An In-Depth Guide to SBA Loans

If you’re a small business owner, you’re probably constantly trying to find additional ways to get funding for your business. Applying for finance can be tough, especially if you’re trying to open a business for the first time. Lenders often prefer to work with business owners that have an established lending history and business credit score. But this isn’t always possible and it leaves potential new business owners with a lack of viable options.

If you’re looking for ways to add to your small business’ working capital or if you need to refinance debts, purchase new equipment or acquire real estate, among many other reasons, an SBA Loan might be the loan product that you’re looking for. This guide will give you all the tools you need to get an SBA loan.

This type of small business loan can get approved in as little as 3 weeks’ time. You will be required to make very low down payments and can get a longer payment term compared to other loan types. Furthermore, interest rates remain fair and reasonable and you can use this loan for a wide variety of purposes.

However, it is good to know as early as now that this type of loan may require collateral at certain situations, can involve a lot of paperwork and requirements, and may take quite a bit of time to get approved. This is why it’s important to be aware of all the components of an SBA loan, and to approach the process with plenty of time on your hands.

Comparing Different Loan Types

Minimum processing time: 3 weeks

Interest rates: Starting at 6.5%

Minimum processing time: 2 days

Interest rates: 7-30%

Minimum processing time: 2 days

Interest rates: 8-30%

Minimum processing time: 1 day

Interest rates: 7-25%

Minimum processing time: 1 day

Interest rates: 3% + %/week outstanding

Minimum processing time: 1 day

Interest rates: Starting at 10%

Minimum processing time: 1 week

Interest rates: 1.14 – 1.18

Minimum processing time: 2 weeks

Interest rates: 7.9 – 19.9%

Minimum processing time: 1 day

Interest rates: 5.9 – 36% APR

One of the most popular initiatives the government operates is the SBA loan initiative, but they also have a variety of other projects that help enrich the economy. They provide microloans, as well as disaster loan programs for businesses that have been impacted by natural disasters or other major events. In addition, they have special SBA programs geared towards individuals who are underrepresented in the business ownership population – minorities, women, and former military service members all have access to unique programs that are tailor made to help them get the most out of owning a business.

Are You Qualified to Get an SBA Loan?

Because small businesses that are having a difficult time securing bank loans are turning to SBA loans, many business owners are under the impression that the process must be very simple. Truth be told, it won’t be an easy journey for you; however, it doesn’t matter whether you own a small or very new business, as long as you meet the criteria and have complete documentation, you can be granted a SBA loan. This is why SBA loans have become such a popular financial product with business owners around the country.

Typical Customers Who Received Approval

Firstly, you must have a strong credit score. This is one of the most important factors considered by lenders. Your personal credit score can be very important as well. For most of our customers, those with a credit score average of about 640 to 680 had better chances of getting approved for a SBA loan.

While nothing is impossible, lenders also usually prefer higher annual revenue and a longer track record for a business. If you have a high credit score and you don’t mind spending a lot of your time and energy applying for this type of loan, there’s no harm in trying if your small business can actually get approved for an SBA loan.

They guide entrepreneurs on how they can spot and take advantage of opportunities and give them access to loans applicable for their small business.

Contrary to popular belief that an SBA is a place that can let you borrow money, the SBA only helps you out in securing a bank loan. Basically, you are still getting your money from the bank, except that the SBA, with the help of government funding, will help banks in getting a guarantee for the amount you’re loaning, hence less risk to them. Commercial lenders are effectively SBA loan brokers.

Because of this, banks are less strict when loaning out money through the SBA. This is also the very reason why many business owners who are turned down by banks proceed to the SBA. You won’t be needing an extensive business ownership history like many commercial lenders will require for a traditional business loan – the backing of the government makes it easier for you to qualify as a new business owner.

Yes, it can be cheaper and yes, it will be more cost-effective in the long run, but as we already mentioned earlier, an SBA loan can take a whole lot of your time and energy. Remember, the SBA is just helping you out. The bank is still the one processing your request. You must know by now that they love taking their dear time and make things more complex than they should be. In some instances, we’ve seen loans take as much as a few months just to get approved. But with the low rates and the longer payment period? It is definitely worth all the time and energy.

If you’re not keen on showing a lot of your business documents, and some personal documents in many cases, then an SBA loan might not be good for you. You will be asked to show a range of documents to prove that you are a worthy borrower. If you don’t have all of your businesses documentation you may find it hard to be approved for a SBA loan. SBA loan lenders are typically quite strict when it comes to requiring proper documentation. The government will not want to back a loan by a commercial lender if they feel you are unable to meet the demands.

Despite the hard work, you’re still getting all the help you need from the SBA. If you don’t like dealing with banks directly or if you are simply being ignored by financial institutions, the SBA can and will help you out.

Not having these documents with you at the time of application can massively prolong the process of receiving the capital you need – be prepared.

The Microloan program is very popular among small business and new businesses that require loans usually less than $50,000. There are no additional fees associated with this type of loan., however interest rates can go anywhere from 8 to 13%. The maximum payment period though is usually only up to 6 years, and as most loans, there will be monthly charges on top of your loan payments.

These loans are mainly provided by community lenders – organizations set up with the purpose of providing small amount of finance to local business owners. Sometimes community lenders will require you to be of a specific background, or working within a specific industry. For example, there are SBA loans for women and SBA loans for veterans – there are even FEMA SBA loans. That’s why it’s important to research local lenders prior to going in an applying for microloan – you may be wasting your time if you don’t qualify for a specific lender.

