SBA Rules On Bankruptcies

Can you get an SBA loan with a bankruptcy?

YES, you can get an SBA loan after Chapter 7 or 13 and with some lenders after a Chapter 11 bankruptcy.  This is because there are no “SBA rules on bankruptcies.”

Generally speaking, a previous bankruptcy would need to have been discharged for at least a few years before you could hope to qualify for an SBA loan.

SBA lenders will evaluate a loan request for someone with a previous Chapter 7 (or other type of BK)  on a case by case basis because the SBA rules on bankruptcies do not exist.

This is not a misprint; other than some specific rules regarding “a previous loss to the government (SBA, FHA, VA, USDA, etc.),” there is no guidance given by the Small Business Administration regarding how lenders should consider borrowers seeking a business loan after bankruptcy other than to say it is up the judgement of the lender.

It seems counterintuitive that this would be the case in a such a rule-heavy type of finance, but getting a business loan after bankruptcy is much more of an individual lender decision than anything else.

FYI: if you are thinking that an actual underwriter at some SBA office decides who does and does not get approved, well that is not necessarily the case, because many SBA lenders are authorized to underwrite, close and fund the loans themselves.

SBA Loan After Bankruptcy

How long a bankruptcy needs to be discharged is also up to the lender.

Some lenders will consider a borrower with a personal bankruptcy whether it was a Chapter 7 or Chapter 13 after it has been discharged for at least 2 or 3 years, some 5 years and some not at all.

In fact, it is safe to say that the majority of SBA lenders will not lend to someone with a bankruptcy.  However, there are lenders who are more open minded about such matters and they will give you a shot if you present a good case.

FYI:  A Chapter 11 business bankruptcy is harder to overcome, but again, depending on the circumstances and when it happened it is possible to get financing.  There are many borrowers whose businesses were decimated during the Recession in 2008 or who suffered other catastophes in their personal or business lives that completely derailed their businesses and they ended up filing a Chapter 11 BK.

Many of these business owners have since recovered and have been able to get loans.

SBA Loan for Real Estate After Bankruptcy

Both the SBA 7a and the SBA 504 programs can be used to buy owner-occupied business property.  Owner occupied means that your business will occupy 51% or 60% of the total square footage of the property depending on whether or not you are buying an existing building or doing ground up construction and both allow for borrowers with a previous bankruptcy to qualify.

100% Financing for Real Estate

There are some lenders who will approve an SBA loan after Chapter 7 (or 13 or even possibly an 11) for up to and over 100% of the value of a commercial property.

In fact, if the bankruptcy is old enough you might be able to get excellent terms.  In other words, rates and terms that are just as good as for someone who does not have a past BK.  If the BK is more recent than you might end up paying a bit of premium in rate, but it is rarely ever a truly bad rate.

You can visit our main website for a lot more info re: buying a property with no down payment here:  100% commercial real estate financing.

Business Loan After Bankruptcy

You can also use an SBA 7a loan to buy or recapitalize a business (with or without real estate) even if you have a past BK.

See below for more info on what matters to a lender in these situations, but we have helped many clients in various situations with business purchase loans over the years and it all comes down to how the lender evaluates the risk in the transaction.

They will want to see that you are fully recovered and stable with regard to cash flow/income, personal credit and net worth (although the bar is not high from a net worth perspective) in order to approve a business loan after bankrutpcy.

For a good summary of what it takes to buy a business you might review my post regarding online businesses: e-commerce business loans.

SBA Loan Requirements Rules Credit Score

Minimum Credit Score for SBA Loan

Just like there are no “SBA rules on bankruptcies,” there is NO minimum credit score for an SBA loan.

Again, not a misprint, but let me state that in a way that relates better to this post: SBA loans DO NOT have a minimum credit score for “regular” 7a or 504 loans.

A “regular” 7a loan is what I refer to as an SBA loan of more than $350,000 and the SBA does not require that you have a certain minimum credit score to obtain one of these loans.  Some smaller SBA loans do require certain personal and business scores.

