What Are SBA Loans?
Rather than lend money directly to small businesses, the SBA guarantees loans. Because this guarantee reduces the risk for lenders, small businesses can get easier access to capital.
The SBA is a U.S government agency, which provides loans and leases as well as other assistance to small businesses. In order to be eligible for a SBA loan, your business must be deemed ‘small’, which is often defined as having fewer than 500 employees or purchasing fewer than $10 million in assets. Your business may also fall within the scope of the agency’s Micro-lending program, which provides loans of up to $50,000 to small businesses and nonprofits.
If your business qualifies as ‘small’, you may be eligible for an SBA loan, which offers a variety of repayment options and grants your business an opportunity to grow. The agency also offers a variety of specialized loans for different industries, such as water and wastewater treatment facilities, steel production, and pharmaceutical and medical equipment manufacturing.
Also, SBA loans usually have significantly lower interest rates than credit cards.
Entrepreneurs can choose from several kinds of SBA loans. The type of SBA loan you need will depend on what you're using it for and how much you want to borrow.
Here are some of the most common types of SBA loans:
504 loan. Depending on your industry and loan requirements, you could qualify for up to $5.5 million to buy real estate and equipment.
These loans are provided in partnership with a certified development company, a nonprofit that promotes economic development within its community. CDCs are certified and regulated by the SBA and work with participating lenders to provide financing to small businesses.
7(a) loan. This is the most popular type of SBA loan, available in amounts of up to $5 million, for furniture, equipment, inventory, real estate and working capital.
Community Advantage. A pilot loan program, it is designed to meet the needs of small businesses in underserved markets with loans of up to $250,000. CA will either renew or expire on Sept. 30, 2022.
Microloan. This program is for loans of less than $50,000. The average microloan is for about $14,000, says Dianna Seaborn, director of the Office of Financial Assistance for the SBA.
Disaster loan. Through this program, borrowers can access low-interest loans of up to $2 million directly from the SBA to repair or replace real estate or other assets damaged or destroyed in a declared disaster area. Your loan will be based on financial needs, regardless of whether your company suffered any property damage.
Businesses also can access a special disaster loan program when an essential employee who is a reservist is called to active duty.
How Do You Qualify for an SBA Loan?
When you apply for a small-business loan, the lender will typically determine whether you'd qualify for a conventional business loan with reasonable credit terms without the SBA's backing, says Debbie Fernandez, retired SBA office branch manager and current volunteer with the nonprofit business mentoring group Score.
If you don't qualify, then the lender can seek the SBA loan guarantee. A borrower cannot apply for the guarantee directly through the SBA.
SBA loans are available to borrowers who meet these requirements:
Location: The business must be located and operated in the U.S. and controlled by a U.S. citizen or someone with lawful permanent resident status.
Business type: The business must be for-profit and in an eligible industry.
Investment: The borrower must have sufficient invested equity to operate on a sound financial basis.
Size: Only small businesses qualify. Size requirements depend on the industry and either the number of employees or average annual receipts.
How Do I Apply For An SBA Loan?
The application for an SBA loan is very straightforward and can be done online using the organization’s website. Simply visit the website and follow the on-screen instructions. One of the first things you will need to do is create a user account and select a user name and password. Next, you will need to identify the type of business you are operating, the address of your physical location, and the telephone number you can be reached at by customers or staff. You will also need to include your Social Security number and complete the legal document called a ‘Business License’. Finally, you will need to upload various documents supporting your application, including a recent profit and loss statement, balance sheet, and, if applicable, tax returns. You are advised to use professional accountants to help you prepare your personal and business tax returns.
After you have completed the basic application, you will be asked to answer some questions about your business. The website will then verify your business information and assess your credit worthiness. Once your application has been verified, you will be presented with a list of lenders who have expressed an interest in offering you a loan. You will have the option of contacting these lenders directly via phone or email, or you can begin negotiating a loan agreement with the lenders through a commercial lending agency. Agencies that represent lenders such as Bank of America, Wells Fargo, and U.S. Bancorp are often contracted by the SBA to offer loans and work with business owners to ensure that their loans are processed in a timely manner. This is vital because the smaller your business, the greater the chance of your application being denied by a lender.