A popular choice for those seeking loans for general purposes for their small business, you will be charged a guarantee fee based on the maturity of your loan and the guaranteed dollar amount. Another 0.25% will be charged if there’s a guaranteed portion above $1,000,000. To set your expectations, loan payment terms can be as long as 25 years if you’re using the money for real estate, 10 years if you are using it to purchase equipment and for working capital loans, you can get as much as 7 years. Note that the SBA 7(a) Loan can give you one of the longest payment period possible so it is definitely worth considering.

This form of SBA loan can come in either a fixed or variable interest rate. One of the major benefits of using this SBA backed financial product is that there is a ceiling on how much interest charge changes there can be. The SBA have imposed a restriction on how much a lender can increase your variable interest rate. This is great for small business owners who like to be fully aware of their potential costs. Often, lenders can spike an individual’s interest rate which can result in a business owner being unable to meet the debt obligations.

The CDC/504 SBA Loan is usually availed for commercial real estate or equipment purchases. To secure this type of loan, you will be asked to make around a 10% down payment for your purchase. It is actually a very complex loan product but very worth it — the interest rate can only about 5 to 6%. You will only know about the exact rate though about 45 days after the deal has been closed with the CDC.

The CDC is the Certified Development Corporation that usually shoulders about 40% of the loan amount. The remaining 50% comes from a bank. The 10% remaining comes from your down payment. Since there are two separate loans here, it can take time. Payment terms can take as long as 10 or 20 years for this loan type. The long term times have made it extremely popular with companies that are looking to make large, long term investments in real estate of equipment. If you need to invest in a heavy machinery or land, this is probably the best government backed loan available to you.

Depending on the type of SBA loan you’re applying for, you’ll most likely get very low interest rates. This is because the loans are backed by the government and lenders can afford to take larger risks with you.

One of the other primary advantages of an SBA loan is simply how easy it is to be eligible. You will need proper documentation and a deep understanding of the industry you’re working in, but you are much more likely to be approved for an SBA loan than almost any other loan on the market. This is especially true for those who have never owned a business before.

One of the primary reasons people apply for an SBA loan is because they have a lack of borrowing history. Your personal credit score may act well to help you secure certain forms of finance, but lenders who are offering big payments will often want business experience and lending history. One of the best ways you can get on the borrowing ladder and build a solid lending history is to get an SBA loan and begin making SBA loan payments on time.

As mentioned previously, there truly is a large amount of documentation that needs to be filled out in order to be eligible for an SBA loan. This can be problematic for many business owners who may not have all this information on hand, or haven’t though through their entire business model yet. While it is easy to be eligible for an SBA loan, SBA loan requirements for documentation are very extensive.

Many SBA loans have a cap on the size that your business can be to be eligible. This may seem obvious, as SBA loans are geared towards small businesses. But the truth is that many people who consider their businesses to be small, especially in manufacturing or real estate, may actually be considered too large by the SBA. Make sure to ask you lender what the business size requirements are for your specific loan prior to making any applications.

This is similar to the first advantage mentioned, but the length of due diligence effectively ensures that you won’t be able to get your money quickly. The SBA is especially careful that their borrowers fit all requirements, and therefore doesn’t rush to judgement. Many other lenders with higher interest rates may be able to get you money quickly if you’re in needy of quick finance.

Tips and Tricks

Firstly, you should begin investing heavily in ensuring that your credit score is as high as possible prior to applying for a SBA loan. Many people don’t think about their personal credit score when they begin applying for various business loans – this is a big mistake. If you have never owned a business before you will not have a business credit score, this means that lenders will use your personal credit score to help judge how suitable of a borrower you are. This poses a range of problems for people who have been irresponsible with lenders in the past. Make sure in the months prior to applying for a business loan that you pay down your debts and try and improve your score as much as possible.

Secondly, make sure that you don’t have any tax problems prior to applying for an SBA loan. Because SBA loans are backed by the government, they’ll want to make sure that you are full up-to-date with your taxation requirements. If you have any outstanding debts with the IRS, or a tax bill that is due soon, make sure that you’re paid up prior to heading to the bank to apply for a loan. You don’t want to get denied for something that could have been avoided. This won’t be a problem for most people, but if you have owed a business in the past, you may have some outstanding tax.

Lastly, make sure to invest heavily in having a comprehensive business plan. Above all else, lenders will want to know that your business is fully viable, and the best way to exhibit this is through a business plan. The SBA want you to have a three-year business plan that exhibits a clear understanding of the industry that you’re working within. You should be able to easily document the ways that you plan to generate revenue, as well as the associated costs that you will have along the way. You should also be prepared to show ways that you will respond to market forces should a problem arise. If you don’t have a business plan, you may want to consult with a professional in order to build comprehensive documentation for your company – accountants can often be a good first port of call for these types of plans. If you don’t want to spend money getting a business plan sorted, you should head to the SBA website for their ‘Build your Business Plan Tool’ – it’s awesome for anyone looking for a nice format for a business plan.

FAQ

SBA loans can be very important for owners who want to make their businesses grow. It has so many advantages in applying for one, but knowing the process can be tricky. The actual procedure is lengthy and it involves a bit of learning to effectively utilize it.

SBA Loan Basics

Learning about SBA loans and the application process can be daunting. So let’s start with the basics and know what SBA loans really are and what can you use them for:

Types of SBA Loans

Knowing that you want to apply for a SBA loan is the easiest part of the process. The tricky part is knowing what type of business loan you need and what is the best for your business.

Application for SBA Loans

Now that you know the type of SBA loan you want to get, have you checked if you’re even eligible? If you are, how do you navigate the lengthy process? Use this information to find out:

SBA Loans Specifics

Still have inquiries in your mind? Maybe these specific questions will provide the answer you are looking for: