The credit elsewhere test is SBA's rule that it guarantees a loan only when the borrower cannot obtain the same credit on reasonable terms from non-federal sources without the guaranty. The lender, not the borrower, makes the determination and records the reason in its credit memorandum: most often that the business needs a longer term than the lender's conventional policy allows, that collateral falls short of conventional standards, or that the deal type is one the lender would not make without SBA's support. A business that clearly qualifies for conventional credit on its own may be steered there instead.
- What it tests
- Whether the same credit is available on reasonable terms without SBA
- Who decides
- The lender, and it must document the reason in its file
- Common reasons
- Longer term, collateral shortfall, deal type, time in business
- What the borrower does
- Nothing separate; the file itself supplies the evidence
- If it fails
- The loan belongs in the conventional market, on that market's terms
Why SBA has the test
The 7(a) program exists to fill a gap. SBA guarantees 85% of 7(a) loans of $150,000 or less and 75% above that, which lets a lender make a loan it would otherwise turn down or make only on shorter, tighter terms. A guaranty spent on a borrower who could have borrowed conventionally does not fill any gap; it only moves risk from a bank to the government. The credit elsewhere test is the gate that keeps the guaranty for the loans that need it.
The test sits in SBA's SOP 50 10 among the eligibility rules, alongside size, use of proceeds and the nature of the business. Like the other eligibility decisions, a Preferred Lender makes it on SBA's behalf, and SBA reviews it on a non-delegated loan. If a loan defaults and SBA finds the determination was not supported, the lender's guaranty is at risk. That is why lenders take the documentation seriously even when the answer is obvious.
The reasons lenders document
The lender has to identify the specific factor that keeps the borrower from conventional credit on reasonable terms. A general statement that the borrower needs SBA is not enough. The factors lenders cite include these:
| Factor | What it looks like in a file | Common in |
|---|---|---|
| Term the lender cannot offer conventionally | A goodwill loan conventional policy would amortize much faster than the 10 years SBA allows | Business acquisitions, partner buyouts |
| Collateral short of conventional standards | Mostly intangible value, or hard assets worth less than the loan after the lender's discounts | Service businesses, acquisitions |
| Deal type outside conventional appetite | A change of ownership financed mostly with debt, or a start-up | First-time buyers, new locations |
| Time in business or track record | A business too young, or with an uneven history, for conventional underwriting | Expansions, recent turnarounds |
| Loan size against the lender's limits | The request exceeds what the lender will hold to one borrower or industry without a guaranty | Larger loans, concentrated industries |
| Down payment below conventional norms | An equity injection near SBA's 10% minimum rather than a larger conventional down payment | Acquisitions, real estate purchases |
On an acquisition, the documented reason is very often term. SBA allows up to 10 years for working capital and goodwill and up to 25 years for real estate. A conventional lender financing goodwill usually wants it repaid much faster, and the resulting payment would fail the coverage test. That alone makes the conventional loan unreasonable for many buyers, and the file shows it directly.
How the lender documents it
The borrower does not complete a separate credit elsewhere form. The lender writes the determination into its credit memorandum and certifies it as part of its application for the guaranty. The evidence comes from the file the borrower has already provided:
- The financial statements and debt service coverage under a conventional structure versus the SBA structure, which shows whether a shorter term would fail.
- The collateral schedule, with the lender's discounted values against the loan amount. See collateral coverage.
- The sources and uses, showing the equity injection and any seller note on full standby.
- The owners' personal financial statements on Form 413, which show the owners' own resources and whether other credit is realistic.
- The business's history, from tax returns and year-to-date figures.
A lender that also offers conventional loans must be able to explain why this borrower does not fit its own conventional policy. That is usually a matter of pointing to the policy: the maximum term, the collateral advance rates, the minimum time in business. The more specific the reference, the stronger the file.
When a strong borrower is steered to conventional credit
Sometimes the honest answer is that the borrower does qualify elsewhere. A profitable business with hard collateral that covers the loan, a long history and a request a bank would make on its own terms may not pass the test, and a careful lender will say so. Some lenders also steer strong borrowers away from SBA for their own reasons: a conventional loan they hold themselves can suit them better.
For the borrower, that is not necessarily bad news. An SBA loan carries costs a conventional loan does not: the SBA guaranty fee, a mandatory personal guarantee from every owner of 20% or more, a prepayment penalty on loans of 15 years or more, standby rules on seller notes and closing conditions set by SBA. A conventional loan trades those for a shorter term, a larger down payment and usually covenants. Which is better depends on the deal.
| Borrower profile | Likely outcome of the test | What to compare |
|---|---|---|
| Buyer of a service business with little hard collateral | Passes: term and collateral both support SBA | SBA lenders against each other |
| Established company refinancing a real estate loan with ample equity | May fail: a conventional mortgage is available | SBA 504 against a conventional commercial mortgage |
| Profitable company funding equipment it can pledge | May fail: an equipment loan fits | Equipment financing against a 7(a) |
| Larger acquisition with strong earnings and a sponsor | Often fails, or exceeds SBA's $5 million limit | A conventional acquisition loan |
Failing the credit elsewhere test is a finding that the borrower is strong enough for the conventional market, not a decline.
What borrowers can do about it
Nothing needs to be argued; the test follows from the facts. What helps is a file that states them plainly. A financing model showing the SBA structure next to a conventional one makes the term point in a single page. A clean collateral schedule makes the shortfall, or its absence, obvious. A buyer who presents both options also finds out early which market the deal belongs in, instead of learning it from a lender's decline.
Transparent's lender book holds 278 lenders that write SBA 7(a) and 504 and 1,148 that write term and private credit, so a file can go to whichever market fits. The lender package, financing model, lender presentation, blind teaser and underwriting memo, is built in a day once the documents are in. On SBA loans the lender pays Transparent, not the borrower. See how we underwrite.
Common questions
- Do I have to prove I was turned down by a bank?
- No. SBA does not require a written decline from another lender. The SBA lender itself documents why conventional credit on reasonable terms is not available, using the facts in your file.
- Can I fail the test by having too much personal wealth?
- Lenders look at the owners' personal financial statements, and substantial liquid resources can bear on whether SBA's help is really needed and how much equity a lender expects. How much weight that carries depends on the lender and the current SOP; it rarely ends a file on its own.
- Does the test apply to SBA 504 loans?
- Yes. The 504 program has the same requirement that credit not be available elsewhere on reasonable terms, documented by the Certified Development Company.
- Is a longer term really enough to pass?
- Often, yes, when it is specific: the lender shows its conventional policy's maximum term for this collateral and that the payment on that term would not be supported by the business's cash flow.
- What happens if SBA later disagrees with the lender?
- If a defaulted loan is reviewed and the credit elsewhere determination was not supported, SBA can reduce or deny the guaranty. The borrower's obligation to repay the loan is unchanged.