Qualifying for the SBA Loan Program for Employee Trust Companies with Bad Credit

Qualifying for an SBA loan program while having bad credit requires overcoming six hurdles that stand in the way. These include equity and the five C's of credit factoring, which are capacity, capital, collateral, conditions and character (each of which are listed and explained on the SBA website).


When it comes to SBA loans, and in particular bad credit business loans, your personal credit is relatively equivalent to your business's credit in the eyes of lenders. One of the few ways that employee stock ownership companies can use this is through using established equity to supply leverage to the loan. Most lenders examine the ratio of the requested loan amount to how much the principal owners have invested in the business either in the form of assets or cash injections. In fact, the SBA looks favorably on small business loan requests which entail purchasing the real estate connected with the business. It also views a history of building up equity through personal capital injections as a demonstration of your personal investment in the success of the company.

Credit Factoring

Fortunately, there is no one factor that determines your credit standing with a lender or the SBA. So even those small businesses which have been poorly managed into having bad credit or whose principal owners have bad credit, there is still hope for qualifying for an SBA loan program. What is required is advanced preparation in the areas defined by the five C's. Lenders will meticulously examine each of these areas in order to determine whether or not to offer you a bad credit business loan.

  1. Your capacity to repay the loan will be scrutinized. Lenders will attempt to determine the cash flow of your business, the length of time and schedule of the repayment, and your personal and business payment histories. And remember, personal payment histories include all principle owners holding 20% or more of the business. Lenders will also consider contingent sources of repayment that are available to these same owners.
  2. Your capital will be examined. This is the money that you have personally invested in the business. As with your equity, lenders view your capital as a demonstration of your commitment. The more personal risk involved for you and the rest of the principal owners, the more confident lenders will be that the loan will be used wisely.
  3. Your collateral will be reviewed as a possible contingent or second source of repayment. A certain amount of collateral is required as a security on all SBA loans, and especially in the case of bad credit business loans. As always, collateral can be either business or personal assets, though whether the SBA looks into including your personal assets depends on the value of the business assets already pledged.
  4. Your conditions will be considered. This means lenders and the SBA will inquire after the purpose of the loan and whether it is to be used for working capital, purchasing equipment or for adding inventory. Furthermore, they will consider the relevant conditions of your industry the local economy that might affect your success.
  5. Your character will also be examined.  This is probably the most subjective aspect of the application process. It is also likely complicated for employee stock ownership companies that have multiple owners. This is when the SBA loan program and lenders size you up personally to determine whether or not you are trustworthy. They will consider your education, both your personal and work experience, the quality of your references and the background and experience of your employees.