SBA Form 413 Instructions
Financing a new business often necessitates raising significant capital to fund operations, purchase assets, and finance growth. Unfortunately, getting approved for a small business loan can be difficult due to the risks associated with business failure. In an attempt to stimulate entrepreneurial growth, the U.S. government offers a variety of loans to small businesses. Although not all loan applications are accepted, entrepreneurs can significantly increase their chances of being approved by submitting their application in the right way.
Benefits of SBA Loans
The Small Business Administration is the primary government agency responsible for issuing loans to small businesses. SBA loan availability varies significantly depending on the type of loan that an applicant files for. Furthermore, many loans have significant requirements that can prevent some individuals and businesses from qualifying for certain programs. For example, a business with low revenue and assets may not be able to quality for a general SBA loan, but the entity may instead be able to qualify for an SBA microloan or an asset loan. While most people assume that all SBA loans are the same, the reality is that there are dozens of options available to increase the flexibility of borrowers.
Types of SBA Loans
The SBA was founded in 1953, and many of its loans have been available since its inception. However, keeping up with current SBA offers is important because new loans and temporary programs are made available on a regular basis. For example, disaster loans are sometimes made available after a significant national catastrophe, so businesses in the affected areas could qualify for a loan by keeping up with SBA news. Some of the most common SBA loans include:
- General Small Business Loans: Most of the funds distributed through the SBA are general loans issued through the 7(a) loan program, which can offers up to $5 million in financing.
- Microloans: Businesses requiring a limited amount of capital can borrow through the SBA microloan program, which offers loans up to $50,000.
- Real Estate and Equipment Loans: Ordinary SBA loans restrict real estate purchases, so a real estate and equipment loan can help businesses acquire capital that they would otherwise not qualify for. Real estate and equipment loans can be either short-term or long-term.
- Disaster Loans: Businesses that experience a disaster or acquire assets from a company that went through a disaster can quality for special loans designed to help them get back on their feet. Disaster loans have the advantages of low interest rates and an elevated chance of approval.
Who Can Apply for SBA Loans
Only qualified businesses can apply for SBA lending, but the specifics of these limitations can vary significantly between loan programs. For general SBA loans, applicants must operate for profit, be legally classified as small, do business in the U.S., have outstanding equity, and exhaust external funding before applying. However, there are additional requirements that can apply in some situations. For example, the SBA imposes limitations on how funds from certain programs can be used, and general loans cannot be issued to businesses with outstanding debts owed to the U.S. government.
Businesses engaged in some industries, such as finance and life insurance, are forbidden from taking out an SBA loan. Furthermore, entrepreneurs marketing products or services considered by society to be immoral or illegal, such as gambling or pyramid sale distribution schemes, are also ordinarily disqualified from SBA loan programs. In general, businesses that compete on the basis of personal labor or expertise are more likely to be approved for a loan than businesses premised on the speculative value of a new innovation.
The federal government also imposes limitations based on the ownership structure of a business. Small businesses owned primarily by large corporations, lenders, or nonprofit organizations are excluded from most SBA loan programs. Furthermore, the individuals who own the applicant business will also be scrutinized during the loan origination process. Individuals who own at least 20 percent of outstanding equity will have to submit documentation describing their personal assets and activities with other businesses. Personal association with businesses that failed and caused the U.S. government to incur a loss can bar entrepreneurs from acquiring SBA funding for their enterprise.
Minimum Requirements for Submitting an SBA Loan Application
The requirements for submitting an SBA loan application are rigorous due to the amount of funding that this program can offer. Businesses will need to have submitted prior tax returns so that these forms can be sent in as part of an application. Furthermore, each individual who owns at least 20 percent of outstanding equity must submit personal statements detailing their assets and liabilities. Due to the personal nature of the information that is required, applicants should start by obtaining agreement to cooperate from each equity owner, general partner, and guarantor before initiating the application process.
Individuals who have committed a felony or a crime of moral depravity automatically disqualify their company from receiving SBA funds. Furthermore, individuals who are incarcerated, on probation, or on parole are also automatically disqualified from receiving loans through the SBA program. As with nearly all ordinary loans, personal credit history is also factored into the application process to ensure that borrowers have a track record of meeting their loan obligations in a timely manner. Applicants, therefore, will need to ensure that all individuals who will sign for their loan are in good financial standing and are clean in the eyes of the law.
