Table of Contents
- What Are SBA Loans?
- Types of SBA Loans
- Minimum Requirements for SBA Loans
- Applying for SBA Loans: A 5-Step Guide
- Applying for an SBA Loan Online
- Finding an SBA Loan That Works for You
It’s notoriously difficult to get approved for a long-term loan as a small business owner. That’s where SBA loans come in handy. With an average loan value of $371,000, traditional SBA 7(a) loans are among the most affordable and accessible long-term business loans for SMB entrepreneurs.
The catch is that the SBA loan application process requires a lot of time, energy and documentation. That’s why we put together this quick how-to guide to nailing your SBA loan application. Because we believe that with the right know-how, your business can access the capital it needs through the SBA and its lending partners.
What Are SBA Loans?
SBA loans are unlike regular term loans offered by banks and credit unions. This is because up to 85 percent of the loan amount provided through an SBA-approved lender is secured by the U.S. Small Business Administration, a federal government agency dedicated to supporting American small businesses.
As a small business owner, the SBA is one of your closest allies. By partnering with lending partners, including banks, community development organizations, credit unions and alternative online lenders, the SBA makes loans more accessible to small business owners.
The Benefits of SBA Loans
Before we dig into how SBA loans work, we should run over the various benefits that SBA loans offer small business owners. Best of all, the benefits of SBA loans are multi-faceted, since they have numerous benefits for both the lender and the borrower. Some of the main advantages of SBA loans include:
- Lower down payment requirements
- Annual percentage rate (APR) limits
- Generous repayment terms (10+ years)
- Provides financing for 75 to 90% of project costs
- Counselling and business education offered by SBA
Disadvantages of SBA Loans
It’s important for prospective borrowers to know that SBA loans aren’t perfect, and neither are they for every small business owner. Like virtually every small business financing option, SBA loans come with their share of tradeoffs. Below, we’ve listed some of the main criticisms and drawbacks associated with SBA loans:
- Applicants must put a lien on personal assets
- Can negatively impact liquidity
- Can only apply through SBA-preferred lenders
- More exclusive than standard term loans
Let’s unpack these criticisms a bit. First, if you have personal assets that can be used to help secure the loan (think home equity, personal vehicles or any other store of value), then you will be required to put a lien on these assets. In other words, you need to provide a legal filing that permits the lender to recoup these assets if you default on the loan.
In other words, defaulting on an SBA loan can have massive downstream consequences.
Plus, your liquidity can be negatively affected if you put a lien on these assets, since you won’t be able to sell them or transfer ownership until the loan has been repaid.
It’s important to note, though, that these criticisms shouldn’t rule out SBA loans as a potential financing option. Most SBA loans are paid in full without default, out of which no issues arise.
This all goes to show that if you abide by the rules and repay the loan, you won’t have any problems with your SBA loan affecting your personal assets or financial security.
How SBA Loans Work
Now that we know the various advantages and disadvantages of SBA loans, let’s explore how they work.
To begin, it’s important to point out that lenders need to protect their investments. Otherwise, they can go out of business if the loans they issue are too risky. The truth is that every small business loan presents a risk to creditors since they can be defaulted on, which has harsh consequences for their bottom line and can involve lengthy legal battles.
To offset the risk of lending to small businesses, lenders collaborate with the SBA to secure each loan. The SBA does this by providing a guarantee to lenders that the money lent will be paid back.
That is, the SBA will provide the capital for the lender to recoup the losses incurred after a borrower defaults.
It’s a common misconception that the SBA issues small business loans. Rather, the SBA doesn’t make any direct loans at all. Instead, they provide an SBA guarantee to preferred lenders (like local banks and credit unions) who issue loans in accordance with the SBA’s requirements.
Types of SBA Loans
Contrary to what many applicants believe, there are several kinds of SBA loans that borrowers can choose from depending on their needs. Below, we’ve outlined the various SBA loan options available to small businesses and the ideal applicant for each.
SBA 7(a) Loans
When most small business owners think of an “SBA loan,” they think of SBA 7(a) loans. The most popular type of loan program backed by the SBA, the SBA 7(a) loan program provides flexible long-term capital to businesses that need working capital, equipment investments, debt refinancing and more.
Every fiscal year, the SBA approves over 50,000 SBA 7(a) loans, eclipsing over $20 billion in total value annually. It’s no surprise, then, that 7(a) loans are the most commonly applied-for loan type in the SBA lending program.
These loans can be applied for through any preferred lender that works with the SBA, and they have the highest rates of approval.
The second-most popular type of SBA loan, CDC/504 loans are large, high-value loans with long repayment terms that are used to finance significant fixed assets. Commonly used to purchase real estate or to fund major business expansion projects, CDC/504 loans are specifically dedicated to large capital projects that cannot be funded through other means.