What Are SBA Loan Requirements?
Each lender sets its own rules for lending within the SBA's parameters. A lender may impose additional requirements that are stricter than the SBA's.
When you apply for a small-business loan, you will need to gather documents that the lender and the SBA will use to determine your lending risk. A startup needs cash-flow projections, and an established firm needs business plans and proof of viability, plus bill payments.
SBA loan submission requirements include:
Borrower information, with a list of owners, percentage of ownership, criminal background and other personal information
Articles of organization
Business licenses
Lawsuit, judgment or bankruptcy documentation, if applicable
Personal financial statement for all owners of 20% or more
Business financial statements, including an income statement and balance sheet, cash-flow projection, business debt schedule, and income tax returns for the last three years
Real estate documents, including appraisals, lease agreements and any environmental investigation reports
Major agreements, such as franchise, real estate purchase or supply
The lender will also look for red flags, such as tax liens or too many Uniform Commercial Code filings. A UCC filing is a legal document that says a lender may have an interest in the borrower's personal or business property. A lot of UCC filings can affect your lending risk.
Lenders may require you to have personal and business credit scores as well. Of the many different business credit scores, the SBA typically uses the FICO Small Business Scoring Service.
If you don't have a FICO SBSS score or it's low, Detweiler says, "That doesn't mean you can't get a loan, but it means your application will be manually reviewed and possibly more challenging to approve."
She adds that many small-business owners either have not established credit in their business's name or don't know whether they have a business credit file.
"If you haven't established credit for your business, the credit bureaus have no way to evaluate how the business handles its debts," Detweiler says.
And this dearth of data can slow the application process.
If possible, work to establish credit in your business's name before you start loan shopping. If you have a business credit report, get a copy and review it for accuracy.
"Check your credit ahead of time so you don't run into a hurdle during the application process," Detweiler says.
What Documents Do I Need To File?
In order to apply for an SBA loan, you will need to submit the following documents:
A current and complete Business License – This must be obtained from the city or county in which your business is located. Check with the city or county clerk’s office to see if you need to renew your license annually.
Receipt of payment for last year’s taxes – This is also vital in order to prove that you have paid your taxes and are committed to doing so in the future. If you have not yet filed your taxes, you can ask for an extension.
A copy of your business plan – Your business plan should include a detailed description of your company, a financial analysis of your projected revenues and expenses, and the steps you intend to take to achieve profitability. You are advised to consult with an expert business advisor or attorney to put together your business plan.
A proof of ownership of the intellectual property rights – For example, if you are the owner of the patent or trademark used by your business, you will need to provide proof that you own the rights to that property. Typically, this includes providing evidence of registration for the patent or trademark with either the United States Patent and Trademark Office or a country’s equivalent of a patent office. If you are the sole owner of the intellectual property rights, you may not need to provide any additional documentation. However, if you are operating a business with investors, each of them may need to sign an agreement to certify that he or she owns the intellectual property rights in the company.
Personal Financial Statements – In order to qualify for an SBA loan, you will need to provide personal financial statements. This includes a Personal Financial Statement (PFS) for yourself and one for each owner of more than 20% of the business. Your PFS should demonstrate that you have the means to repay the loan. You can find a sample PFS online at the SBA website or download a free PDF from the agency’s website. You are strongly encouraged to consult an expert accountant or attorney to help you prepare your personal and business financial statements. They can ensure that your business is financially viable and help you work through any potential tax issues. If you are self-employed, you may choose to use the business side of your tax returns to show your income and expenses. However, if you are employed, you must use your personal tax returns to show your income and expenses (unless you want to claim the business expense for mileage).