Keep in mind that even for loans over $350K that most SBA lenders will impose their own minimum score – usually somewhere between 620 and 680.  If your score is lower, then the key is to find a lender that does not have a minimum AND is willing to work with you.

Credit Scores and Bankruptcy

If your score is lower due to a bankruptcy there are lenders that will consider your application for financing, but don’t misunderstand the fact that just because a lender does not have a minimum score, it does not mean they are going to approve “bad” loans.  If you cannot put together a good explanation for the events that lead to the bankruptcy then you have no shot at getting financing.*

However, if you can lay out what happened, why it may have been close to the perfect storm, or why things got to the point where there was no coming back AND you can prove how you have recovered AND show why you are now a good risk, then a flexible SBA lender will be able to connect the dots and hopefully get you the financing you desire.

Please note that if you have a low credit score and you are looking for less than $350K you can still apply for a “regular” SBA loan as regular loans can be under or over $350K, but keep in mind that only the stronger transactions will be approved for a small loan with a low credit score as a lot of lenders do not like smaller loans as they are less profitable.

Don’t Believe Everything You Read

I need to editorialize here regarding the above info about the minimum SBA credit score, as it is different from what you might have read on some very highly ranked/seemingly authoritative websites or what some lenders might tell you. 

Numerous websites make blanket statements re: the minimum credit score for an SBA loan and this is unfortunate.  I believe this may be due to the fact that many articles re: SBA financing are published by people who do not work in the industry, and as a result they are doing a disservice to some who may actually be able to get an SBA loan after chapter 7 or with a low score.

Also, if a lender is telling you that you need a minimum score then those lenders are telling you their guidelines, but they usually say it in a way that makes it sound like it is SBA policy for credit scores.

Bottom line: sometimes you just need to keep looking

What Kind of Rate Can You Expect After a Bankruptcy?

Good question…it is hard to know as everyone’s situation is different and since, as stated above, there are no SBA rules on bankruptcies, every lender has different “bankruptcy guidelines.”

The older the bankruptcy and the better you and your business look on paper, the better the odds are that you will get a loan that is just as good as someone who does not have a BK.  The less old the BK and the less great you look on paper, the worse the deal.  Simple as that.

For a real estate loan you can get a 25 year loan and for non-real estate you can typically expect 10 years.

The good news is that no SBA loan offers terrible terms.  Some might not be great, but even if you get stuck with a less than great rate – for example, the worst possible terms you can get on a “regular” 7a loan is typically a floating rate at Prime + 3%.

However, the beauty of the SBA 7a loan is that for loans under 15 years there is NO prepayment penalty and 25 year real estate loans have a very short and very reasonable penalty that allows you to refinance after just 3 years with no penalty or after 2 years with a 1% penalty.

A Bridge Loan of Sorts

So you can almost think of the 7a in this case as a bridge loan – a way to get from point A to point B – and for many people looking for a fresh start it is worth it to pay a slightly higher rate.

Business Loans After Bankruptcy

What You Need For Approval

Lenders can be fairly forgiving and Small Business Administration loans are a less risky type of loan due to the guaranty the lender gets from the Federal government, but you will need to prove your case, so to speak, or at least help a lender really understand what happened in order for them to seriously consider approving an SBA loan after Chapter 7 or other type of bankruptcy.

The common misconception about SBA loans is that the Small Business Administration makes loans directly – they do not.  Instead, they provide a “guaranty” to lenders for a percentage of the loan amount.  It is kind of like mortgage insurance, and because of this “insurance” lenders can be more flexible in how they underwrite and what they approve.

With most SBA 7a loans, a lender gets a guaranty of 75% of what they lend out or 90% if the loan is an “Export Loan.”  (An SBA Export Loan is a loan for borrowers who currently export or intend to export their products or services either directly or indirectly to countries outside of the U.S.).

FYI: with the 504 program, only the 2nd mortgage is guaranteed by the SBA, so at most there is a guarantee on only 40% of the financing with the 504.  Because of the higher guaranty on the 7a, the lenders that make those loans tend to be more flexible in how they underwrite for a borrower with past credit issues.

