SBA Loans didn’t start with COVID – a look at their history
Many business owners first heard about the Small Business Administration (SBA) during COVID-19 when programs like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) provided emergency relief. However, SBA loans have been around for decades.
The SBA was founded in 1953 with a clear goal: help small businesses access financing that traditional banks would not provide.
Traditional banks were often hesitant to lend to small businesses due to:
- High risk and lack of strong credit history
- Insufficient collateral to secure a loan
- Short operating history,
- making it hard to assess long-term stability
To fix this, the SBA does not lend money directly. Instead, it partners with banks and guarantees a portion of the loan. This reduces the lender’s risk, making it easier for businesses to get approved.
Since its inception, SBA-backed loans have helped millions of businesses grow through:
- Expanding operations
- Buying inventory
- Purchasing real estate
- Acquiring other businesses
- Stabilizing cash flow
Even today, SBA loans remain one of the most powerful funding tools available for small businesses.
Why does the SBA offer these loans
The SBA exists to fuel economic growth. Without it, many small businesses would struggle to secure the funding they need.
An SBA loan benefits all parties involved:
- For business owners, SBA loans offer longer repayment terms, lower down payments, and better interest rates than conventional loans.
- For lenders, the SBA reduces risk by guaranteeing up to 85 percent of the loan amount.
- For the economy, more businesses get funded, creating jobs and driving growth.
However, SBA loans are not an automatic approval. Business owners must still qualify based on cash flow, creditworthiness, and financial strength.
What makes SBA loans so attractive
SBA-backed loans have several key advantages over conventional bank loans:
- Lower interest rates due to the SBA guarantee
- Longer repayment terms, up to 25 years for real estate and 10 years for working capital or business acquisitions
- Higher approval odds since banks take on less risk
- The possibility of 100 percent financing for owner-occupied real estate purchases and business acquisitions
The two most popular SBA loan programs
While the SBA offers multiple financing options, two programs dominate the market.
SBA 7(a) Loan – the most flexible option
Maximum Loan Amount: 5 million
Best for:
- Business acquisitions
- Partner buyouts
- Working capital
- Refinancing debt
- Purchasing real estate or equipment
Repayment Terms:
- Up to 10 years for working capital, equipment, or business acquisitions
- Up to 25 years for real estate purchases
SBA Guarantee:
- 85 percent for loans under 150,000
- 75 percent for loans over 150,000
100 percent financing and more is available for owner-occupied real estate purchases, sometimes including construction and working capital.
SBA 504 loan – 90 percent financing for real estate and equipment
Maximum Loan Amount: 5.5 million for the SBA portion, but deals can exceed 12 million
Best for:
- Purchasing land, buildings, or large equipment
- Expanding or improving commercial property
Repayment Terms:
- Up to 25 years for real estate
- Up to 10 years for equipment
Loan Structure:
- 50 percent from a bank
- 40 percent from an SBA-backed Certified Development Company (CDC)
- 10 percent from the borrower
(We will cover SBA 504 loans and other owners’ occupied options in more detail in a separate article.)
How SBA 7(a) loans work and what banks require
Typical documents required for an SBA 7(a) loan application
Banks will typically require the following documents when applying for an SBA loan:
- Personal and business tax returns – Last three years (both personal and business)
- Year-To-Date (Ytd) Profit & Loss (P&L) statement and balance sheet
- Debt schedule – A breakdown of all outstanding business and personal loans
- Personal Financial Statement (PFS) – Detailing all personal assets and liabilities
- Pay stubs – For business owners who receive a salary
- Employer Identification Number (EIN) Confirmation Letter
- Certificate of Incorporation or Articles of Organization (for LLCs)
- Bylaws or Operating Agreement – Some banks will request this to confirm ownership structure
- Business license – If applicable to the business
- General Liability Insurance – Required, with the lender added as a certificate holder
- Business Personal Property (BPP) insurance – Required for businesses with inventory or equipment, also listing the lender as a certificate holder
- Workers’ compensation insurance – Required for businesses with employees
- Affiliate business documentation – If the borrower owns any additional businesses, some lenders will require all the above documents for those entities as well and may require the affiliate business as a corporate guarantor
Business acquisitions and partner buyouts
If you are buying a business or buying out a partner, SBA 7(a) loans are one of the best ways to finance the deal.
- Banks fund up to 90 percent of the total acquisition cost
- Seller financing can lower out-of-pocket expenses
- Cash flow must support the loan, typically requiring a debt service coverage ratio of 1.15 or higher
- Some lenders offer 100 percent financing for partner buyouts
How banks approve SBA loans: SBSS scores, collateral, and cash flow
SBSS Score (Small Business Scoring Service)
For loans under 500,000, banks always check the SBSS score.
