|All content presented here and elsewhere is solely intended for informational purposes only. The reader is required to seek professional counsel before beginning any legal or financial endeavor.|
You can’t get a loan unless you can guarantee its repayment and if you don’t have something of significant value, equal to the amount you need to borrow, you can’t guarantee the loan. The SBA Loan program offers a solution to this conundrum by being the guarantor for the loan incentifying the lending institution to loan you the money. The application process can be overwhelming, however if you take it step by step - you’ll get there.
- Be patient - You can’t control the application process - work with it
- Seek guidance - Use the SBA itself that offers advice in all aspects of the loan process
- Be organized - If you are not of the type - become the type or find someone that is
STEP 1: Eligibility For An SBA Loan
An SBA loan isn’t granted to every business that applies but you can improve your chances. By determining your eligibility before you begin the SBA loan application process you can then make the necessary adjustments for when you do apply. You should also keep in mind the lender may have its own requirements in addition to those required for an SBA loan. Generally speaking, expect the following:
- Credit score. The exact credit score requirements vary slightly depending on which SBA loan you’re applying for. Typically the required personal credit score is at least 620 to 640.
- Down payment. Expect to put down at least 10% for an SBA loan but it could be as high as 30% if you are purchasing real estate.
- Collateral. This is what you’ll offer to increase your chances of the SBA loan approval, which can include both personal and business assets. Real estate, manufacturing equipment, second mortgages are all examples.
- Repayment ability. Cash flow is analyzed heavily, including the business’ debt-service coverage ratio (DSCR). The business DSCR should be at least 1.15. A DSCR of 1 means you have exactly enough to cover debt, but a score of 1.15 means you have extra.
- Time in business. Two years is the standard, but some new businesses may qualify if using enough collateral.
- No debt obligations to the US government. If you’re delinquent on payments to the government, including taxes and federal student loans, then you will not qualify.
- Profitable business. Your business must be profitable for consideration.
- Business size, type and location. This can vary depending on the loan you’re applying for and the industry, but an SBA 7(a) loan requires less than 500 employees. All businesses applying must be located in the U.S.
- Business purpose and impact. The SBA will need to clearly understand the business purpose for your loan and ensure the business purpose aligns with SBA policy goals.
- 51%+ owner-occupied. This is a requirement for commercial real estate loans.
STEP 2: Identify The Right Loan For Your Business
Choosing the right SBA loan to apply for is a critical step because it also influences the lender you choose to work with since not all lenders work with all types of SBA loans:
SBA 7(a) For small businesses to be used for a variety of business needs: Equipment, Real Estate, Cash Flow. It is the most flexible loan guarantee the SBA offers and the money is provided by third party lending institutions. You may wish to look into SBA 7a loan requirements before applying.
Long term, fixed rate loans offered to small businesses to be used for a variety of business needs from real estate, equipment or expansion. The money is provided by large organizations who have decided to help in the economic development of their communities.
Offers loans up to $5 million. This loan is designed for small businesses requiring funding for their short-term needs and general cash flow health. Under this loan structure there are four types: The Contract Loan Program, The Seasonal Line of Credit Program, The Builders Line Program and The Working Capital Line of Credit Program.
SBA Export Loan
The export business is a tricky one. In order to produce the product for sale you need money that you don't have yet because you are waiting on payment from a previous delivery. Most banks will not offer a loan to be spent on production costs whose repayment is based on the client paying for the product upon receipt. The SBA Export Loan solves this problem. They guarantee the loan so a third party will provide an export business with the credit it needs to pay for production costs.
Provides up to $50,000 for small businesses for expansion, working capital, furniture and equipment. The money is provided by non-profit organizations created specifically to provide funding for small businesses to help business development in their communities. Visit our detailed article about the SBA Microloans program.
SBA Disaster Loan
Regardless of business size, profit, capital or anything else, all businesses located within a designated disaster area are eligible for disaster relief. The money is for losses not covered by insurance and for the usual business operating expenses that would have occurred had the disaster not happened.
Seeking professional advice regarding this step is paramount and for that reason the SBA administration has designed themselves to offer the best possible resources for this endeavor. They will even put you in touch with a mentor or organization in your community to coach you on your SBA disaster loan process.
STEP 3: Find your SBA loan provider/lender
As mentioned above; The SBA does not provide the money rather the guarantee. Instead, you work with approved lenders, with the exception being the SBA disaster loans which are the only ones funded directly through the SBA. Choosing a lender is as large of a decision as choosing the loan, so keep the following in mind:
Find the preferred direct lenders. Direct lenders include banks, credit unions, online banks, or other traditional lending institutions. Choose one that is part of the SBA Preferred Lender Program.
Know the questions to ask. Be prepared with the right questions to find the best lender for your SBA loan:
- What is the total SBA loan volume and average SBA loan size?
