Administration Archives - Atherton & Associates, LLP

What you need to know before applying for an SBA loan

Posted on May 14, 2025June 2, 2025 by don@mbn.io

May 14, 2025 | by Atherton & Associates, LLP

For many entrepreneurs, an SBA loan is the gateway to launching or acquiring a business—but it’s not as simple as filling out an application. From choosing the right loan type to preparing a lender-ready financial package, success hinges on preparation and financial clarity.

Whether you’re purchasing an existing business or launching a new venture, knowing what to expect can mean the difference between approval and costly delays.

Understanding SBA loan options

The SBA doesn’t lend directly. Instead, it guarantees loans issued by private lenders—such as banks, credit unions, and nonprofit intermediaries—to reduce risk and increase access to capital. Because loans are delivered through these private institutions, terms, underwriting practices, and processing times can vary depending on the lender, the borrower, and the specific loan structure.

What follows is a general overview of some of the most common SBA loan programs. This isn’t an exhaustive list, and it’s important to note that eligibility or documentation requirements may vary depending on your lender or use of funds. All SBA terms and programs are subject to change. Always check with the SBA or your lender for the latest requirements.

Before evaluating which SBA loan might be right for you, make sure your business meets the core eligibility criteria that apply across most SBA loan programs.

Size standards: Your business must qualify as a “small business” based on your industry classification under the North American Industry Classification System (NAICS). The SBA uses your six-digit NAICS code to determine size limits, either by annual revenue or employee count.
Business structure: Your business must be organized for profit and operate in the U.S. or its territories. Nonprofits, certain passive real estate investors, and businesses engaged in illegal activity (even if legal under state law) are ineligible. Franchises and affiliated entities may be eligible but must meet SBA affiliation rules and, in some cases, receive SBA approval.
Credit elsewhere: SBA applicants must show they are unable to obtain credit on reasonable terms without the SBA guarantee. This does not require a formal loan denial, but lenders must certify that comparable financing is not otherwise available under conventional terms.
Repayment ability: Applicants must demonstrate they can repay the loan through business cash flow, have a sound purpose for the loan, and are willing to submit personal and business credit histories—even if the business is newly acquired or recently formed.

With these foundational requirements met, the next step is identifying which SBA loan program aligns with your goals.

SBA 7(a) loans

The SBA 7(a) loan program is the most popular and versatile, used for purposes including business acquisitions, working capital, equipment purchases, debt refinancing, and real estate (when it’s a secondary purpose).

There are several subtypes within the 7(a) umbrella:

Standard 7(a)

The standard 7(a) loan can fund up to $5 million. It’s frequently used for business acquisitions, where borrowers are typically required to provide a 10% equity injection, though lenders may require more depending on experience, risk profile, or collateral.

Lenders are generally required to secure loans over $25,000 in accordance with their internal policies, and loans above $350,000 must be collateralized to the maximum extent possible, though a lack of collateral is not an automatic disqualifier.

Loan terms can extend up to 10 years for working capital or equipment and up to 25 years for real estate components.

The SBA guarantees 85% of the loan amount for loans up to $150,000 and 75% for loans above that. This guarantee protects the lender—not the borrower—but makes financing more accessible.

7(a) small loan

The SBA 7(a) Small Loan program offers financing up to $500,000, with a more automated underwriting process. It’s well-suited for smaller expansions, working capital infusions, or modest acquisitions. While structurally similar to the standard 7(a), it features reduced documentation and faster processing.

SBA express loans

SBA express loans are also capped at $500,000 but offer expedited decisions. The SBA provides a response to the lender within 36 hours, which can speed up – but not guarantee – faster funding decisions. These loans are often used for short-term working capital, equipment purchases, or revolving lines of credit, which can have terms of up to 10 years. The trade-off is that the SBA guarantees only 50% of the loan, which may result in more conservative underwriting or higher interest rates.

SBA 504 Loans

If you’re purchasing real estate or major equipment, an SBA 504 loan may offer more favorable terms than a 7(a). This loan is structured in three parts: a private lender covers 50%, a Certified Development Company (CDC) provides 40%, and the borrower contributes 10%. For startups or special-use properties (e.g., hotels, gas stations), the borrower’s contribution may increase to 15–20%.

504 loans can only be used for fixed asset investments—such as buying or renovating owner-occupied real estate or purchasing long-life equipment. They cannot be used for working capital, inventory, or debt refinancing. Terms are typically 10, 20, or 25 years, with fixed interest rates on the CDC portion.

To qualify, the borrower must occupy at least 51% of an existing building (or 60% of a new construction project), with plans to occupy 80% over time. Passive real estate investment is not allowed.

SBA Microloans

The SBA Microloan program is designed for startups and very small businesses that may not qualify for larger financing. Loans are capped at $50,000, with the average loan amount around $15,000. They are administered by nonprofit, community-based lenders that receive SBA funding and set their own underwriting criteria. These lenders often serve specific regions or business populations.

Funds can be used for working capital, inventory, equipment, or basic startup expenses—but not for real estate purchases or refinancing. Terms are up to six years, and most lenders require a personal guarantee, some collateral, and a detailed plan for use of funds. Because underwriting is handled locally, requirements may vary between intermediaries.

Can you combine or layer SBA loan types?

In some cases, combining SBA loan types can be a strategic way to match your financing structure to your business goals – particularly if you’re acquiring both a business and the real estate it occupies. However, some lenders may not be willing or able to process concurrent SBA loans, so early coordination is crucial.

For example, if your project totals $2.8 million, with $1.8 million for real estate and $1 million for the business acquisition and working capital, you might use a 504 loan for the property and a 7(a) loan for the business. This allows you to leverage the long-term, fixed-rate terms of the 504 loan for the real estate and the flexibility of the 7(a) loan for inventory, goodwill, and staff-related costs.

Collateral is typically aligned with the loan structure—real estate secures the 504 loan, while business assets and a personal guarantee secure the 7(a).

Keep in mind that combining loans increases the importance of repayment capacity. Lenders will assess your Debt Service Coverage Ratio (DSCR), and a minimum of 1.25 is generally required—meaning the business should generate 25% more in annual cash flow than its combined loan payments.

Also, the total SBA 7(a) loan amount is capped at $5 million. The SBA guarantee can cover up to 75-85% of that, meaning the maximum guaranteed portion is $3.75 million for larger loans.

Key documentation lenders expect

Applying for an SBA loan requires a thorough, well-organized financial package. Here’s what lenders will typically request:

A well-crafted business plan – lenders want to understand how your business will operate, make money, and why it’s positioned for long-term success.
Tax returns – typically three years of personal and business tax returns.
Personal Financial Statement (SBA Form 413) – this document lists all of your assets, liabilities, income, and obligations. It’s typically required for all owners with 20% or more equity.
Business Financial Statements – for acquisitions of existing businesses, expect to provide the last three years of profit and loss statements, balance sheets, and cash flow statements. Lenders will generally look for a DSCR of 1.25 or higher.
A Current Debt Schedule – a breakdown of all outstanding business debts, including payment amounts, terms, and remaining balances.
Loan Application Form (SBA Form 1919) – covers basic information about your ownership structure, affiliates, existing debt, and legal history. This is also generally required for all owners with 20% or more equity.

If you’re buying an existing business, lenders may also request a copy of your purchase agreement or letter of intent, a formal valuation or appraisal, and historical financials and tax returns from the seller.

Due diligence matters

One of the most common reasons SBA loan applications stall—or fail altogether—is incomplete, inconsistent, or poorly prepared documentation. Many borrowers underestimate just how rigorous the review process can be.

A CPA can help structure your loan package in a way that speaks directly to lender expectations. For example, a Quality of Earnings (QoE) review can help confirm that a business’s reported earnings are not only accurate but also sustainable.

Similarly, cash flow projections are critical—especially for startups or businesses undergoing a transition. Lenders typically want to see 12 to 24 months of forecasts that are grounded in realistic assumptions.

And pre-due diligence reviews can uncover financial risks that might otherwise derail a deal. Whether it’s inconsistencies in seller financials, unexplained liabilities, or customer concentration issues, identifying these risks early gives borrowers the opportunity to renegotiate deal terms—or walk away from a transaction that may not be as solid as it seems.

Preparation is a strategy

An SBA loan isn’t just a form to fill out—it’s a comprehensive process that rewards preparation, transparency, and credibility. A CPA can help anticipate lender concerns, ensure you have the right documentation, and increase your chances for funding success.

If you’re planning to start or buy a business, don’t wait until after your loan application is submitted to get expert support. Reach out for more personalized guidance.

Let’s Talk!

Call us at (209) 577-4800 or fill out the form below and we’ll contact you to discuss your specific situation.

Mitigating liability as a 401(k) plan sponsor: your role as a fiduciary

Posted on February 21, 2025February 21, 2025 by don@mbn.io

February 21, 2025 | by Atherton & Associates, LLP

Offering a 401(k) plan to your team is a meaningful way to invest in their future financial security. However, it also comes with a host of legal and administrative obligations. As a plan sponsor, you’re responsible for complying with regulations designed to protect your employees’ retirement savings and ensure prudent management of their investments.

Understanding these fiduciary duties can help you minimize liability, stay compliant, and safeguard your employees’ retirement assets.

The basics of fiduciary responsibility

The moment you establish a 401(k) plan, you assume fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA). This means you must act in the best interests of your employees and their beneficiaries. Failing to manage the plan prudently, comply with regulations, or address employees’ financial needs can expose you to significant liability.

Some plan sponsors mistakenly believe that hiring third-party service providers relieves them of all fiduciary duties. However, ERISA requires active oversight of these providers and careful decision-making on your part. Even if you delegate specific tasks, you retain ultimate responsibility for selecting and monitoring those service providers.

Fiduciary responsibility: what it means

ERISA broadly defines a fiduciary as anyone who exercises discretionary control or authority over the management or administration of a plan or its assets or who gives investment advice for a fee. This generally includes the plan sponsor, administrator, advisors, and investment managers. For the purposes of this article, we’re focusing on sponsors—the employers—and what you need to know to fulfill your responsibilities.

The plan administrator (sometimes the employer or a designated third party) oversees daily operations. This includes filing the necessary forms, providing timely participant notices, and maintaining plan records. Even if you outsource administration to a third party, you must ensure everything meets regulatory requirements. Inadequate oversight of plan operations could result in costly mistakes, including late filings, missing disclosures, and fines from government agencies.

Fiduciaries can also be “named” in the plan documents (such as the employer or investment manager) or “unnamed” by virtue of their actions (someone who effectively controls the plan’s decisions, even if not officially designated). Ultimately, if you or anyone in your organization has the power to influence the plan, that individual can be considered a fiduciary.

Core fiduciary duties under ERISA

Regardless of the number of fiduciaries involved, each must adhere to these key responsibilities:

Acting in the participants’ best interests
Performing duties prudently and with sufficient expertise
Following the plan documents and policies
Diversifying plan investments
Keeping plan expenses reasonable

At first glance, these requirements might seem vague. However, these rules have been in place long enough that there’s substantial guidance on how to interpret and apply them.

Common pitfalls and best practices for managing them

Even with diligent oversight, plan sponsors can face challenges that put compliance and employee retirement savings at risk. Below are some of the most frequent pitfalls sponsors encounter, along with best practices to address them effectively.

Insufficient oversight of service providers

Failing to properly monitor administrators, recordkeepers, or other third-party service providers can lead to regulatory violations or costly mistakes. Many sponsors assume that outsourcing absolves them of responsibility, but sponsors are required to oversee the performance of any providers they hire.

It’s important to establish a structured process for reviewing your service providers’ performance regularly. Schedule periodic evaluations to ensure they meet expectations and review contracts to confirm fees remain reasonable. Clear documentation of your oversight efforts will also demonstrate compliance during audits or regulatory reviews.

