What is the Credit Elsewhere Test?
Learn what the SBA credit elsewhere test is, why SBA loans require it, and how to demonstrate you cannot get financing on reasonable terms elsewhere.
The credit elsewhere test is an SBA requirement that borrowers must demonstrate they cannot obtain financing on reasonable terms from non-SBA sources. It exists because SBA loans are intended to help businesses that would not otherwise qualify for conventional financing at reasonable rates and terms.
Why the Test Exists
The SBA uses taxpayer funds to guarantee loans and reduce lender risk. To ensure these resources are used appropriately, the SBA requires that borrowers actually need the government guarantee to access capital.
If a business can easily get a bank loan without SBA backing, there is no need for the SBA to take on risk. The credit elsewhere test ensures SBA resources go to businesses that truly need them.
Not a Hard Rejection Test
You do not need to prove you were rejected by every bank in town. You need to demonstrate that you cannot get financing on reasonable terms — meaning at competitive rates, with appropriate repayment periods, and without unreasonable requirements.
How the Test Works
The credit elsewhere determination is made by the SBA lender, not the SBA itself (except for loans processed directly by the SBA). Lenders document why the applicant could not obtain financing on reasonable terms, considering:
- Lack of sufficient collateral for conventional financing
- Business history or financial ratios outside conventional lending standards
- Need for longer repayment terms than conventional lenders offer
- Industry risk factors that make conventional lending unavailable
- Recent business challenges (though with recovery path)
Common Credit Elsewhere Factors
Businesses often pass the credit elsewhere test due to:
- Insufficient collateral: Not enough assets to secure a conventional loan
- Time in business: Too new for conventional lenders' requirements
- Industry risk: Operating in an industry conventional lenders avoid
- Debt-to-equity ratio: Leverage levels outside conventional guidelines
- Cash flow coverage: DSCR borderline for conventional underwriting
- Term requirements: Needing longer repayment than conventional loans offer
What You Need to Do
As a borrower, you typically do not need to shop around and collect rejection letters. Your SBA lender will assess credit elsewhere eligibility as part of their underwriting process.
However, being transparent about your situation helps:
- Explain why you are seeking an SBA loan rather than conventional financing
- Share any prior loan applications or discussions with other lenders
- Be clear about any business challenges or financial limitations
Do not be discouraged by the credit elsewhere test. It is not about proving you are a bad credit risk — it is about documenting why the SBA guarantee makes your loan possible or provides meaningfully better terms.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.