Completing SBA Form 413
Almost all SBA filings require at least one SBA Form 413 to be submitted with an application. The individuals who need to submit an SBA Form 413 include:
- Each stockholder or limited partner owning at least a 20 percent equity stake.
- Any guarantor who will be co-signing the application.
- For LLCs and S corporations, all general partners and managing members.
Some individuals who might be considered principals, owners, or directors in other contexts are not necessarily required to complete SBA Form 413, so the process of submitting an SBA loan application can be less difficult than some entrepreneurs intuitively assume. For example, it is not uncommon for businesses with dozens of directors to need only one or two SBA Form 413 filings to be submitted. However, businesses must be careful to ensure that every party submits a filing when required. Neglecting to submit even a single filing can lead to an application being denied or even fraud charges.
SBA Form 413 Instructions
Each element in SBA Form 413 requires care and attention. Documentation must be submitted to prove the existence of assets, income, liabilities, and other information that is needed to determine a borrower’s creditworthiness. Applicants must be careful to ensure that all information submitted is accurate to the best of their knowledge. When the value of an asset is uncertain, borrowers should have their property items appraised or use conservative estimates. In some cases, working with a licensed accountant or attorney can help to ensure that paperwork is accurate and complete. Since SBA Form 413 is considered a federal filing, incorporating incorrect information into a submission can lead to criminal charges.
Applicants should keep in mind that most SBA loans require more than simply submitting SBA Form 413. For example, statements of company assets and loan-specific filings will ordinarily need to also be included. Moreover, personal interviews and other due diligence is also ordinarily associated with completing an application. Nevertheless, successfully submitting a complete SBA Form 413 is an important initial step toward obtaining an SBA small business loan.
Information Provided on SBA Form 413
The exhaustive amount of information that applicants are required to submit can theoretically fit into the official SBA Form 413 documents, which are only three pages long. However, applicants should understand that most submissions require the addition of an appendix, and it is not uncommon for this section to be hundreds of pages long. Moreover, many items, such as real estate and loans, require photocopies of original documentation, and this can add hundreds of additional pages. Applicants, therefore, should expect to invest a significant amount of time putting together the required paperwork for completing an SBA Form 413 filing.
The first section on SBA Form 413 asks applicants to list personal assets. All significant assets that are not stocks, bonds, or real estate should be included in this section. Furthermore, applicants should keep in mind that all personal assets, including televisions, furniture, and automobiles, must be included in assets according to SBA rules. Each line item must be listed individually, so applicants generally put their assets in the appendix.
Since business valuation must be included as part of asset estimation, individuals who possess an ownership stake in a private entity must assign a value for the price of their equity. Unfortunately, applicants often struggle to assign an accurate value for their private equity due to the fact that it is not actively traded on public markets. Professional business valuation is sometimes required, but this can be an expensive process. Entrepreneurs who cannot afford a private appraisal are often forced to understate the value of their private businesses to avoid accusations of fraud.
As with the assets section, applicants will need to submit a thorough statement of liabilities as part of the SBA Form 413 submission process. Even small liabilities, such as credit cards and overdrawn bank accounts, must be included according to SBA rules. However, applicants should be careful to include their installment loans under the notes payable section, which is easily confused with accounts payable. Instead, accounts payable should be limited to items bought with store credit or through recurring payments; since few people borrow in this way, many applicants leave accounts payable blank. Other items that should be included under the liabilities section include unpaid taxes, loans on life insurance, car installment loans, and mortgage payments.
Source of Income and Contingent Liabilities
Individuals should put the income they reported on last year’s W-2 or 1099 in the source of income section. If supplementary or explanatory information is needed, it should be added in the appendix section whenever appropriate. Payments made for installment loans and other liabilities should not be deducted from total income. Individuals who obtain their income from an LLC or S corporation should be careful to include their income and its annuity value in the other assets section. However, self-employment income derived from other sources, such as rental income, always belongs in the source of income section. Additional income that should be included in this section includes child support, pensions, and social security benefits. Married applicants must ensure that they include their spouse’s income and liabilities alongside their own.
Notes Payable to Banks and Others
The notes payable section is important because it includes the installment loans, mortgages, and other liabilities that are common among individuals in today’s world. For each payable note, prospective borrowers should be sure to attach documentation describing their current balances, payment history, and the terms of their agreement. In many cases, documentation from multiple sources will be needed to thoroughly describe the state of each payable note. For example, an individual who owns a car with an installment loan would need to submit their lending contract, a bank statement showing outstanding balances, and paperwork detailing recent payments. Although certain pieces of information can be left out, individuals filing an SBA Form 413 should recognize that it is always better to submit unnecessary documentation than to leave out required paperwork. Due to the extensive amount of documentation that is needed for the notes payable section, individuals often spend dozens of hours completing this component of the application.
