Want an SBA Loan? – Here is Your Ultimate Guide

Getting an SBA Loan can be a daunting task but securing new lines of capital for your business can bulk up your companies finances and allow you to grow.

An SBA loan is one of the most useful loan instruments ever invented, but trying to wade through all of the government bureaucracy can be time consuming. Buckle up because I’m here to help you decide if it’s right for you and offer advice on how to get approved for one.

First off lets Cover the Biggest Reasons Why SBA Loans Are Rejected

Is an SBA Loan Right for Your Business?

SBA Loans are great for businesses that want to grow but don’t have enough cash on hand. Showing budget and profit projections to a bank allow them to understand how the money will be used and increase your chances for approval.

The financing options are also quite attractive. Loans and capital for specific projects can be financed up to 90% requiring a smaller down payment preserving your businesses cash.

Most SBA loans have a 10-year fixed rate term. This gives you ample time to grow your business or use the money for capital improvements. The longer term also has strict interest rate standards. For example most SBA loans fall within 2-3 points over the prime rate.

It can be a cheap option for cash in your business. However there are some negatives. Often times the lender will want to put a lien on your personal assets to secure the loan. For example, if you want a $300,000 loan but have a $200,000 house they will want your home as collateral.

Business owners will often times use Cash and Securities to collateralize the loan. This is safer than using your house but prevents those assets for another loan down the road.

Are you Eligible

While there are specific SBA loans for start-ups or disaster funding, the most common SBA loans share these same general guidelines.

• A For-Profit US based Small Business
• Have equity in the Business
• Been in business for 2 years or more
• No previous defaults on government loans
• Have tried and failed to secure financing from other lenders

Choose Which SBA Program Fits Your Needs

• SBA 7(a): This is the option that most businesses opt for. It is a combination of many specific programs into one easy to understand program. Qualified business owners can get a term loan of up to $5 million that can be used for almost any purpose.
• SBA 504: This is one of my favorites for growing or expanding the fixed assets of your business. Down payment requirements are normally around 10-20 percent which is far below what traditional financing would usually require.
• SBA CAPLine: This program functions as a simple to use line of credit. Line of credit options can be up to $5 Million.
• Disaster Assistance and PPP: While the Paycheck Protection Program is newer the Disaster Assistance loans are not. These loans typically have very low interest rates and favorable payment terms (If any at all). The disaster loan can be up to $2 million while the PPP loans are based on a couple different factors. Overall this is the easiest type of SBA loan to get

Find an Experienced SBA Lender

A very common misconception, and one I had myself, was that the SBA is the provider and originator of the loans. This isn’t the case and can lead to some confusion. The Federal Government secures up to 85% of the loan which makes the lenders more willing to give you favorable lending terms.

I have found that local small banks seem to be the best. Larger banks oftentimes have more bureaucracy, which can cost you time, and unneeded paperwork. I received an SBA loan under the PPP program in one day where another business owner I know took almost 2 weeks to get approval.

What to Know When Looking for a Lender

The SBA Website does have a tool to find lenders you can use, but I recommend first talking to your local bank. They will usually be quicker and have a better understanding of what you do as a business in their community.

Some Questions to Ask Yourself when Shopping for Lenders:

• Do I Qualify? Figure out your credit score and check that your business falls within the size requirements.
• How Much Will I be Able to Borrow? Make sure you have sufficient capital to make the down payments requirements and that the loan amount is enough for your business
• What are the Terms? The length of the loan and interest rates should be affordable to you
• How Long Will it Take? SBA Prefered Lenders can typically get you financing faster than other lenders.
• Will I Need a Downpayment? Most SBA loans require a downpayment so make sure you have sufficient capital.
• Do I Have Enough Collateral? A lender will clearly state what the collateral requirements are ahead of time

Gather the Paperwork

While the specific paperwork you need largely depends on the specific lender, the following items are generally what will be required:

• An up-to-date Profit and Loss Statement (Income Statement) and Balance Sheet
• A Current and Future Business Plan
• Previous two years business and personal tax returns
• A Cash Flow and Budget Statement
• Detailed explanation of how you plan to use the funds
• Financial Projections
• A personal Financial Statement of owners (Usually those with over 20% Equity)
• Proof of ownership including the business license
• Resume and history of previous owners
• Income Statement and Balance Sheet of business you’re planning on buying (If applicable)

Fill out the SBA Loan Application and Forms

Once all of the required documents are collected it is time to enter the world of government bureaucracy. The SBA 7(a) loan is the most common, but all types of SBA Loans share forms. The most common are:

• SBA Form 1919: Borrower Information Form
  • This form provides the basics of your business, its operations and owners. The primary purpose of this form is to give lenders an idea who the owners and/or investors are in the business, to help determine loan eligibility.

• SBA Form 159: Fee Protection
  • Not all lenders require this form but most do. It’s the SBA’s way of protecting borrower’s from unnecessary fees. The form itself sounds very complicated when reading, but its purpose is straight forward.

• SBA Form 413: Personal Financial Statement
  • Each owner, investor or cosigner to the loan will need to fill out this form. This is the most complicated step of the process and may require the help of an accountant. The fields on the form require a detailed list of all the assets and liabilities of the borrowers involved. A helpful tip is to give anything that could be considered an asset a value. Borrowers like to see sufficient assets to cover debts. You never thought that ugly table from your grandma would come in handy did you?

• SBA Form 912: Statement of Personal History
  • This form asks about current or past criminal activities as an owner cannot be presently involved in criminal proceedings. Having a criminal record will make it more difficult to obtain a loan from lenders. However, it’s not impossible to get a loan. The bank officer will handle it on a case by case basis.

Closing on Your Loan and What Happens Next

Once all of the paperwork has been submitted it may take a couple weeks for the lender to approve or deny your loan application. If your application is approved you will be given a commitment letter that will lay out your payment terms and interest rate. The down payment may also be required at this time.

The amount of time it takes for the loan to get finalized varies by lender and underwriter but a 60-90 waiting period can be expected on most SBA loans. It may be a good idea to speak with a loan advisor about how long the process will take to complete.

How Hard is it to Get an SBA Loan?

You should be aware that the process can be complicated and certain businesses and individuals will not be accepted. The amount of paperwork required and the forensic look at your finances can make it unnerving but most businesses with a solid business plan and average finances will get approved.

Getting approved may be more difficult if your business is struggling, you have less than ideal credit, a short business history, or are lacking a business plan. Most SBA loans aren’t meant for struggling businesses. Their goal is provide liquidity for expansion or the purchase of fixed assets. Certain loans such as disaster loans or PPP funds can be given quickly with lower financial requirements. However, these loans usually have lower borrowing rates.

If you have good personal credit, a good business, and a solid business plan your chances of approval are high and you shouldn’t worry.

What to Do If Your SBA Application is Denied

Getting denied on your application isn’t the end of the world. Finding other sources of financing through investors or more conventional sources is still possible. There is nothing preventing you from applying again once your personal or business finances have improved.

Final Thoughts

While SBA loans are a cheaper form of borrowing, the time it takes to get one can be frustrating. It can take several months to completely finish the process and receive your funds. Collecting and filling out all of the forms can take many hours. However, if you can stick it out and get through the process it can give your business the necessary capital to grow in ways that other conventional sources may not provide.