CDC/504 loans operate according to distinct rules. For instance, to qualify for an CDC/504 loan, borrowers must be able to front 10 to 20 percent of the total project cost. Under this arrangement, the private lender contributes between 40 and 50 percent of the cost, and a Certified Development Company (CDC) provides the last 40 percent.
If a capital expense is projected to cost $500,000, then the borrower must be able to contribute at least $50,000 themselves.
The SBA CAPLine is the most popular SBA loan type dedicated to seasonal working capital for small businesses. Introduced in 2011, the SBA CAPLine offer maximum loan sizes of $5 million with between 75 and 85 percent of the guarantee coming directly from the SBA. As of 2019, the SBA CAPLine family of loans include:
- Working Capital CAPLine
- Standard Asset Based CAPLine
- Contract CAPLine
- Seasonal CAPLine
- Builders CAPLine
The entire CAPLine family of loans are expense-specific, meaning they must be used to finance specific projects. In the case of a Seasonal CAPLine, the funds must be put toward temporary seasonal expenses, like increased labor.
For a Builders CAPLine, funds must be used solely for construction expenses or substantial renovations.
SBA Disaster Loans
For businesses that have been impacted by a natural disaster, the SBA offers Disaster Loan Assistance at low interest rates. These loans have strict eligibility requirements and are specifically geared toward businesses and homeowners that have lost property due to disasters. These loans must be put toward repairing or replacing physical property.
SBA Microloan Program
Not every business owner needs to take out a 6- or 7-figure loan to finance their capital projects. This is why the SBA introduced their Microfinance Program, which is geared toward startups and entrepreneurs that require small amounts of capital to get on their feet or to overcome minor cash flow issues.
The average microloan issued through the SBA is $13,000. However, the SBA Microloan Program provides loans of $50,000 or less to for-profit small businesses.
One distinction between SBA-backed microloans, as opposed to 7(a) loans, is that they cannot be used to acquire real estate or to refinance existing debt.
SBA Express Loans
The entire SBA funding process, from application to deposit, takes at minimum, 30 to 90 days. Borrowers in need of fast financing should consider SBA Express Loans. Applicants will know within 36 hours whether or not they’ve been approved. The maximum loan amount is $350,000 through this program, and the SBA backs 50 percent of each loan. For this reason, these loans can be challenging to qualify for, as it presents more risk for the lender.
Minimum Requirements for SBA Loans
Per the SBA website, there are several rather lenient qualification standards for SBA loans. Standard SBA loans cannot be issued to prospective borrowers unless all the following minimum requirements are met:
- The business is physically located and operates in the United States or its territories
- The owner has invested equity into the business
- The business cannot receive funding by other means
- The business is a legal, for-profit enterprise
While the above requirements are relatively lenient, applicants should be aware that the lending institutions you borrow from may make it more difficult to get approved. Depending on the lender, you may find that you cannot apply with a FICO credit rating of less than 580.
In other cases, the minimum credit score for applicants can be as high as 680.
Applying for SBA Loans: A 5-Step Guide
Now that we know everything about SBA loans, we can move on to the fun part—applying for, and getting approved for, your first-ever SBA loan.
We’ll walk you through the preparation and application process, so you can concentrate, worry-free, on what matters most to you: your business’s bottom line.
Step 1: Ask Yourself “Why”
Before you consider applying for an SBA loan, you must first understand why you need it. Although this may seem self-evident to you (after all, doesn’t every business need cash?), it isn’t so obvious to the lender.
Not only is it wise to prepare a response to the inevitable “why” question, it’s also important to reflect on why, exactly, an SBA loan will meet your needs. If there are other options available to you, you may be better off exploring those opportunities. With many affordable alternative small business lending options to choose from, you should weigh your options before settling on an SBA loan.
The bottom line is that you should never apply for a loan that you don’t need. However, over-borrowing can also have negative ramifications for your business. If, for example, you only need capital to see your company through a temporary cash crunch or a seasonal project, you shouldn’t consider applying for a decade-long SBA 7(a) loan.
Step 2: Start Searching
After you’ve weighed your options and have decided on applying for an SBA loan, you can begin searching for the best lender. Search online for SBA lenders that cater to your industry or niche (i.e., Google “SBA lenders for veterinarians”), and write down a shortlist of potential lenders.
Ideally, you will have to include a healthy mix of banks, credit unions, non-profit lenders and online lenders.
Before you fire off your application, you should note that banks (especially larger multinational banks) tend to have the strictest eligibility requirements. For this reason, you may only want to include banks in your shortlist if you have the following credentials under your belt:
- You have a high FICO score (680+)
- You have personal or business assets with which to secure the loan
- You aren’t in a hurry
Regarding the last point, large banks are notoriously slow-moving when it comes to processing and reviewing SBA loan applications. In the most extreme cases, it may take up to 3 months for a bank to approve and fund your loan.
Applicants in need of cash in a hurry may be better off skipping banks altogether and instead applying to smaller lenders or online lenders who specialize in SBA Express Loans.
