How to Apply for an SBA Loan for Your Small Business
Year after year, innumerable small business owners across the U.S. apply for of SBA(small business administration) loans for their business. With simple and favorable repayment terms and extended payback, these loans are perfect for many situations. Whether you need funds to set off a loss, refinance existing debt, or enhance production capacity, SBA loans can be ideal. Many business owners use the SBA loan program them for expansion plans too.
If you are a small business owner in need of cash at affordable and easy terms, here’s all you need to know about how to apply for an SBA loan.
What are SBA(Small Business Administration) Loans?
These are loans from the U.S. Small Business Administration (SBA). The SBA loan programs encourage financial institutions(sba approved lender) to loan funds to small businesses with easy terms. The terms may be with respect to underwriting or loan terms or other aspects. SBA loans are made available by this government agency via partnering financial institutions, which may be banks, credit unions, and others.
SBA loans work differently from traditional loans and other business debt options. The government backing ensures that the credit standards requirements for borrowers are less rigid. Also, the down payments are more affordable and repayment periods are longer.
Usually, businesses can take out a fixed loan at a given rate of interest. The amount is dependent on the kind of SBA loan you apply for. The repayment period for SBA loans is agreed upon at the beginning depending on the program. The loan can be used to meet a variety of business expenses. In many cases these loans can be used for real estate purchases or business assets like equipment or inventory.
How do SBA Loans work?
· You, the business owner, identify the loan that suits your needs best. Common SBA loan types include:
- SBA Express Loan
- Working capital loans
- Export working capital program
- SBA 7A
· Complete an sba loan application through a participating sba lender(find these at your local SBA district office) that partners with the SBA (credit union or bank or other such institution).
· The lender applies to the SBA and gets a loan guarantee. The amount guaranteed is repaid by the SBA to the lender if you (the borrower) default.
· You and other owners of the business give a personal guarantee. This means you will have to make good the loan with your personal wealth if the business cannot.
· The lending institution then processes and closes the loan before disbursing the amount.
· You start repaying the lender on a monthly basis (or as agreed) as per the terms of the loan.
Can you have multiple SBA Loans?
Yes, you can have multiple SBA loans, provided your overall loan amount still falls within the maximum loan limit allowed by the specific loan type you apply for. For example, the maximum is $5 million for a 7(a) loan. You can have multiple 7(a) loans, all adding up to or less than $5 million at the same time.
The types of SBA Loans
There are several loan types that the SBA backs via partner lenders, each serving different needs:
7(a) Small loans: Mainly used by businesses that need to purchase real estate for the firm, these are SBA’s most popular loans. The lender will mainly look at how your business gets its income and how strong its credit history is.
SBA Express Loans: A revolving line of credit that you can operate for up to seven years or a term loan for up to 25 years. This loan has a $500,000 limit.
SBA Veterans Advantage Loans: Part of the Veterans Advantage Program initiatives, these loans are available to veterans at reduced fees. If your business is owned/ controlled to the extent of 51% by veterans, you can qualify for this loan.
EIDL Loans (Economic Injury Disaster Loans): Use these to pull your business out of a financial emergency. When you have losses that your insurance does not cover, the EIDL loan may come to your rescue. A maximum of $2 million is available as a term loan for up to 30 years.
Costs of an SBA Loan
The SBA loan is an affordable option for small businesses. The loan interest is the major cost associated with the loan, alongside the down payment (typically 10%). There is also a guarantee fee paid for the SBA guarantee backing your loan. Also, set aside some funds for the closing costs for these loans, such as:
Business Valuation fee: Appraisal cost for a business that you wish to acquire using the SBA loan.
Title fee: Cost of checking the title deeds of real estate that you wish to acquire for your business.
Packaging fee: A charge that covers the paperwork, background checks, and credit checks the lender undertake before closing the loan.
Appraisal fee: Fee for appraisal of any collateral you put up.
Environmental report fee: For loans used for commercial property purchase, an environmental report may be necessary – this fee covers the cost of such a survey.
Legal fee/ attorney fee: Charges for reviewing all the paperwork and loan documents
SBA Loan requirements
When you apply for an SBA loan, you have to back up your application with the following:
Business Plan: A business plan that outlines a clear vision, projected financial statements, and pathway for the business improves your loan approval chances. This demonstrates you will be able to meet financial obligations paying back the loan proceeds.
Collateral: Placing collateral improves your chances of approval and also reduces the interest rate on the loan since the lender risk is lower.
Good standing on current debts: This shows good financial health and a strong track record of timely repayments. Both make you a good risk for a lender.
Strong credit score: Another parameter that shows good financial health. A credit score indicates how responsibly you manage your debts and where you stand right now in terms of your debts to assets ratio.
Potential for long-term success: A new business in a growing niche is a good risk. A business in a niche that is experiencing a slump is not favored by lenders.
Standard Business Financial Statements such as federal income taxes, Profit and loss statement, balance sheet, recap of outstanding financial obligations, personal financial statement, etc.
How do I qualify for an SBA Loan?
While qualification for sba offers are not very complex, you must fulfill these:
– You are a for-profit business (as defined by SBA) operating in the U.S.
– Other financial and personal resources are used in the business to support cash flow.
– Some lenders have a minimum profits or average net income amount set (usually $100,000 annually).
– A solid credit score (620 and above).
– More than two years of business history and business tax returns.
1. I can’t get a bank loan for my business through any traditional channels or conventional business loans. Can I try for an SBA loan?
SBA loans are ideal for those who do not qualify for loans in regular channels. There’s a good chance that this may work out for you. Speak with a small business specialist to discuss available sba programs.
2. How long does approval take after I apply for an sba loan?
That depends on the sba backed loan options you are exploring. For example, the 7(a) Express loan may be processed in just 36 hours. Others may take more time. Also, for non-express loans, like a loan for real estate acquisition, expect the small business approval process to take around 60 to 90 days.
3. Who gives me the loan – the SBA or the lending institution?
The loan is made possible by the SBA via a partner financial institution. It is not the SBA that directly loans funds.
4. What is the SBA guarantee for?
A part of your loan is guaranteed by the government-backed SBA. This reduces the risk for partner institutions and enables them to offer these loans on more flexible terms than conventional loans.
5. Are there restrictions on what I can use the loan funds for?
SBA loans can be used for almost all kinds of business expenses. For example, for working capital needs (like seasonal financing or refinanced debt). It can also be used to purchase fixed assets like machinery, commercial property, or for constructing a warehouse, etc.