A government program known as the Small Business Administration (SBA) is designed to encourage financial institutions to lend to small businesses that would otherwise be ineligible for funding. Many factors play a part in this, including insufficient business time, insufficient experience, insufficient personal liquidity, or insufficient credit history, among others.
The Small Business Administration incentivizes partner banks to make loans by guaranteeing 75% – 90% of the loan principal. Therefore, in case of default, the bank’s risk falls into the range of 10% – 25% of the outstanding principal loan balance at the moment of default.
The SBA Guaranteed Loan is a form of financing used by business owners and entrepreneurs typically to purchase owner-occupied real estate, acquire a business or franchise, purchase equipment, or obtain working capital to grow their business.
The business must first meet SBA eligibility requirements before applying for an SBA loan, which is different from a conventional l
oan. The tangible net worth test and net profit test are the two most important criteria. For a business to qualify for an SBA guaranteed loan, the company must have a tangible net worth of $15MM or a net profit of $5MM for the fiscal year preceding the application submission.