The SBA loan program was designed to encourage entrepreneurs to start and expand new businesses by providing loans partially backed by the government in order to provide extra security for lenders. The idea behind the program is to lower the risk of lending to small businesses.
If you’re considering purchasing an online business, an SBA loan may be an option for you to secure at least a portion of the funds that you’ll need; however, it can be difficult to qualify for a loan even with SBA backing when you’re purchasing an Internet-based company. Read on to learn more about the qualifications for SBA loans to see whether or not this option is ideal for your needs.
Qualifications and Rules
The SBA program has very strict requirements regarding who can and cannot apply for a loan through the program. To qualify you must:
- Be operating a for-profit business. Nonprofit companies are not eligible for SBA loans.
- Have an office and a business presence in the U.S. SBA loans cannot be used to fund companies that will be based or that will operate only overseas. If a company does business overseas, it must prove that it makes a significant contribution to the U.S. economy to qualify. In other words, if your business is based in your home in the U.S., but you employ people who live abroad, source your merchandise from abroad and sell primarily to those living abroad, you would likely not qualify for an SBA loan.
- Meet SBA size standards. SBA loans are reserved for small businesses. The administration has put together a list of size standards for every industry. Depending on your industry, the size will be determined either by your sales volume or the number of employees that work for the company. To find out what the size standard for your industry is, you’ll need to know the North American Industry Classification System (NAICS) code for your line of business. Don’t be discouraged by this requirement. “Small” doesn’t necessarily mean only a few employees. In many industries, the maximum number employees allowable is 500 to 1,000, and many industries have maximum dollar amounts in the millions.
- Be an eligible business. The SBA will not lend to certain types of businesses regardless of their size. Some of the ineligible businesses include those in real estate investing, dealers in rare coins and stamps, gambling businesses and pyramid sales companies. Any company that engages in activities or works in an industry that is illegal where it is based is also ineligible for an SBA loan.
- Have a plan to use the funds for an eligible purpose. The SBA restricts what their funds can be used for. Allowable lending reasons include long and short-term working capital, revolving funds, purchase of real estate or equipment, construction, establishing a new company and refinancing existing debt.
- Have no other access to funds. If you could qualify for a bank loan on your own or based on the strength of your company, you cannot qualify for an SBA loan. The SBA will take a close look at both your own financial information and the information about the company that you are choosing to purchase to make a determination as to whether or not you would have the ability to obtain funds without the SBA guaranteeing your loan.
- Show evidence of an ability to repay the loan. The SBA will not sign off on a loan that they do not believe you will be able to repay. They will look for evidence of your ability to repay the loan in the company’s sales history and any other income that you may have.
- Be of “good character.” The SBA will have you complete a Statement of Personal History. By signing the form, you are agreeing to let the SBA investigate you. If you have a history of arrests or convictions, this may hinder your ability to secure a loan.
- Show evidence of management experience. You will need to prove to the SBA that you have the experience and skills necessary to successfully operate the business that you are purchasing. This will involve explaining any relevant experience to the industry or niche or in business management in general.
- Have an effective, complete and sound business plan. To qualify for an SBA business loan, you will need to have a traditional business plan in place.
- Be willing to personally guarantee the loan. Any person who owns at least 20 percent of the company will need to sign the loan as a Guarantor.
Whether or not you qualify for an SBA loan, an online business broker can help you find the financing that you need to purchase an Internet business. He or she can discuss all of the financing options, including SBA loans and owner financing, with you to help you make the best decision concerning how to get the funds to buy your own company.