Understanding How To Get an SBA Loan

There are more than 30 million small businesses in the United States, making up more than 99% of all businesses. From startups to established companies, small businesses represent both economic growth and entrepreneurial spirit.

If you are a small business owner, there are many reasons that you could seek an additional loan. You could need to purchase new equipment or inventory. You may also be looking to expand or take advantage of a business opportunity.

Whatever the reason, financing your business’s needs will come up as a small business owner. One option for financing is an SBA loan. SBA loans provide small business owners with access to capital and have a lot of benefits.

If you decide to apply for an SBA loan, you want to give your loan the best chance for approval. Knowing what to expect from the SBA loan application process can help you prepare.

What is an SBA Loan?

The Small Business Administration (SBA) does not loan money to borrowers directly. Instead, the SBA partners with banks and credit unions to make these loans happen.

Lenders work with the borrower on the request for a loan. The borrower will bring all requested information to the lender and talk about the type of loan, length of the loan, and other terms. The lender then works as an intermediary and submits the information to the SBA for approval.

For lenders, these loans have less risk. If a lender makes a loan to a small business directly, and then the business fails, the bank has a potential loss.

With an SBA loan, the SBA backs the loan, or a majority percentage of it. It encourages lenders to make loans to borrowers that they may otherwise consider too risky. Borrowers benefit because these loans give them access to capital that they might otherwise not have. 

Benefits of an SBA Loan

The SBA has a mission of maintaining and strengthening the economy by assisting small businesses. Because SBA loans are specifically geared toward small business owners, they have a lot of benefits.

The loan programs are comparable with a non-SBA loan. You’ll find interest rates and terms that are competitive, and sometimes no collateral is needed. Dollar amounts for SBA loans range from $500 to $5 million.

The SBA also requires a lower down payment than other financing. Counseling and ongoing education are also available through the SBA. Resources are often available through local offices.

The SBA Loan Application

As you prepare your SBA loan application, there are several things you need to know. Part of having an application approved is identifying the type of loan you need and finding the right partner-lender at a bank or credit union.

Remember that the lender you work with will also need to approve the loan, and that’s the first step. While the SBA has requirements, the bank or credit union will also have their own standards. 

Lenders need to be convinced that your loan is a good investment. While the SBA guarantee minimizes their risk, lenders will still evaluate your creditworthiness.

Types of Loans

The primary loan program of the SBA is the 7(a) program. Loan amounts are up to $5 million, and the guaranty provided to the bank is either 75% or 85%. Loans over $25,000 must have collateral and the approval time is 5-10 business days.

A 7(a) Small Loan or SBA Express loan have a maximum loan amount of $350,000. The turnaround time for approval with an Express loan is 36 hours, and the lender makes the primary credit decision. 

Eligibility for an SBA Loan

In order to apply for an SBA loan, you must meet SBA eligibility requirements. 

  1. You must be a for-profit business, officially registered and operating legally.
  2. You must be physically located and do business in the United States.
  3. You must have equity and have invested your own time or money in the business.
  4. You must have exhausted all other financing options.

These are in addition to any requirements the lender may have. Talk with a loan officer to learn what the particular bank or credit union may require as part of the loan application.

Write Your Business Plan

The importance of your business plan cannot be overstated. When you submit your SBA loan application, this is your opportunity to convince the lender and the SBA of your need for the loan and that you will put the money to work.

This is not a one-size-fits-all situation. Do not throw something together and hope that it is good enough.

Your plan needs to be thoughtful and well-organized for the best chance for approval. You are essentially making a pitch for your business. Your business plan should include the following:

  • Executive Summary: Tell your reader about your company and mission
  • Company Background: Describe your company in depth
  • Market Analysis: Show that you understand your industry and the competition
  • Organization/Management: Identify how your company is structured
  • Service or Product: Explain what your company offers and the benefits
  • Marketing and Sales: Describe the strategy that fits your business model
  • Funding Request: Outline your requirements for a loan and why it is needed
  • Financials and Projections: This supports your request and shows that you will be able to pay the loan back

Lender Approval

While the SBA has its own turnaround time for approval, you should ask the lender about their own approval process. Often, the loan may need to be approved by a group of lenders (called loan committee) and the committee may only meet once a week or every few weeks.

You will also want to understand the funding time from the point at which the loan is approved. Ask the lender how quickly the loan can close after approval is received from both the lender and the SBA.

Starting or Growing Your Business

If you are thinking about growing your business or starting a business, an SBA loan might be right for you. For either expansion or startups, one option is to purchase an existing business rather than start from scratch.

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