Stocks and Bonds
Most individuals in the modern world own stocks and bonds, so the SBA dedicates a separate section to these assets. Unfortunately for individuals submitting an SBA Form 413, the necessity of diversification often causes entrepreneurs to have hundreds of different stocks and bonds in their portfolio. Applicants must write one line for each corporation’s stock that they own, and this can lead to hundreds of lines when many stocks are held. Consequently, applicants will need to use an appendix while ensuring that they provide all necessary information for each stock.
It is especially important in this section to be careful to write the market value quotation with as much accuracy as possible. In today’s digital age, the SBA’s expectations have risen because information about the value of a stock is available instantaneously online. As a result, the SBA requests that all applicants state the price of each stock according to the “as of” date at the beginning of the application. Applicants should price their shares consistently using either the closing price or an average daily value, and this should be stated in the submitted application.
Applicants who own stocks in a managed portfolio, such as an investment account or a mutual fund, should use the most timely information available. For example, mutual funds that allow clients to log in to view their live balances should use this information. However, applicants can use monthly statements when live information is not available. When monthly statements are used, a copy of each document should be appended to the final application.
Real Estate Owned
Real estate items, such as primary residences, undeveloped lots, and investment properties, should be accounted for in the “real estate owned” section of SBA Form 413. Out of all of the items on the application, the real estate section requests the highest level of detail for each property owned. The SBA asks for comprehensive information about real estate because of how these assets can have different levels of significance depending on the terms through which they are owned. For example, real estate that is owned outright could potentially act as collateral while properties owned through a mortgage could represent a negative liability.
Real estate valuation can present problems for applicants because properties must be listed at their current value, and this is often different from the assessment values used for property taxes. Many applicants use an appraiser to determine the value of their residential properties. Conservative property values should be used when estimating the value of real estate to avoid the potential for accusations of fraud.
Other Personal Property and Other Assets
The SBA offers an “other personal property” section to enable applicants to include assets that do not fall into any of the other categories. Examples of other assets include recreational vehicles, tools, jewelry, and other assets. Unique assets, such as complex life insurance arrangements or international property, can also be included in this section. However, all property disclosed in this section will need to include sufficient documentation to prove its value. Contracts, titles, and receipts should be included for all items to verify their worth.
Although the SBA requests very specific information throughout SBA Form 413, the lender is flexible with items that fall into ambiguous categories. For example, applicants can include the value of their business in the “other personal property” section if they feel that it is not either an ordinary asset or a stock. Even if the asset would fit better into another section, an application is unlikely to be denied for this reason. Instead, applicants should be sure to list all possible assets in the “other personal property” section to improve their chances of being approved for a loan.
Unpaid Taxes and Other Liabilities
The general terms of SBA loans stipulate that borrowers cannot be approved if they have outstanding tax debts with the federal government. However, the rules are less straightforward when applicants owe taxes to state and local governments. In some instances, applicants can still be approved when they owe money to a tax authority that is not the U.S. government. For example, unpaid property taxes owed to a local government are unlikely to impact an applicant’s chances of being approved. All tax debts should, however, be carefully documented to ensure that their full impact is reflected in the final application.
In most instances, individuals who owe tax debts to foreign governments should describe these debts in this section because it also includes “other liabilities.” Furthermore, liabilities that are ambiguous in nature should also be included in this section. For example, debts derived from private arrangements could fit in this section. Ordinary liabilities, however, should be placed in the liabilities section at the beginning of the application.
Submitting SBA Form 413
Upon completing SBA Form 413, applicants should print out all completed documents for careful review. It can be helpful for applicants to ask a trusted associate to review their work, but the SBA does not require third-party certification. Applicants should make sure that all numbers stated are less than 30 days old to avoid having to resubmit information that will be considered to be outdated.
Once the application is finalized, it should be stapled together and submitted in writing. Since most SBA loan programs are managed through licensed intermediaries, applicants should send their SBA Form 413 directly to the financial institution that they are working with for their loan. For future reference, an additional copy of all submitted materials should be kept by the applicant. Instead of using a general phone number, applicants should write their personal extension to make themselves more accessible to individuals tasked with approving their loan. Applicants who successfully submit all necessary paperwork can be approved in as little as 14 days.