The SBA Offers $5,000,000 Loans, Why Can’t I Get That? 

The reasons that most small businesses may not be able to get the maximum amount of $5,000,000 with the SBA 7(a) loan program is because: 

• The lender does not find them to be creditworthy enough 

• Their financial ratios are too high of a risk 

• There is not enough collateral to secure the loan 

• They cannot cover enough of a personal guarantee  

• The markets are risky 

• Their business has not been around long enough 

While $5,000,000 is the available maximum for the SBA 7(a) loan program, the SBA only backs part of the loan while the lender provides the rest out of its cash reserves. The lender is responsible for the remainder so they need to determine the risk level of the borrower to protect themselves in case of default. The SBA sets the maximum but it is the lender that determines the amount offered.   

At the $5,000,000 level, the SBA covers a maximum amount of $3,500,000, which leaves $1,500,000 for the lender – a substantial amount to lend to a small business. Unless the company can make a strong case for the maximum amount, the lender may offer a lower amount, knowing the SBA may cover a larger share. For example, the SBA may cover up to 85% of a $150,000 loan, substantially reducing the lender’s risk and making it easier to approve the financing. 

To get larger amounts of money on any of the SBA loans, you need to build a strong case for yourself to the lender. Here are some of the ways you can improve your chances of getting larger amounts, even if it isn’t the $5,000,000 maximum. 

Increase your creditworthiness 

Lenders use the term “creditworthy” as a non-numerical measure of how much risk the lender feels they have by loaning money to the borrower. There is no actual number like a Debt Service Coverage Ratio (DSCR) or scale like a business credit score, but instead is an estimation of risk that the underwriter assigns based on what you submit with your loan application. 

The better the application and the more assets you can provide as collateral, the less risk for the lender. Here are some of the things you can do with the application to improve your creditworthiness. 

• Include a financial forecast with your business plan that details how the $5,000,000 will be used and share how quickly you’ll generate enough revenue to cover the monthly payments with interest. 

• Improve your business credit score by clearing debts and ensuring you make on time payments. 

• Increase your DSCR to show your company has sufficient cash flow. 

• Open a business checking account, business line of credit, and have an active business credit card with the lender. This shows there is loyalty to their business and gives them first-hand insights into how financially responsible your business is. 

• Bring any contracts, letters of intent, and other documents that show once you have the larger amount of money you’ll have enough new customers signing deals so you can make loan payments. 

Use a loan marketplace or loan broker 

Loan brokers and business loan marketplaces like us have relationships with multiple lenders that specialize in financing by industry, situation, and need. When you shop for a loan on your own you have to do the research and may miss niche, alternative lenders.   

These niche lenders understand how ratios and finances may be lower or higher for certain industries as they specialize in your space. This may help you get approved for a larger amount compared to a lender that is unfamiliar with your industry.  

If you use us for example, you only need to click here and fill out some information about your company. Our system takes this data and matches you with our trusted partners that specialize in SBA 7(a) and other types of business loans. If you see one you like, you can click and apply directly on their site. It’s risk-free, hassle-free, and has no impact on your credit score – saving you time and stress compared to searching on your own. 

Fix your financial ratios 

Financial ratios play an important part on how large or little of an amount you qualify for. The $5,000,000 SBA maximum is going to take really strong numbers, so you’ll want to calculate yours before you apply to see where your numbers range.   

• Debt Service Coverage Ratio (DSCR) is a measure of how much income you have compared to your debt and is measured at the number 1.0 for the median. Anything above a 1 means you have more income than debt and are more likely to be able to make payments, anything lower means you lack the cashflow and you’re a larger risk. 

• Credit Utilization Ratio (CUR) is how much revolving credit you have available with the amount you’re currently using. When a company has lower than 30% of their available credit being used, it is a sign they are better at managing money and are a lower risk borrower. At 100%, all of their available revolving credit is being used and they are a higher risk of defaulting as they don’t have any flexibility with available credit. 

• Debt to Income (DTI) shows how much total personal debt you have compared to your income which matters for a business loan as you’ll likely be asked to make a personal guarantee, and your personal finances can be seen as a reflection of your business financial responsibility. Much like the CUR, 30% and lower is favorable. The higher the number, the worse your score is. 

• Current Ratio or Working Capital Ratio (CR) tells the lender what your ability to pay your short-term financial obligations are by dividing your current assets by your current liabilities. Just like the DSCR you want your number to be above 1.0 as it means you are more likely to have the ability to make payments. 

Collateral and personal guarantees 

Collateral and personal guarantees are assets the borrower allows the lender to seize and sell if the borrower defaults.  

• Collateral are assets the business owns in full including vehicles, machinery, property, and stocks or bonds. 

• Personal guarantees are personal assets the company officers own in full and offer as a backup or in addition to collateral including vacation and primary homes, investment portfolios and savings accounts, vehicles like cars and boats, and anything else that is easy to liquidate to cash. 

As long as you do not default on the loan, there is no risk of losing your assets regardless if they are business collateral or personal guarantees. The larger the value and ease of liquidation for the assets used, the less risk there is for the lender, making it easier for you to get approved for larger amounts of funding.   

For $5,000,000 SBA loans, the lender may be on the hook for $1,500,000, so you’ll need to reduce this risk for them with high-value assets. The closer you have to $5,000,000 to use, the better your chances of getting approved for this maximum amount.   

Risky markets and a lack of longevity 

When markets take a turn and there is less certainty for your company to remain profitable, the risk level of your business loan increases. If your business has been around for a long time and weathered through downturns and recessions, your books will show resilience and smart decision making in downtimes. Having the financial data to show you keep cash flow strong and can make payments is one of the best confidence builders for a lender. This is also where your business plans come in. 

If the market is expected to turn, but you have the opportunity to increase marketshare, demonstrate what this will look like in your business plan, and what your new revenue will look like. Include the financial projections and the steps you’ll be taking to get there.   

Have sections where you cover hiring specific people (and their bios if they’re already hired) in different important roles, marketing and advertising strategies, pricing and expansion ideas, and include the financial forecasts at each stage of your plan. Having a backup plan in case the initial strategy does not work also demonstrates business acumen and can go far with the underwriter. 

While most companies will not get approved for a $5,000,000 SBA 7(a) loan, they can increase the amount of financing offered by increasing their creditworthiness. Increasing your credit score, improving your financial ratios, offering more collateral, and submitting a strong business plan are all ways to get approved for larger amounts of financing. And if you want to save time, click here and let our system match you for your small business loan. 

SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.