Recordkeeping Errors

Missing or inaccurate records—particularly for loans, hardship withdrawals, or contribution tracking—can lead to compliance issues and penalties. Poor documentation can also create unnecessary challenges during regulatory audits.

Maintain thorough, well-organized records for all aspects of plan administration, including meeting minutes, plan amendments, and loan documentation. Regularly audit your records to ensure they are complete and up to date. Use automated systems where possible to reduce manual errors and ensure consistency.

Misunderstood compensation definitions

Plan sponsors often miscalculate contributions due to unclear or incorrect definitions of compensation, such as excluding bonuses or overtime from eligible earnings.

Work with payroll and HR teams to clarify how compensation is defined in your plan documents and ensure systems are aligned to calculate contributions correctly. When necessary, consult experts to confirm compliance with IRS rules. Regular audits of payroll processes can help identify and address potential issues early.

Nondiscrimination testing failures

Plans that disproportionately benefit highly compensated employees may fail nondiscrimination tests, leading to penalties or required corrective contributions. Low participation rates among rank-and-file employees often exacerbate this issue.

Encourage broader employee participation by offering education sessions about the plan’s benefits, emphasizing matching contributions, or introducing automatic enrollment features. These steps can help create a more balanced plan and reduce the risk of failing nondiscrimination tests.

Delayed contributions

Delays in depositing employee deferrals can result in penalties from the Department of Labor (DOL), including the requirement to compensate participants for lost earnings. Even minor delays can trigger scrutiny.

Synchronize your payroll systems with the plan’s records to ensure timely deposits of employee contributions. Set up automated processes wherever possible to minimize delays. Conduct regular checks to verify contributions are being deposited within the required timeframes.

Audits, compliance, and regulatory changes

Plans with more than 100 participants typically undergo an external audit each year, which scrutinizes financial reporting and compliance practices.

The participant count is now based on the number of participants with account balances rather than just those who are “eligible.” This change took effect for the 2024 plan year and is intended to reduce the burden on plans where many workers may be eligible to participate but don’t maintain an active balance.

Even if an audit is not mandated, performing occasional internal or external reviews can reveal issues such as improper fees or administrative oversights before they become major problems.

Preparing for DOL or IRS Examinations

Regulatory agencies often look for missing documentation, incorrect plan definitions, and oversight failures when they conduct an examination. Plans that have kept comprehensive records, acted promptly to fix issues, and documented each important decision tend to fare better in these reviews. The DOL and IRS also encourage sponsors to self-correct or voluntarily disclose errors to secure more lenient treatment and reduced penalties.

Voluntary correction programs and self-reporting

Errors can and do happen, particularly if you manage a large plan or rely on multiple service providers. Both the IRS and the DOL have established programs allowing plan sponsors to report and fix mistakes before they escalate, typically resulting in reduced fees or no penalty at all. Proactive reviews—ideally yearly or semi-annually—are often the easiest way to catch potential issues. Self-correction not only saves money but also demonstrates your intention to prioritize the plan’s health and function.

Staying compliant

Sponsoring a 401(k) plan is both a valuable benefit for your employees and a serious legal and ethical responsibility. While these duties can feel daunting, the good news is that you don’t have to manage them alone.

Outsourcing key responsibilities to professionals can significantly reduce your burden. These experts bring the necessary expertise to handle the complexities of investment decisions, plan administration, and compliance. However, it’s important to remember that outsourcing doesn’t absolve you of all liability; you retain the responsibility to select and monitor these professionals carefully.

By staying informed, establishing strong internal controls, and relying on seasoned experts where appropriate, you can meet your fiduciary obligations with confidence while safeguarding your employees’ retirement savings.

This article is for informational purposes only and should not be considered legal advice. If you have specific questions or concerns about your 401(k) plan, consult with a qualified professional to ensure compliance and protect your organization and your employees.

Let’s Talk!

Call us at (209) 577-4800 or fill out the form below and we’ll contact you to discuss your specific situation.