LOANOLOGY
QUALIFIFYING OBSTACLES
Securing an SBA loan for your small business or franchise can be challenging if you face financial or personal hurdles like prior bankruptcy, tax liens, criminal records, or credit issues. While these obstacles don’t automatically disqualify you, they require careful navigation to meet lender and SBA requirements. Below, we outline common qualifying obstacles and how LoanBox helps you overcome them to achieve loan approval.
Prior Bankruptcy
A common misconception is that a prior bankruptcy makes an SBA loan unattainable. While challenging, approval is possible under certain conditions.
Key Considerations:
Recent Bankruptcy (Within 3 Years): Most lenders are reluctant to approve loans if you’ve declared bankruptcy within the last three years, as it signals recent financial distress.
Older Bankruptcy: Some lenders are more lenient if the bankruptcy is:
Over 10 years old for certain lenders.
Over 7 years old for others, depending on their risk tolerance.
Context Matters: Lenders evaluate the cause of the bankruptcy, such as personal circumstances (e.g., divorce, health issues) or a failed business venture in an unrelated industry. A detailed letter of explanation is required, outlining the circumstances, resolution, and your current financial stability.
SBA Requirements: Per SOP 50 10 8, lenders assess your financial recovery post-bankruptcy, requiring strong credit (SBSS 155+ for loans under $500,000 or FICO 650–680 for larger loans) and a debt service coverage ratio (DSCR) of 1.15+.
Liens & Judgments
Tax liens and judgments can complicate your SBA loan application, as they appear in public records searches conducted by lenders (e.g., via LexisNexis or DataVerify).
Paid or Released Liens/Judgments:
No significant barrier if fully paid or released, though they may remain on your credit report for 7 years (from release date) or 10 years (from filing date for unpaid liens).
Provide proof of payment to clear this hurdle.
Unpaid or Outstanding Liens/Judgments:
Tax Liens: SBA lenders will not approve loans with current federal or state tax liens, nor will they fund loans to pay off existing liens. However, the SBA permits loans to pay off a federal IRS tax lien settlement if you have an approved payment plan and have made timely payments for at least 6 months.
Judgments: Must be resolved or paid off before loan approval, as they indicate unresolved financial obligations.
Criminal Background
A criminal record doesn’t automatically disqualify you from an SBA loan, but it requires careful documentation and depends on the offense’s severity and recency.
SBA Policy (SOP 50 10 8): Lenders assess the character of borrowers and key individuals (e.g., owners with 20%+ equity, managers, or trustors), requiring good standing. Minor offenses from decades ago (e.g., 25+ years) typically pose no issue, and certain felonies may be overlooked if sufficiently aged.
Challenging Scenarios:
Recent Felonies (Within 10 Years): Generally disqualify applicants due to perceived risk.
Multiple Misdemeanors (Within 5 Years): Raise red flags, especially if they show a pattern.
Recent DUIs (Two Within 2 Years): Often lead to denial.
Unsatisfied Court Conditions: Borrowers with ongoing sentencing, probation, parole, or unmet court requirements (e.g., sex offender registry) are ineligible.
Required Documentation: A detailed explanation letter must include:
Date(s) and location(s) of offense(s).
Specific charge(s) and conviction(s) (e.g., misdemeanor or felony).
Disposition, including sentencing and court conditions.
SBA vs. Conventional: SBA loans are more flexible than conventional loans for borrowers with criminal records, provided the offenses are old and resolved.
Character and Background Issues
The SBA considers character one of the five C’s of credit eligibility, encompassing credit history, personal background, and management ability.
SBA Character Requirements (SOP 50 10 8):
Applies to the borrower and Subject Individuals (e.g., general partners, officers, directors, managing LLC members, owners with 20%+ equity, trustors, or day-to-day managers).
Prohibits loans to businesses with associates who are:
Incarcerated, on probation, or on parole (including deferred prosecution, conditional discharge, or sex offender registry).
Subject to ongoing criminal charges (e.g., indictment, arraignment).
Ownership Changes: Individuals with 20%+ ownership within six months before the loan application must meet character requirements, unless they’ve fully divested (relinquished all ownership and severed ties, including employment) before applying.
Other Issues: Prior bankruptcies, short sales, multiple liens, judgments, or weak management skills can raise character concerns, requiring detailed explanations and strong financials to offset risks.
Payment of Delinquent Taxes
SBA loan proceeds cannot be used to pay past-due federal, state, or local taxes held in trust (e.g., payroll or sales taxes).
Exception: Delinquent business income taxes can be paid if you have an approved IRS payment plan and are current on payments for at least 6 months.
Why It Matters: Demonstrating tax compliance strengthens your application and aligns with SBA’s eligibility criteria.
Prior Loss to Government:
Defined as a default on a federal loan or federally assisted financing (e.g., SBA, VA, or FHA loans) resulting in a loss to the government after write-off or close-out procedures.
Includes losses from any business you own, operate, or control, or from associates (e.g., guarantors or key owners).
Example: A previous SBA loan default that led to a $100,000 loss disqualifies you unless waived by the SBA for good cause.
Excludes losses from unpaid taxes or FDIC loan sales at a discount.
Delinquent Federal Debt:
Non-tax debts (e.g., student loans, federal contracts) owed to the government, unpaid within 90 days of the due date, render you ineligible.
Example: A $10,000 delinquent federal student loan bars you until resolved.
Waiver Process: Lenders can request an SBA waiver for prior loss or delinquent debt, but full repayment of the debt eliminates the need for a waiver.
Why It Matters: Resolving prior losses or debts is critical to maintain eligibility and avoid automatic disqualification.
Prior Loss to the Government or Delinquent Federal Debt
SBA loans are unavailable if you or your business have caused a prior loss to the federal government or owe delinquent federal debt, per SOP 50 10 8.
Improving Credit Score
A low credit score can hinder SBA loan approval, but targeted improvements can enhance your chances.
SBA Credit Requirements:
SBSS Score: 155+ for 7(a) and Express loans under $500,000.
FICO Score: 650–680 for loans over $500,000; 600+ for Microloans.
FICO Score Factors (300–850 Range):
Payment History (35%): Timely payments boost scores; late payments, bankruptcies, liens, or judgments hurt, with recent or large issues having greater impact.
Amounts Owed (30%): High credit utilization (e.g., over 30% of credit card limits) or large loan balances signal risk; reducing debt improves scores.
Length of Credit History (15%): Longer histories with good records enhance scores; newer accounts may lower the average age.
Types of Credit (10%): A mix of credit (e.g., credit cards, mortgages) in good standing helps; avoid opening unnecessary accounts.
New Credit (10%): Multiple recent inquiries or new accounts can lower scores, especially for short credit histories.
Improving Your Score:
Pay bills on time for 6–12 months.
Reduce credit card balances below 30% of limits.
Dispute errors with credit bureaus (TransUnion, Equifax, Experian).
Avoid new credit applications before applying for a loan.
Why It Matters: A strong credit score (SBSS 155+, FICO 650+) signals reliability, improving approval odds and potentially reducing collateral demands.