The SBA Program
SBA Loans for Small Businesses are great low-cost long term capital for your business growth and expansion.
As a small business owner, you might have heard of SBA loans and wondered if it’s right for you.
Learn about the SBA, SBA loans, how to get approved and how to avoid the pitfalls of the loan process.
What is the SBA?
SBA – the U.S. Small Business Administration – is an independent federal government agency created to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy.
- The SBA offers a variety of loan programs to small businesses – including general small business loans, microloans, real estate & equipment loans, and disaster loans.
- The SBA itself does not lend to businesses. It sets the guidelines for loans and guarantees that these loans will be repaid. The loans are then made by its partners – including banks, community development organizations, and micro lending institutions.
- When you apply for an SBA loan, you’re actually applying for a commercial loan structured according to the SBA requirements with an SBA guaranty.
- Lenders are willing to offer the loans at a reduced interest rate because of the SBA guaranty.
- Conventional loans can have high interest rates, sometimes as high as 15% and stringent loan requirements. The SBA sets interest rate for their loans at prime plus 2.75% for working capital and prime plus 2.25% for real estate. Conventional loans are often limited to 5 year terms. SBA loans are from 10- to 25-years.
Who Qualifies For an SBA Loan?
- The SBA defines a small business by its gross sales amount among other definitions, for all for-profit industries. The numeric values vary to reflect industry differences and are revised periodically to stay in line with the economy.
- Typically, if your small business earns less than $5 million annually after tax profits, you qualify to apply.
- Good credit history and healthy cash flow are also key qualification factors.
What Do I Need To Submit To Get An SBA Loan?
- Three years of business tax returns
- Current year-to-date interim financials
- Three years of personal tax returns
- Articles of business formation/incorporation
- Credit authorization form
- Business History
- Debt Schedule (if applicable)
- Equipment list (if applicable)
- Real Estate Schedule (if applicable)
- Personal Financial Statement (Form 413)
Any missing or incomplete documentation could slow down the process or cause the rejection of your SBA loan application altogether.
How Does the SBA Loan Application Process Work?
Finding A Local Lender: Even though SBA guarantees your loan, you still need to find a local lender, e.g. a bank, to kick-start the process.You can visit your local SBA District Office to help identify a few SBA lenders in your area that may be a good fit for you.
Different banks offer different terms and rates, even for SBA loans, so you may need to speak to quite a few banks in order to find the best option for your unique business needs.
Application: Next, you need to complete your SBA loan application and prepare for your meeting with the bank.
Factors Considered By The Bank: Debt payments, cash flow projections, debt-to-worth ratio, good standing with your state treasury and the IRS, collateral, and working capital. Supporting documentation is critical.
Business Plan: Part of the review process by the bank includes having a well prepared business plan with at least three years of financial projections, an overview of how you plan to utilize the loan funds, and a solid understanding of your industry and market.
What Are the Pitfalls?
Spending all the time and energy to put together a lengthy loan application only to be rejected can be a very frustrating and discouraging experience, not to mention the time lost as you have to start the process all over again.
Make sure you do your due diligence to avoid the following pitfalls:
Incomplete Documentation: Make sure you gather all the required documentations before you submit your application. Any missing item could delay your application process or disqualify your application.
Errors In The Application: The application form requires in-depth information and can be complicated. Errors, even made unintentionally, can cause the bank to dismiss your application.
Failure To Adhere To Rules And Regulations: The SBA has over 400 pages of rules and regulations for its loan programs so make sure you don’t overlook these important guidelines.
Applying For The Wrong Loan Program: The SBA offers a variety of loan programs so make sure you pick the best option for your unique business needs.
Choosing The Wrong Lender: If you don’t take the time to shop around and speak to a good number of banks or financial institutions, you may not get the best rate or payment terms for your loan.
If your application is denied by one bank, you will have to start the process over again so make sure you follow all the guidelines and submit all required materials.