SBA Loan Guide for New Business Owners

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  • SBA loans typically have lower rates and longer terms than you could otherwise qualify for with a conventional loan.
  • Although it’s easier for a small business to qualify for an SBA loan than a conventional loan, the application requires that you provide extensive documentation about your finances.
  • The amount of money you can borrow depends on the type of SBA loan you apply for. For instance, the SBA microloan is capped at $50,000, while the 7(a) is capped at $5 million.
  • This article is for small business owners who want to learn more about SBA loans and how to apply for them. 

As a new small business owner, it’s important to have a full grasp on all the funding options available to you. Many small business owners seek out initial loans from banks, friends and family, and other outside investors, but if you’ve exhausted all of these options, it may be time to look into SBA loans.

There are many different loan types available through the Small Business Administration (SBA), including options for small businesses that have been affected by a natural disaster or a national event like COVID-19.

An SBA loan is a loan provided by local banks that’s backed by the government. The SBA regulates the amount of money you can borrow and guarantees certain interest rates that are lower than what a bank would typically offer you.

While you are working with a government agency, this is not a direct relief program. The SBA provides a lending program that both lenders and borrowers participate in – so while you’ll be partnering with the SBA, you’ll really be borrowing money from a local or national bank. The SBA is more of a middleman than a direct lender.

Instead of providing you with a direct loan, the SBA partners with you and a lender to offset the risk of the loan. The lender may have been unwilling to provide you with a loan initially, but by working through the SBA, the government is backing a major portion of the loan. This offsets the risk for the lender, pushes the interest rate down, and guarantees that the lender will receive a portion of the loan back.

“The SBA works with lenders to provide loans to small businesses,” reads the SBA website. “The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.”

With an SBA loan, you’re required to provide extensive financial documentation about your company to both the bank and the SBA. This allows the SBA to determine your eligibility and to determine if the loan is a good fit for both the agency and your business.

The SBA has different qualifications for each of its loans. While there are numerous loan types available – from international trade loans to veteran-focused lending programs – the most common SBA loans are the 504 and 7(a). Regardless of which loan you decide to pursue, there are some major benefits to getting an SBA loan.

Key takeaway: SBA loans are provided by banks but are backed by the government. This assures lenders that they will get at least a portion of their money back, even if the borrower defaults on the loan.

 

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You can reap a multiple benefits from an SBA-backed loan, including lower interest rates and longer loan terms. However, your situation will be unique to your business. Weighing the benefits between an SBA loan and conventional loan may come down to something outside of a conventional benefits list.

As an example, the maximum interest rate on a 7(a) SBA loan over $50,000 is WSJ Prime plus 2.75%. That cap means you’ll be getting a lower interest rate compared to standard banking interest rates. The rate is used to entice lenders, but it also entitles the borrower to offer a fair market rate.

As of August 2020, the WSJ Prime Rate was 3.25%. Add the 2.75% requirement, and you could get a loan for your business at just 6% interest. That’s often well below what many banks provide small businesses, especially those that are struggling financially.

Due to the nature of the SBA’s loan program, you may be given flexibility when repaying your loan. This is especially true for disaster-relief loans. Companies may be able to defer payments, refinance the loan, or schedule interest-only payments until more normal economic times resume. Keep in mind that this is highly specific to your business’s situation.

If you can meet the SBA standards, you’ll be able to get a loan. This makes it a good option for new businesses and other companies facing financial hardship that could not otherwise qualify for a typical bank loan. By going through the SBA, you’re establishing your credibility as a borrower. It also changes the vetting process so the bank is working with SBA to obtain and interpret your financial information.

Longer loan terms mean you have more time to repay what you’ve borrowed. Depending on your business’s situation and the amortization schedule of your loan, a longer loan could be an advantageous option. It could provide lower monthly payments and provide your businesses with more flexibility down the line. Much like flexible payment options, this potential benefit is highly specific to your company’s financial situation.