Employment and/or Training Records – You must have a reliable source for verifying your employment. This could include paying bi-weekly phone bills or rent, which enables the landlord to verify your rental agreement. Alternatively, you could ask potential employees for direct references or ask past employers for a recommendation. Remember, your SBA loan will be considered ‘neighborhood’ lending, which is intended to reach out to people in your community and give them an opportunity to succeed. Your business should not engage in any illegal activity and should not pose a threat to national security. A signed Note From A Banker – Your loan agreement with a bank will include the terms and conditions of your financing, as well as a promissory note (Note). While it is not required that a bank formally approve your application, signing a Note from a bank is a good way to prove to the lender that you have indeed tried to negotiate an acceptable loan agreement with them. This will expedite the loan approval process and save you both time and money in the long run.
Financial Projections For Next 12 Months – Ideally, you should have prepared financial projections for next 12 months. This will be invaluable to both the lender and the lender’s consultants who will be working with you to help you achieve profitability. The consultants will use the projections to establish a realistic timeline for the repayment of the loan, and the lender will use the projections to establish the business’ credit worthiness. Any Additional Documentation – This can include things like insurance policies, credit cards, mortgage applications, etc. You can find a complete list of the documentation required for your SBA loan approval on the agency’s website.
As you can see, the documentation required for an SBA loan is very similar to the documentation required for a business loan from a bank. The main difference is that banks will require you to have a profit and loss statement and other corporate documentation. The SBA requires you to have a business license and personal financial statements. In addition, you must provide a signed Note from a bank or other reputable third party, which serves as a formal commitment to make the loan, as well as provide the agency with proof that you have negotiated an acceptable loan agreement with the bank. Finally, the SBA requires you to submit your business plan and financial projections for next 12 months. If you are unable to provide these documents, you may be able to negotiate an alternative loan with another lender who is willing to make a smaller loan to you. However, you should still endeavor to obtain the documentation required from the SBA. This is because the agency will still consider your loan to be ‘neighborhood’ lending and may offer you better terms than a bank would due to their government status.
What Are The Repayment Terms?
The terms and conditions of your SBA loan will be determined by the government agency, which means that they will have the final say in the case of any disputes. However, you should still try to negotiate an acceptable payment plan with the agency. If your business is successful and you are able to pay back the loan in accordance with the agreed-upon terms, the SBA will consider this a ‘good deed’ and can help you secure additional loans from them in the future.
How Hard Is Getting Approved for an SBA Loan?
SBA lending is designed to have less strict approval criteria than conventional small-business lending. But loan approval still hinges on the strength of your business and credit.
The lender will use your documentation to gauge the strength of your application. Here are some criteria you should expect the lender and the SBA to use to assess your loan application, according to Bill Manger, associate administrator for the Office of Capital Access at the SBA:
Reputation and credit history of the applicant, business (if applicable), associates and guarantors
Management experience of the applicant
Strength of the business
Past earnings and projected cash flow
Ability to repay the loan with business earnings
Sufficient invested equity to operate on a sound financial basis
Potential for long-term success
Nature and value of collateral, although inadequate collateral will not be the sole reason for a loan denial
The effect any affiliates may have on the applicant's repayment ability
How Can You Prepare for an SBA Loan?
For a successful loan application, preparation is key. Being unprepared can hold up an application or lead to rejection.
"Not having good financial information and a (business) plan that is well thought out and supportable is a typical reason for an application to stall," Seaborn says, "especially for younger, less-experienced business owners."
Fernandez agrees that the business plan is the cornerstone of your application.
"Without a business plan, you cannot communicate your business model to the lender or investors – your product, service, the problem you can solve," she says. "They need to know the particulars of your business."
She adds that the business owner should complete all the sections in the business plan. If the market analysis or financial projection, for example, is missing, the lender may reject the application.
Fortunately, the SBA and its partners provide resources to help you prepare your business plan. Any small-business owner can access free help through the SBA's Small Business Development Centers, Women's Business Centers, Veterans Business Outreach Centers or Score.
"These partners and mentors can help you put your business plan together," Manger says, and that's the first step.
Once you're ready to apply, you can directly approach a lender or use the SBA's online lender match tool. A local SBA-approved lender will generally contact you 48 hours after you submit your information via the lender match tool.
Charles L Green
CEO & Founder of Main Source Lending