- Is this lender part of the SBA direct lender program?
- How familiar are they with the SBA 7(a) borrowing and lending processes?
- How long does it take to get pre approved?
- How long will it take to get funded?
- Who is the point of contact?
- What are their internal policies on collateral for a loan like mine?
- Will I need a down payment? If so, how much?
- What are the approximate interest rates I might qualify for on an SBA loan?
You may opt for a loan broker. A loan broker is someone who “shops” the best SBA loan option for you. Typically the brokers are experts in the loans available and have experience with the various programs. It saves a business owner time but a broker does charge additional fees. You can choose the right loan broker by asking them about:
- The number of lenders they work with directly
- How they get paid and the fees they charge
- The number of loans closed
- Are they familiar with both your business and industry?
- The interest rates your business is most likely to qualify for
- The length of time for the approval process and funding
- How much of the process does the loan broker handle versus what is contracted out
Direct SBA lenders vs. SBA loan brokers— which is better?
The answer is, it depends on the industry and type of business you need funding for. The advantage to the SBA loan brokers is their familiarity and expertise with the SBA loan application process. Using a loan broker generally means a quicker funding timeline because you aren’t spending valuable time searching for a lender. The additional fees a loan broker charges may not work with your budget.
STEP 4: Gather all necessary documentation of your business
Each loan type requires a specific set of documents, including some that are unique to the lender. However, some basic requirements are common. This includes basic business details such as your name, age, address, and number of employees. You should also expect to provide a business loan request letter and personal background information. Personal background information includes any previous names and addresses plus criminal records. Other documentation includes:
Business-related documents. This includes resumes of the management team and a detailed business plan. The business plan should include the project, how your business compares to competitors.
Financial documents. This includes historical financials (at least three years) and projected financials, credit records (both personal and business), tax returns, financial statements, and collateral.
Detailed financial statements. Be prepared to show balance sheets with assets and liabilities, cash flow statements, business debt schedules, and all bank statements.
STEP 5: Fill up relevant SBA application forms
Another aspect of the SBA loan application requirements is to properly fill out the forms. These forms must be submitted with the application. These forms could vary slightly depending on the lender, but these forms are the most common among the SBA application.
- SBA Form 1919: Borrower Information Form
- SBA Form 159: Fee Disclosure Form
- SBA Form 912: Statement of Personal History
- SBA Form 413: Personal Financial Statement
STEP 6: Submit completed SBA loan application
When you submit the SBA loan application, think of it as a chance for the SBA to get to know your business at a greater, more personal level. While there is a large amount of paperwork already required, take the time to explain how the funds (including a breakdown of how the funds are used) and exactly how the amount will be repaid. Other important details include:
- An Executive summary
- Business profile
- Ownership breakdown
- Management experience
STEP 7: Work with the SBA lender to close the loan
There are more steps to complete the loan process even once you’ve submitted the paperwork. The next steps are needed to move the loan closer to closing. The length of time this takes depends on both the lender and if there is a need for additional documentation. The timeline to closing includes:
Letter of Intent. An initial Letter of Intent (LOI) is offered once a lender has reviewed the application and is willing to move forward with your application. At this point you will be required to put down a small deposit to proceed.
Underwriting. Once the LOI is submitted, the underwriting process begins. This is the time when the underwriting team may have further questions or request additional documentation.
Loan agreement. This outlines the terms and conditions of the loan, additional deposit required, and any other steps and fees required for closing.
Closing. This is when the loan agreement is signed and all closing costs are paid.
Are There Any Additional Documents Required Before Funding?
Just when you think you have all the documentation submitted, you will likely have to provide even more once you receive approval. By gathering these documents in advance, you can save time in the process and access your funding more quickly. An SBA lender could require the following for the final release of funds:
- Copy of your life insurance policy
- Lease for the business location
- Business valuation
- Purchase agreements (in case of an acquisition)
- Corporate documents
- Tax transcripts from the IRS
Things To Keep In Mind When Applying For An SBA Loan
The approval timeline is lengthy. While it’s possible to get approved within a few weeks, realistically you can expect two or three months before receiving approval.
Knowing your personal and business credit score is crucial, so be sure to review prior to submitting an application. There are numerous credit monitoring services to view it for free or go to annualcreditreport.com.
The most common reasons for applications to be denied are: insufficient credit, not enough collateral, insufficient revenue or capital, too much debt, past criminal record of the applicant, or missing documentation.
Despite the paperwork and stringent requirements for approval, SBA loans have numerous benefits, including flexible repayment terms and lower interest rates.
The SBA loan application process is more intricate versus traditional loans and involves a multitude of steps. However, the effort required can be beneficial to a business with lower interest rates and longer repayment terms for funding. The best approach is to gather all your financial and business documents prior to submission and choose a highly-recommended lender familiar with your unique business needs.