Depending on the state of the economy and world, you may have a better chance of getting an SBA loan compared to a regular loan. Especially in areas where natural disasters have struck, as SBA loans are designed to save small businesses that have been impacted by those events.

In the case of COVID-19, the SBA rolled out a new lending program that was approved by Congress. This allowed certain businesses to get approved faster with less rigid restrictions.

Key takeaway: SBA loans are easier to qualify for than regular bank loans, plus they have lower interest rates, longer terms, and more flexible repayment options.

For a complete list of SBA loans that are available, you can visit the agency’s website. Here’s an overview of the SBA’s loans, typical interest rates, amounts, and other qualifications.

7(a) loans are the most basic and flexible type of SBA loan. The maximum lending amount is $5 million, and the interest rate varies based on the amount you’re looking to borrow. What the loan is used for can be very flexible, varying from working capital to business expansions.

The 7(a) Small Loan program directly mirrors the regular 7(a) program, but it is for amounts of $350,000 or less.

This loan program is for businesses looking to borrow up to $350,000. The interest rate varies from 4.5% to 6.5%, depending on the amount you borrow. The money can be used as a revolving line of credit or a term loan, which is a similar structure to 7(a) loans.

These loans are designed for small businesses owned by veterans and their families. The amounts vary between the SBAExpress and 7(a) packages. These loans are processed as a subset of those two loan packages, so many of the same rules apply.

This loan package is for working capital loans. The same qualifications required under the 7(a) loans are required here. Like the 7(a), the maximum loan amount is $5 million. In addition to meeting the 7(a) requirements, borrowers must also file SBA Form 750 and 750B.

International trade loans are for 7(a) qualifiers who engage in international trade. The maximum borrowing amount is $5 million, and the loan can be used for a range of expenses, from working capital to equipment purchasing.

This loan program is for short-term borrowers with businesses in indirect or direct exporting. There is no cap on the interest rate, but the SBA monitors which rate you get. Maximum loan amounts are $5 million, and the funds can be used as a short-term working capital loan.

This loan program is similar to the SBAExpress loan package, but it’s geared toward businesses looking to expand into the export markets. The maximum loan amount is $500,000.

This, along with 7(a) and SBAExpress loans, is one of the most common SBA loan types. It’s for property and other fixed-asset loans. The maximum loan amount ranges from $5 million to $5.5 million, depending on the business size and project. Interest rates will vary based on your situation, but it is most likely a fixed rate.

This program mirrors the 504 loan program, but it is for refinancing existing long-term fixed asset loans. To qualify, you must be current on all your payments for 12 consecutive months before applying.

The maximum loan amount for these microloans is $50,000. Interest rates vary from 7.75% to 8.5%. For a business to qualify, it must meet the 7(a) requirements.

Key takeaway: There are multiple types of SBA loans. The right loan for your business depends on how much money you need and how you intend to spend it.

Here are some of the different routes you can take to get an SBA loan.

This is one of the most common ways to apply for an SBA loan. Working closely with your local bank allows you to quickly get in touch with the SBA, as banks often have a designated employee or representative who deals directly with the agency and can help you get the process started.

If you’re working with a bank that you do business with regularly, it’ll be easier to get your documentation submitted and work on the next steps. If you don’t already have a relationship with a local bank, and the banks you’ve visited can’t provide you with a loan option, there are other routes to finding the right lender for your small business. 

Use the SBA website to find your nearest Small Business Development Center. These centers provide small businesses with more than just lending help, but it’s often a great first step toward finding the right lender.

By meeting with an SBA representative, you can take the first step toward getting funding. While you’re at the center, take advantage of some of the agency’s other services, which include:

  • Business plan development
  • Manufacturing assistance
  • Financial packaging and lending assistance
  • Exporting and importing support
  • Disaster recovery assistance
  • Procurement and contracting aid
  • Market research help
  • Healthcare guidance

Sometimes you may not be able to work with a local bank or make it to your nearest Small Business Development Center. If that’s the case, the SBA still has you covered.

