Small Business Administration loans can provide flexible financing options on competitive terms if you’re starting or expanding a small business. Depending on the type of loan, it can be used for a variety of purposes, such as purchasing equipment, real estate, or inventory.
But applying for and approving an SBA loan may require detailed documentation. Before applying, take the time to understand the process and requirements.
“The better prepared you are, the easier it will be,” says Gerri Detweiler, director of education for Nav, an online marketplace for business finance.
What are SBA loans?
Rather than lending money directly to small businesses, the SBA guarantees loans. Since this security reduces the risk for lenders, small businesses can access capital more easily.
Also, SBA loans usually have significantly lower interest rates than credit cards.
Entrepreneurs can choose from several types of SBA loans. The type of SBA loan you need will depend on how you use it and how much you want to borrow.
Here are some of the most common types of SBA loans:
loan 504. Depending on your industry and loan needs, you may qualify for up to $5.5 million to purchase real estate and equipment.
These loans are granted in partnership with a certified development company, a non-profit organization that promotes economic development within its community. CDCs are certified and regulated by the SBA and work with participating lenders to provide financing for small businesses.
7(a) ready. This is the most popular type of SBA loan, available for up to $5 million, for furniture, equipment, inventory, real estate, and working capital.
Community benefit. 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 renew or expire on September 30, 2022.
Microcredit. This program is for loans under $50,000. The average microloan is about $14,000, says Dianna Seaborn, director of the SBA’s Financial Aid Office.
Disaster loan. Through this program, borrowers can access low-interest loans of up to $2 million directly from the SBA to repair or replace damaged or destroyed real estate or other assets in an area. declared disaster. Your loan will be based on financial need, whether or not your business has suffered property damage.
Businesses can also access a special disaster loan program when an essential employee who is a reservist is called up for active duty.
How to qualify for an SBA loan?
When applying for a small business loan, the lender will typically determine whether you would qualify for a conventional business loan with reasonable credit terms without SBA support, says Debbie Fernandez, retired SBA branch manager and current volunteer of the non-profit company. Score mentoring group.
If you don’t qualify, the lender can apply for the SBA loan guarantee. A borrower cannot apply for the guarantee directly through the SBA.
SBA loans are available to borrowers who meet these conditions:
- Location: The business must be located and operated in the United States and controlled by a US citizen or a person with lawful permanent resident status.
- Type of company: The business must be for-profit and in an eligible industry.
- Investment: The borrower must have sufficient invested equity to operate on a solid financial footing.
- Cut: Only small businesses are eligible. Size requirements depend on industry and number of employees or average annual revenue.
What are the SBA loan requirements?
Each lender sets their own lending rules within the SBA settings. A lender may impose additional requirements that are stricter than those of the SBA.
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 loan risk. A startup needs cash flow projections, and an established company needs business plans and proof of viability, as well as bill payments.
SBA loan submission requirements include:
- Borrower information, with a list of owners, ownership percentage, criminal history, and other personal information
- Organization statutes
- Commercial licenses
- Lawsuit, judgment or bankruptcy documents, 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 statements for the past three years
- Real estate documents, including appraisals, rental agreements and any environmental investigation reports
- Major agreements, such as franchise, purchase or supply of real estate
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 states that a lender may have an interest in the borrower’s personal or business property. Many UCC deposits can affect your loan risk.
Lenders may also require you to have personal and business credit scores. Of the many business credit ratings, the SBA typically uses the FICO small business rating service.
If you don’t have a FICO SBSS score or if it’s low, says Detweiler, “It doesn’t mean you can’t get a loan, but it does mean your application will be manually reviewed and may be more difficult to approve.”
She adds that many small business owners don’t have established credit in their business name or don’t know if they have a commercial credit history.
“If you haven’t established credit for your business, the credit bureaus have no way of evaluating how well the business manages its debt,” Detweiler says.
And this lack of data can slow down the application process.
If possible, try to establish credit in your business name before you start shopping for a loan. If you have a business credit report, get a copy and check it for accuracy.
“Check your credit in advance so you don’t run into any obstacles during the application process,” says Detweiler.
How hard is it to get approved for an SBA loan?
SBA loans are designed to have less stringent approval criteria than conventional small business loans. But loan approval still depends on the strength of your business and your credit.
The lender will use your documentation to assess the strength of your request. 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 of the SBA’s Office of Capital Access:
- Reputation and credit history of applicant, company (if applicable), associates and guarantors
- Candidate management experience
- Company strength
- Past earnings and projected cash flow
- Ability to repay the loan with business income
- Sufficient invested equity to operate on a solid financial footing
- Potential for long-term success
- Nature and value of collateral, although inadequate collateral is not the only reason for loan refusal
- The effect any affiliate may have on the applicant’s ability to repay
How can you prepare for an SBA loan?
For a successful loan application, preparation is essential. Not being prepared can delay an application or lead to its rejection.
“Not having good financial information and a well-thought-out, justifiable (business) plan is a typical reason for an application to stagnate,” says Seaborn, “especially for younger, less experienced business owners.”
Fernandez agrees that the business plan is the cornerstone of your candidacy.
“Without a business plan, you can’t communicate your business model to the lender or investors — your product, service, the problem you can solve,” she says. “They need to know the details of your business.”
She adds that the business owner must complete everything sections of the business plan. If the market analysis or the financial projection, for example, is missing, the lender can reject the application.
“These partners and mentors can help you build your business plan,” says Manger, and that’s the first step.
Once you’re ready to apply, you can contact a lender directly or use the SBA’s online lender matching tool. A local SBA-licensed lender will typically contact you within 48 hours of submitting your information through the Lender Matching Tool.