SBA Loans are Credit Based

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

With no end sight to the economic disruption of the COVID-19 pandemic, small business owners everywhere are continuing to adapt their planning to fit the coronavirus crisis. The most attractive option for small business financial managers looking to keep employees on payroll and make-up for temporarily lost revenue are the government’s three main coronavirus relief lending programs: the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) program, and the EIDL 10K advance.

With PPP loans and EIDL funding being rejuvenated by refreshed government allocations, small business owners who haven’t yet applied for these programs are scrambling to do so. The details of the loan programs are well known and written about, but lots of applicants are still fuzzy on the decision criteria for getting these loans. In this guide, we discuss the credit requirements and other decision criteria for each of the main government coronavirus small business loan programs.

The Biz2Credit team has put together a number of guides to help you get up to speed on the details of the PPP, EIDL, and EIDL 10K Advance programs.

Paycheck Protection Program Loan Decision Criteria

The PPP is a new government program rolled out by the CARES Act with the express purpose of supporting payroll and other regular business costs. Loans through the PPP are eligible for total loan forgiveness. The loan amounts are based on average payroll costs. PPP loan proceeds can be used for payroll costs (including benefits), mortgage interest payments, rent payments, and utility bills.

The main decision criteria for these loans are based on the characteristics of your business and your personal history rather than your credit history.

Eligibility Requirements

The PPP program has a number of requirements based on the type of business you run, your headcount, and your time in business.

  • Type of Business: PPP loans are available to any small business including nonprofits, veteran’s organizations, tribal business concerns, sole proprietors, independent contractors, and gig workers. PPP loans are explicitly unavailable to certain types of businesses, including those that engage primarily in “speculative activities that develop profits from fluctuations in price rather than through the normal course of trade” like hedge funds or private equity firms. In general, the government wants to direct loan funds to those businesses that truly need support.
  • Headcount: The “small business” aspect of the program refers to businesses that have less than 500 employees or those that otherwise meet the SBA’s size standards.
  • Time In Business: Your business must have been operational as of February 15, 2020.

Credit and Personal History Requirements

Nowhere in any of the fact sheets or FAQ documents released by the United States Treasury or the SBA is their discussion of credit requirements. Officially, there are no credit requirements for PPP loans and very few lenders are going through the trouble of checking credit for PPP loan applications.

The obvious question is, why? Every small business owner familiar with the loan application process is intimately familiar with the importance of your personal and your business’s credit history in relation to the ability to get business credit. The lack of credit requirement is a way for the government to speed up the process of getting the funds into the accounts of small businesses, and some lenders are mitigating risk in spite of the lack of credit history by only lending to those borrowers with which they already have a relationship (though that’s not the case for most of the lenders in the PPP program).

The PPP loan application does, however, spell out a few instances that could result in disqualification for a PPP loan. These include, but are not limited to, delinquency or default on federal loans in the past 7 years and details of possible felonies in the last 5 years. The questions asked in the application should be reviewed carefully so that there aren’t any unexpected surprises down the road.

Additionally, this program waives the usual requirement for businesses to look for credit elsewhere to access government loan programs as well as collateral and personal guarantee requirements.

Economic Injury Disaster Loan Program Decision Criteria

The EIDL program is part of a long-standing Small Business Administration (SBA) program that is meant to provide economic support to businesses, non-profits, and other entities affected by natural or other physical disasters. This is in contrast to the PPP, which is a newly conceived government program built to respond to the COVID-19 pandemic’s effect on employment.

The program has been augmented and bolstered by executive orders and acts of Congress to adapt to the coronavirus pandemic. EIDL funding is meant to provide working capital loans at low interest rates to support businesses that have experienced temporary losses of revenue and business interruption stemming from the COVID-19 pandemic. They can be used to pay most bills that could have been paid for had a disaster not occurred including fixed debts, payroll costs, and utilities.

The decision criteria for this program are based on your business’s eligibility to apply and a few credit requirements.

Eligibility Requirements

The EIDL program has a number of requirements relating to the location of your business, the type of business you run, headcount, and your time in business.

  • Declared Disaster Area: SBA disaster loans are only available to small businesses that are located within a “declared disaster area”. Lucky (or unlucky) for you, President Donald Trump issued an emergency declaration under the Stafford Act that declared the entire country a disaster area.
  • Type of Business and Headcount: In their description of the program, the SBA says that this program is for “any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.” Certain businesses can have over 500 employees, and the SBA has a great tool for determining if you meet their size standards.
  • Time In Business: Only businesses that have been in business by January 31, 2020, are eligible for the EIDL program.

Credit Requirements

The SBA hasn’t set out specific thresholds or values for credit requirements, so instead, we’re left to extract some meaning out of their general guidelines for normal SBA loan (like SBA 7(a) and SBA Express loans) requirements and for disqualifications.

General Guidelines

The SBA has stated that requirements for EIDL funding are “relaxed from traditional SBA loan requirements”, but what does that really mean?

In general, SBA loans have the following credit requirements:

Lucky for you, EIDL loans for COVID-19 have waived the “outside credit requirement”, personal guarantees have been waived for loans up to $200,000, and collateral requirements have been waived for loans up to $25,000.

Additionally, in their guidelines for EIDL funding, the SBA defines satisfactory credit history as “a history that generally shows payments to creditors as agreed unless otherwise justified.” If there are a small number of minor bad marks on your credit report, you’ll be fine. If you have major instances of adverse credit on your report, like unpaid judgments or repossessions, you might be able to still qualify for a loan if you can provide necessary justification and have other accounts that are current.

The SBA says that evaluation of adverse credit should be done in the context of “the totality of circumstances; for example, financial difficulties caused by one-time situations such as divorce, job loss, serious medical illness”. In addition, medical collections and non-medical collections with an aggregate value of less than $10,000 are deemed an “acceptable credit risk”. Basically, if you can reasonably explain why something went wrong, you should have no issue getting an EIDL loan for coronavirus aid based on credit requirements.

Disqualifications

There are some circumstances that would preclude your participation in these programs:

  • Criminal Record: SBA loans have a “good character” requirement and ask that you provide a “statement of personal history”. Having been arrested doesn’t disqualify you from getting a loan, but felonies can be a barrier to accessing credit.
  • Outstanding Judgements: You have judgments against you for federal debts and you haven’t yet worked out a repayment plan.
  • Delinquency on Child Support: You are more than 60 days delinquent on child support obligations.
  • Federal Tax Liens: You have federal tax liens of more than $10,000 and can’t reasonably explain them or haven’t worked out a repayment plan with the IRS.

EIDL 10K Advance Program Decision Criteria

Part of the CARES Act is a provision that created a mechanism for getting EIDL funding to small business owners as quickly as possible. This comes in the form of a 10K advance on an EIDL loan, and it can be forgiven if it is spent on paid leave, maintaining payroll, mortgage payments, or rent payments. The amount of the advance can be up to $10,000 and is calculated as $1,000 per employee up to 10 employees.

The same decision criteria that applied to the EIDL program apply here. EIDL 10K Advances are only available to small business owners who have successfully applied for an EIDL loan.

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