCR should be 1.20 or greater in the most recent tax return and interim period. The SBA calculates DSCR as Operating Cash Flow/Debt Service. This is calculated on a historical basis for existing businesses and projected for start-up businesses. Keep in mind, the calculation of DSCR can vary from bank to bank.
Can I purchase a franchise with an SBA loan?
The franchise must already be in the SBA Franchise Directory. If it is not, you can apply for it. Individual borrowers will only be approved once the franchise is on that list.
Are all SBA banks the same?
No, some are SBA-preferred lenders. This is an important detail since preferred lenders can do their own underwriting. Each bank can have different requirements or slightly different terms. Remember this as you apply and tailor your application to their process.
What are the lending limits and loan types?
SBA 7(a) Loan: $5 million
SBA 504 Loan: $20 million (only for owner-occupied real estate)
SBA Express Loan: $350,000
Is there anything that would disqualify me?
Criminal charges, currently on probation, pending legal proceedings, not meeting citizenship requirements, prior loss to government (i.e. default on prior SBA loan, student loan or FHA loan) or opening an ineligible business would be reasons for disqualification.
What else do I need to know?
Lenders review the 5 C’s of eligibility and consider your situation. They look at collateral, capital, character, capacity, and conditions of the loan terms and industry or legislative trends.
For more information, call CBA at 858-216-1637 to be connected to our Preferred Lenders.
One of our preferred lenders:
Mr. Kelley T. Cheney, MBA, MSF
Vice President, Small Business Lending