The SBA provides an online tool called Lender Match that processes your claim and matches you with several SBA-approved partners. You can find a match in as little as two days and start the funding process immediately afterward.

However, before you use Lender Match, gather some documentation and information about your business. Make sure you have the following ready for your potential new lender:

  • Your business plan
  • The amount of money needed and how you’ll use the funds
  • Your credit history
  • Financial projections
  • Some form of collateral
  • Industry experience within your field

A lot of this documentation and information will be required of you when applying for an SBA loan, regardless of whether it’s online or not. Lender Match is a robust online tool and a great option for small business owners looking to quickly connect with funding options and evaluate their choices.

Key takeaway: Most borrowers apply for SBA loans through their local bank, but you can also visit the Small Business Development Center in your area or use the Lender Match tool on the SBA’s website to help you find a lender.

The SBA requires extensive financial documentation before you can get approved for a loan. This is because SBA loans are usually the main option for small businesses that can’t otherwise qualify for loans from traditional banks.

The SBA guarantees a portion of the loan with the bank you’re working with. That means it wants a comprehensive picture of your business’s finances, how your business has performed in the past, and where your business is headed in the future.

It also means the SBA requires personal financial information from you and the major stakeholders in your company. This is because many of these loans require the borrower to sign a personal guarantee for the loan.

It’s important to be aware of what you’re required to submit before you start the process. These documents can include:

Personal statements

  • Personal financial and background statements
  • Statement of personal history (SBA form 912)
  • Personal financial statement (SBA Form 413)
  • Personal records of past loans you’ve applied for
  • Names and addresses of all your subsidiaries and partners
  • Resumes for all business principals 

Business overview and history that explains why you need an SBA loan 

Business financial statements

  • A profit and loss statement current within 90 days of your application
  • Supplementary profit and loss schedules from the last three fiscal years
  • Business records of loans you’ve applied for
  • Three years’ worth of signed business and personal tax returns for all of the business’s principals
  • Business certificate and license
  • Copy of property leases or deeds

Projected financial statements

  • One-year projection of income and finances
  • A written plan that explains how you will reach revenue projections 

Key takeaway: When you apply for an SBA loan, you must provide extensive financial documentation about your business and all business owners. Business owners must sign personal guarantees for SBA loans.

That largely depends on your financial situation. The SBA is looking to provide loans for businesses that may not otherwise qualify with a normal lending institution. However, that doesn’t mean the SBA is looking to invest in failing businesses.

It never hurts to apply, but if your business is in deep financial trouble that has not been caused by a natural disaster or a national economic event, like the COVID-19 pandemic, it may still be difficult to get an SBA loan. Yet, it is still likely easier to qualify for an SBA loan than it is for a loan with a conventional bank.

You may need to provide more documentation, and it may take longer, but the overall qualifications for the SBA are usually less stringent compared to those of a regular bank.

This depends largely on your business’s overall financial situation. If your company is struggling because of some outside event, like a hurricane or earthquake, you may be able to qualify, even if you’re in a dire financial situation.

This is also true for companies affected by the COVID-19 pandemic and other major economic events. But, if your business has been poorly run and you have a bad financial history that is not the result of a national event, you may still not qualify with the SBA for a loan.

Lending times on SBA loans are usually longer than they are for conventional bank loans. There’s extensive documentation to review since businesses often have to provide more financial and logistical documentation for an SBA loan than a bank loan. Plus, representatives at both your local bank and the SBA have to review it before you are approved.

Overall, typical SBA loan times range from 60 to 120 days, depending on your business’s financial situation and the type of loan you’re requesting.

Key takeaway: The lender and the SBA will review your loan application and consider your business’s ability to repay the loan. Even though it’s easier to qualify for than a conventional bank loan, not every applicant is approved.

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