Step 3: Covering Your Bases
To boost your chances of getting approved the first time around, you need to ensure that you’re applying at the right time. For instance, if your business isn’t well-established, recently launched (within the last six months or so), isn’t generating substantial revenues or has bad business credit, you might want to consider delaying your SBA 7(a) loan application.
To get your business’s FICO score up, consider applying for a short-term business loan or a microfinance option. This way, your company can acquire the funding it needs to get off the ground while also building a positive credit rating with the major credit reporting agencies (i.e., TransUnion, Equifax and Experian).
Last, it’s important to consider that the higher your credit score the more likely you will get approved for a lower interest rate or more favorable terms. For this reason, we recommend applying with a personal or business credit score of at least 650 if you want to save money in the long-run via reduced APRs.
Step 4: Gather the Documents
Now that you’ve decided on where you will be applying, you can start collecting the documents needed to complete your application. The documents you need will vary according to the policies of the lending institution, although virtually all lenders will ask for the following standard items:
- One piece of government ID
- Proof of business ownership
- Incorporating documents (e.g., Articles of Incorporation)
- Licenses and permits
- Recent tax returns and financial statements
- Profit and Loss statements
- Balance sheets
- Business plan and use of loans
- Business debt schedule
No matter where you choose to apply, you should never show up empty-handed. This applies to both in-person lending from your local bank branch, or entirely online loan applications.
Since every lender is assuming some degree of risk when lending to you, they will want you to verify your business’s financial standing and authenticate your ownership of the business.
The permits and licenses that you must present as part of your application file will vary by state.
Step 5: File the Application
You’ve finally gathered the required documents for your SBA loan application and have narrowed down a preferred lender and a loan type that best suits your needs.
Now that the hard part is done, you can move on to the fun stuff—applying and getting approved for the loan!
Of course, where you choose to apply will determine what this process looks like. However, physical bank branches and credit unions will almost always require you to apply in-person.
To do this, you must visit your local branch and ask to schedule an appointment with their in-house loan officer. Make sure you state your intention to apply for an SBA loan, and that you receive a copy of their loan application paperwork.
Nailing the Pitch
When you meet with the loan officer, ensure that you bring the completed loan application forms, all relevant documents and pieces of identification and a brief pitch explaining why you need the loan and how you intend to use it.
Think of the meeting with the loan officer as a type of presentation where you “sell” the loan to the officer using the simplest terminology possible. It’s always a good idea to draft a business plan to present to the loan officer.
A word of advice: don’t overdo your “pitch”. Although it may seem tempting to bring in a PowerPoint presentation outlining your business’s 10-year financial forecast and roadmap to profitability, this usually isn’t a wise move. Instead, bring a well-composed business plan and executive summary that explains, in clear language, where the funds will be allocated.
We recommend rehearsing your pitch several times before you meet with the loan officer. If you consistently find that the presentation takes 15 minutes or less, then you’re right where you want to be.
Remember, you don’t want to bore the loan officer to death, but you also want to ensure that all of your main talking points are covered.
Applying for an SBA Loan Online
Every year, an increasing share of SBA loans are being applied for online. Not only are online SBA loans significantly more convenient than bank-issued SBA loans, they are also easier to qualify for, too. This is especially true among borrowers who lack time in business or don’t have collateral to secure their loan.
If you want to skip out on the queues at your bank branch, consider applying for an SBA loan through an online lender. There are plenty of online small business lenders that offer competitive rates for SBA loans. Best of all, online lenders have higher loan approval rates than brick-and-mortar creditors.
Online small business lenders use a secure online web portal to process your loan. Without having to fill out dense paperwork or spend hours preparing a sales pitch to a loan officer, you can complete many online loan applications in a single hour or less. This explains why online loans are becoming the go-to choice among entrepreneurs strapped for time.
Plus, online lenders typically do not require as much documentation as in-person lenders. It’s no surprise, then, that more and more borrowers are moving online for a simpler and more streamlined loan application process. To get started, simply visit an online lender’s website to see how to initiate an SBA loan application.
Finding an SBA Loan That Works for You
Not all SBA loans are the same, and not all SBA lenders are the same either. It’s crucial that every prospective borrower do their homework before they apply for an SBA loan to compare rates, terms and eligibility requirements. Just because you qualify for a loan from one institution says nothing about your suitability for any other.
To find an SBA lender that satisfies your business’s needs, you can leverage the official SBA Lender Match tool. SBA’s Lender Match system is a free online referral service that can set you up with an SBA-preferred lender that you qualify for. Alternatively, you can use a loan broker or online lending marketplace to help assist with your loan search.
In 2019, you can expect more and more small business owners to migrate to online lenders to secure SBA loans. If you want to be part of this burgeoning trend, we recommend shopping around for the best online business loans to help you save time, build credit and start building the business of your dreams.