It’s All About the Explanation

So in order to get an SBA loan after Chapter 7, 13 or (possibly) an 11, you will need to provide a make-sense, detailed explanation of what caused the BK and why you filed.  You will have your best shot at approval if the events that lead to the BK were isolated to a particular time in the past (i.e. like the Great Recession) and if you can show that you have since rebounded.

Keep in mind that lenders are people too and they have seen it all before.  They know that sometimes things happen and sometimes a bankruptcy is the way out, so if you lost it all years ago, but have a legitimate explanation for what happened and have clearly re-established yourself and your credit then you definitely have a shot at getting an SBA loan with some of the more forgiving SBA lenders.

SBA 504 Loan Rate With Previous Bankruptcy

IF you can qualify for a 504 loan then the good news is that the low rate 2nd mortgage will always be offered with excellent terms regardless of whether you have a BK or not.  As of January of 2024, that rate is approx 6.35% for 25 years.

Keep in mind, the 504 is a 2 loan structure (typically 50/40/10) and the rate for the first mortgage could typically anywhere in a pretty large range for someone with a previous bankruptcy and could be a fixed rate or a floating rate, but it will almost always have a 25 term or amortization.

Co Signer For An SBA Loan

It is worth noting here that only those who own (or will own) 20% or more of the subject business have to personally guarantee the loan, so if you have a recent or past bankruptcy and have others with the right experience and net worth who are willing to be a “primary” guarantor AND you can keep your ownership under 20% of the business then you might be able to sidestep the whole BK issue as most lenders will not require a credit or background check if your ownership is under 20%.

One exception to this is that the SBA requires lenders to do a background and credit check for anyone who is managing the business, so while this would require disclosure of a past bankruptcy it does not necessarily preclude you being involved IF a lender does not feel like you weaken the transaction AND if they feel the other guarantor(s) are “solid enough.”

I know this seems vague but some interpration of SBA underwriting rules can get a little gray and not all lenders interpet the rules in the same way.

You also need to be aware that SBA lenders are very vigilant about making sure they do not have a guarantor who is a “straw buyer/straw borrower,” who is standing in for the real buyer or borrower, so it is okay to partner with someone who is truly going to be deeply involved in the business but it is not okay to bring someone in to try and circumvent the rules.

I don’t want to sound like I am discouraging the use of co-signers, because it can be a very viable solution in certain situations, especially if there are multiple business partners with various skills and/or if you are financing a business that is less involved from a managerial standpoint.

For instance, we have helped many clients with SBA financing for self-storage properties where there are multiple borrowers/guarantors including one with a bankruptcy.  Given that self storage (or RV and Boat Storage) are typically businesses that require little in the way of day to day management and can even be fully automated with no need for employees or managed by third party management companies, having one owner with less than 20% ownership and a past bankruptcy can be less of a factor for certain lenders.

A Note About A “Prior Losses to the Government” and “Deliquent Federal Debts”

To get an SBA loan after Chapter 7 or other type of bankruptcy, there is one key guideline to know with regard to SBA loans…if a Federal Government Agency (SBA, FHA, VA or others) took a loss when the bankruptcy was filed then it will be very difficult to get a loan.

Similarly, if you have “deliquent Federal debts,” for instance a Federally-backed student loan, then it will also be very difficult to get an SBA  business loan after bankruptcy.  (If you have a Federal loan or some type of federally “assisted” financing and it is more than 90 days late then it is considered delinquent).

Unless you can get a waiver from the SBA, the SBA will not guarantee a loan for a borrower who is delinquent or who has a “prior loss” and getting a waiver is very difficult.

Please contact me at jking (at) green commercial capital (dot) com if you need assistance understanding the SBA rules on bankruptcies (or lack thereof) or help in finding an SBA after a Chapter 7 (or any other major credit issue) or visit our main site here for more info on SBA financing.

*FYI: It is important to note that even an older bankruptcy that has already fallen off your credit report needs to be disclosed because when an SBA lender does a background check it will turn up.  This is because the background check covers a borrower’s entire adult life.