Small businesses open every day. But starting a venture isn’t cheap. The acts of securing a physical storefront, getting your management structure in order, hiring the necessary employees, purchasing or leasing equipment, and marketing all demand money. Most people starting businesses don’t pay for everything out of their own pockets upfront; it costs far too much for most individuals.
But knowing how to apply and qualify for an SBA loan with this ultimate guide will help you obtain the financing you need to get your business off the ground in its fledgling days. Be aware of the details you need to know and present to gain approval. Going in and not having all your bases covered in terms of a business strategy will most likely result in a denial, so be thorough in your business plan.
What Is an SBA Loan?
Before you do anything, you need to know what an SBA loan is and what it generally entails. It’s a loan that the Small Business Administration gives you to provide start–up small business funding. The SBA receives backing from the financial power of individual banks. Because of this relationship between the SBA and the banks, private individuals can secure the funding they need to establish their businesses.
Know Your Eligibility
Not everyone is eligible for an SBA loan; there are several requirements that you need to meet before the process can go through. Some of these requirements depend on the specific SBA program you apply for, and other conditions vary based on the lender you work with. Familiarize yourself with the general needs to meet an SBA loan approval.
First, you must have a registered for-profit business located within the United States. You must also meet the definition of a small business as the SBA defines it. This can differ by industry. Typically, a small business has less than 1,500 employees and possesses a maximum of $38 million in annual receipts.
The business owner must have also invested time and money into the business and exhausted all other reasonable avenues of financing. Further, the business owner can’t have any delinquencies or defaults on prior government debts.
Lender requirements are different from the SBA requirements. Lenders usually require the business owner to have a good credit score, with minimums ranging from 640 to 675. Many lenders also demand that the individual asking for the loan have prior business experience (at least two years in many cases). Finally, they like to see that the owner has at least a $100,000 annual revenue.
Know What SBA Program to Apply For
There isn’t one single loan for every individual; it can change depending on various factors. These different programs can have distinct term limits, loan amounts, interest rates, and purposes, making some ideal for specific industries. Here are a few popular programs.
SBA 7(a) Loans
These loans generally go up to $5 million and can reach term limits of up to 25 years. Their interests rates vary between 8 and 13 percent. These are by far the most common loans due to their versatility. Many businesses benefit from these standard loans, as they have straightforward expectations and lending practices.
These are smaller loans for companies looking to purchase equipment or buy more inventory quickly. Therefore, they typically don’t go any higher than $500,000. The maximum term limit is around six years, with an interest rate between 8 and 13 percent. The eligibility for microloans is more flexible than other programs due to the lower amounts and shorter term limits.
SBA 504/CDC Loans
These loans provide business owners with the capital to make major fixed asset purchases on significant assets, such as real estate and large machinery. The maximum these loans offer is $5 million with term limits of 25 years and interest rates of five to six percent.
A Certified Development Company (CDC) in your area provides roughly 40 percent of the loan amount, the SBA gives 50 percent, and the business owner must cover the final 10 percent.
SBA Disaster Loans
When businesses go through declared disasters, such as natural disaster events, the SBA offers disaster loans to help them recover. These loans max out at $2 million and have low interest rates, typically at four percent for terms of up to 30 years.
SBA Express Loans
These loans have very quick turnaround times, ranging between 24 to 36 hours. They offer up to $350,000 with term limits of 25 years, along with interest rates between 8 and 13 percent.
Get Your Documentation in Order
Learning how to apply and qualify for an SBA loan involves more than deciding which program is best for you. The next step is to prepare your business documents. The business owner must prove that they thought through their strategy and know where to allocate their money and resources. They must also show where they will turn a profit. Included in these documents are:
- General business information explaining the product or services you provide
- Personal information regarding the background of the business owners
- A loan request letter clearly stating the funds you require and how you plan to utilize those funds
- Your detailed business plan, explaining your management structure, products and services, advertising strategy, and how your business will make money to pay back the loan, among other things
- Personal and business tax returns
- Legal documents, including business licenses, leases, and other contracts
Closing the Loan
After compiling your documents and sending them off for approval, you need to close the loan with the lender. This process includes several more steps.
Receive the Letter of Intent
The letter of intent states the decision of the SBA. It will communicate whether they will grant you the funds or not. The process usually takes two to three weeks before you hear a response. If they approve you and you agree to the rates and terms, you must sign the letter and return it to the SBA.
Wait for Loan Underwriting
Your loan representative will contact you after you sign the letter of intent, reconfirming your legal documents to guarantee accuracy. This is generally the longest portion of the process, taking between two and four weeks.
Sign the Loan Agreement Form
This is the penultimate step, where the lender sends you the legal agreement stating the funds, terms, and rates. They will ask for your signature of approval as well.
Close the Loan
The final step is to close out the loan; this mostly includes filling out any last-minute documents and paying any applicable processing or service fees. The process can take anywhere from a day or two to over a month from start to finish. But waiting is necessary to provide your business with the funding it needs to thrive. Ensure that you provide clear and professional documents and organize all the paperwork you receive from the SBA.