How SBA will use your personal financial status

The U.S. Small Business Administration offers a variety of small business loans aimed to help business owners get the funds they need to successfully launch and grow their businesses. And for many small businesses, these loans can be extremely helpful. Not only do SBA loans typically offer low interest rates, but they also have longer repayment terms than many other small business loans, making them an attractive way for small businesses to get access to the capital they need.

But the area where many small business owners have questions (and, for some, concerns) is the difference between business finances and personal finances—and, more specifically, how their personal financial status will impact their ability to secure an SBA loan for their business.

Let’s take a look at how the SBA leverages personal financial information to determine business loan eligibility, including the types of loans where personal finances may come into play:

Different types of SBA loans

There are four different types of loans offered by the Small Business Administration:

• 7(a) loans. The 7(a) loan program is the SBA’s primary lending program for small businesses. Under the 7(a) loan program, the SBA offers federally guaranteed loans of up to $5 million dollars to small businesses through a network of approved lenders (including banks, credit unions, and other approved financial institutions).
• 504 loans. 504 loans are loans that enable small businesses to access capital for fixed assets (like machinery, real estate, or other equipment). These small business loans (which are also federally guaranteed loans for up to $5 million dollars) are processed through Certified Development Companies (CDCs), a network of approved SBA lending partners.
• Microloans. Microloans are loans processed through intermediary lenders that cap out at $50,000. Small businesses can use SBA microloans for a variety of business-related expenses, including working capital, inventory, or machinery. These loans are a great fit for small businesses that need a small amount of cash to keep things moving forward. (According to the SBA, the average microloan is $13,000.)
• Disaster loans. The SBA also provides small business loans to support businesses in the event of a crisis or disaster. This includes Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program loans—both of which have been essential for small businesses navigating the coronavirus pandemic.

Clearly, the SBA has a variety of loans for a variety of purposes. But the question is, does the SBA use business owners’ personal financial information to determine eligibility—and, ultimately, to decide whether to approve the business’ SBA loan?

When does the SBA require business owners to share personal financial information?

Even though business finances and personal finances are two separate things, the Small Business Administration does weigh personal financial status to determine eligibility for many of their loans.

Most SBA loans require applicants to fill out SBA Form 413—also known as a personal financial statement. A personal financial statement is required to apply for both 7(a) and 504 loans—and a modified personal financial statement (SBA Form 413D) is required for disaster loans.

Who needs to complete a personal financial statement?

If your business is applying for an SBA loan that requires a personal financial statement, there may be multiple people that need to complete SBA Form 413 (or, in the case of a disaster loan, SBA Form 413D). This includes:

• Each business owner
• Each general partner and limited partner with 20% or more interest
• Each stock owner with 20% or more voting rights
• Any loan guarantor

If any of the abovementioned loan applicants are married and file a joint tax return with their spouse, their married partner—and any relevant financial information—will also need to be included on the personal financial statement.

What financial information do you need for your personal financial statement?

In order to successfully complete your personal financial statement and submit an SBA loan application, you’ll need to include both basic personal information (including name, address, social security number, and business name) and relevant financial documentation—in regard to both your assets and your debt.

Required asset information for SBA Form 413 includes:

• Account statements for both personal checking accounts and savings accounts, including total balance
• Cash on hand
• Account statements for any retirement accounts, including 401(k) and IRA
• Life insurance statements (including a statement from your insurance company with current cash surrender value)
• Proof of income (this includes salary, net investment income, real estate income, etc.)
• Market value data on primary residence and other real estate properties, cars, and any other personal property
• Personal investments (including stocks, bonds, or cryptocurrency)
• Notes receivable (only applicable if you’ve loaned personal money and a balance is still owed)

Required liability information for SBA Form 413 includes:

• Credit card statements, personal loan statements, student loan statements, auto loan statements, and any other personal debt statements (including payment amount, balance, and account number)
• Total in unpaid taxes
• Mortgage account information (including name and address of mortgage holder, mortgage account number, mortgage balance, and payment amount for any mortgage-held property)
• Any additional debt obligations (for example, alimony, child support, etc.)
• An estimate of contingent liabilities (for example, balance of any loans where you acted as a co-maker or endorser, pending legal judgements, etc.)

How does the SBA use your personal financial statement when evaluating your loan application?

The SBA uses your personal financial statement as a way to evaluate your creditworthiness, your debt, and your ability to pay back a loan. By including relevant debt information (like credit card balances) and relevant asset information (like your bank account balances and market value quotations for your real estate investments) with your application, the SBA is able to get a clear picture of your current financial situation and compare your net worth to your total liabilities—which can help them determine whether you’re an attractive candidate for a loan.

What you can do to improve your personal financial status before applying for

If you’re concerned about how your personal financial status may impact your ability to secure a small business loan, there are steps you can take before applying:

• Check your credit report. It’s important that all the financial information you provide in your personal financial statement is accurate. Before you submit your SBA loan application, make sure to check your credit report for any inaccuracies and to ensure the information you’re including on Form 413 is correct.
• Pay down debt. If you have the ability to pay down some of your debt before applying for an SBA loan, that can lower your debt-to-income ratio—and potentially frame you as a more attractive candidate for a loan.
• Talk to your lender. Talking to your lender can give you better insights into the requirements for the type of loan you’re applying for—which can help you better prepare.

If you have less-than-perfect credit and are worried how that may impact your ability to secure a small business loan, remember: even though the SBA uses your personal financial statement as a way to evaluate your eligibility for a loan, it’s not the only factor they weigh. Ultimately, SBA loans are business loans—so while your personal creditworthiness (and the creditworthiness of your partners) is important, ultimately, your business’ financial health and ability to pay back the loan is what’s most important.