- The SBA minimum is 155
- Some banks require 185 or higher because they have seen lower default rates at that level
Collateral Rules and Real Estate Requirements
- SBA rules require that loans of 500,000 or more must take available real estate as collateral
- Some banks require collateral at 250,000 or even lower to reduce risk
How banks calculate SBA loan eligibility
Lenders evaluate loans based on cash flow, and each bank has its own criteria:
- Global Cash Flow Analysis – The bank includes all business and personal debt, including investment properties and other loans
- Standalone Cash Flow Analysis – The bank only looks at the business applying for the loan and ensures it can cover the new debt
- 15 Percent Profit Rule – Some banks approve loans if the business has at least 15 percent of the requested loan amount in annual profit
Success story: 500,000 SBA loan approved with no collateral
One of my clients secured a 500,000 SBA loan despite:
- Only 75,000 in annual profit
- No real estate pledged as collateral, even though it was available
- Over 2 million in outstanding loans
The key factors were a strong SBSS score of 185 and a lender willing to take the risk.
Avoiding the common SBA 4363 error
One of the biggest challenges I’ve seen with SBA loans is when a file gets fully approved by a bank, but then it gets stuck at the SBA level due to a 4363 error. This can be incredibly frustrating, especially after all the time and effort spent gathering paperwork, going through underwriting, and getting that initial approval.
This issue has become much more common in recent years because of the SBA’s compliance review process related to COVID-era EIDL (Economic Injury Disaster Loans) and PPP (Paycheck Protection Program) loans.
Why is the SBA flagging loans with 4363 errors?
During COVID-19, the SBA distributed billions of dollars in relief loans through the EIDL and PPP programs. At the time, the application process was quick and, unfortunately, prone to errors and fraud. Now, the SBA has hired a compliance team to review every single loan that went out and track every application to match the numbers entered with actual tax returns.
This means that even though a bank approved your SBA loan, the SBA itself must still issue the final guarantee before the funds are disbursed. Here’s where issues arise—if the SBA detects a discrepancy related to an EIDL or PPP loan, they will pause the loan approval and not provide the guarantee until the issue is cleared.
How does this affect an SBA loan?
I’ve seen this happen over and over again. A client goes through the entire SBA loan process, gets approved by the bank, and then suddenly receives an email from the SBA requesting 2019 tax return transcripts.
At this point, the SBA is doing a full review to see if the financials match the numbers that were originally submitted in an EIDL or PPP loan application.
If the numbers don’t match, or if there were delays or inconsistencies in past tax filings, the SBA may refuse to guarantee the loan until the borrower provides additional documentation or clears up the issue.
Common reasons I’ve seen for 4363 errors
- The numbers on the original EIDL or PPP application don’t match tax returns.
- A lot of businesses miscalculated revenue or overstated numbers when applying for EIDL in 2020, sometimes due to confusion over what “gross receipts” actually meant.
- Now, when applying for an SBA 7(a) loan, the SBA cross-checks 2019 tax returns against the EIDL application to see if everything lines up.
- Late-filed 2019 tax returns.
- Many businesses filed their 2019 tax returns late, especially after COVID hit.
- The SBA compliance team is suspicious of any late 2019 tax filings, as they suspect some borrowers may have adjusted financials retroactively to qualify for larger EIDL loans.
- Missed or late EIDL loan payments.
- If a business missed EIDL payments, the SBA may see this as a red flag and delay approving a new loan.
- Denied EIDL loan increases.
- If a business applied for an EIDL increase and was denied, the SBA will review why before approving new financing.
- Revenue discrepancies between 2019 tax returns and SBA 7(a) loan applications.
- If a business reports significantly different revenue figures on EIDL, PPP, and SBA 7(a) applications, the SBA investigates before issuing a loan guarantee.
How to avoid SBA 4363 errors – here’s what I recommend
After seeing this issue come up repeatedly, here are some key tips to avoid delays and make sure your SBA loan doesn’t get stuck at the final approval stage:
- Make sure your 2019 and 2020 tax returns match what’s on your SBA loan application. If there are discrepancies, address them before applying.
- If you’ve ever applied for an EIDL loan increase and got denied, expect additional scrutiny.
- If flagged, be prepared to provide:
- 2019 tax return transcripts
- 2018 and 2019 bank statements
- EIDL and PPP application records for verification
- Work with a broker and a lender that understands SBA compliance. Some banks are better equipped to navigate these issues and push loans through despite minor discrepancies.
I’ve seen many business owners spend months working on an SBA loan, only to find out at the last minute that the SBA won’t approve it because of a 4363 error.
A good broker can help identify potential SBA red flags before you even start the process.
- If you previously took out an EIDL loan and had any issues with payments, tax filings, or application discrepancies, a broker can help determine if there’s a risk of an error before you submit your application.
- If a potential issue is found, a broker can guide you on how to prepare documentation in advance so it doesn’t slow things down.
A little preparation goes a long way in avoiding unnecessary delays and getting your SBA loan approved without complications.
Why work with a broker for SBA loans
Every bank has different underwriting rules. A broker can:
- Match you with the right lender based on your financials
- Ensure documents are correctly prepared to avoid SBA delays
- Navigate SBSS scores, collateral rules, and cash flow analysis
- Speed up approvals, as big deals can close in as little as four weeks
Final
SBA 7(a) loans are one of the best funding options available, but knowing which banks fit your profile is key. By working with the right lender, preparing strong financials, and understanding how banks approve loans, you can secure the funding needed to grow your business.
Do you need help choosing the right business loan or SBA loan for your business? Or have any questions regarding this post? Feel free to reach out to me
Moshe Mutzen – Capitalize
Email: [email protected]
WhatsApp link: https://wa.link/vwp7i3
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