US Legal Sector: SME Loan Requirements
Small and medium-sized enterprises (SMEs) are the heart of the US economy, making up 99% of the nation’s business population. A business loan can fix cash flow problems, leverage growth opportunities and increase a business’s value – 3 vital goals for SMEs. Funds available to these businesses in the form of SME loans take many forms; including Small Business Association (SBA) 7(a) small business loans; working capital loans; business term loans; business factoring loans; microloans and merchant cash advance loans. The requirements of each of these loan types varies on a case-by-case basis.
The SBA’s size standards determine whether a business qualifies as small or not for the sake of the loan. These size standards define the largest size a business can compete for contracts reserved or set for small businesses. Size standards vary by industries, and are generally based on the number of employees or the amount of annual receipts the business has.
The SBA uses several terms to help ensure a business is correctly classified as small:
- Affiliates – employees or receipts of all affiliates must be declared; affiliation with another business is based on the power to control, regardless of whether it was exercised or not. Power to control is said to exist when an external party has 50% or more ownership, but can also found with less than this by contractual arrangement or when a large share is owned by one party compared to the others
- Annual receipts – the gross income of a business as found on its IRS tax return forms. The average of the business’s receipts over the latest three fiscal years (five for the Business Loan and Disaster Loan Programs) to determine the average annual receipts
- Employee calculation – this is a figure measuring the average number of employees for each period of pay over the business’s latest 12 calendar months
Basic Requirements Beyond Size
Qualifying as small is one of the preliminary requirements a business must meet before they are able to compete for SME loans. If a business meets these numerical standards, it must also:
- Be a for-profit business
- Be owned and operated independently
- Not be nationally dominant in its industry
- Be located and operate in the US or its territories
- Be registered with the federal government’s System for Award Management (SAM)
SBA 7(a) Small Business Loans
An SBA 7(a) small business loan is guaranteed by the Small Business Administration; there are several kinds. The Standard 7(a) is a loan up to a maximum amount of $5 million. The lenders and borrowers can negotiate the interest rate, though it may not exceed the SBA maximum. Eligibility is decided by the SBA or a qualified lender that the SBA has delegated authority to make eligibility decisions without SBA review.
A 7(a) small loan is a loan up to a maximum amount of $350,000. The interest rate is negotiable between lenders and borrowers, but cannot exceed the SBA maximum. Once again eligibility is determined by the SBA or a qualified lender they have granted delegated authority to.
The requirements for applying for an SBA 7(a) small business loan are as follows:
- Operate for-profit (nonprofits are ineligible for these loans)
- Be a small business, as defined by the SBA
- Do business within the US or its territories
- Have a decent quantity of invested equity
- Utilize alternative financial resources (e.g. personal assets, before seeking financial assistance through the SBA)
- Demonstrate a need for the loan
- Use the lent funds judiciously (i.e. for sound business ventures)
- Not be in default on previous loans owed to the US government
Working Capital Loans
Working Capital Loans are a type of business loan extended through a bank that involve a revolving credit line. The funds can be provided to a business for almost any business venture and the borrower only needs to pay interest on the money used, not the total figure borrowed.
Business Term Loans
These are the quintessential type of loan – a business will borrow money, usually from a bank, and the money is handed over as one lump sum to be repaid in full over a set period of time in intervals.