The US Small Business Administration (SBA) oversees a $131 billion portfolio of loans and loan guarantees. If you’re a small or medium-sized business owner, you might be wondering: how can I get a piece of the pie? After all, SBA loans are among the safest and most affordable debt financing solutions for small business owners.
Although it’s relatively easy to apply for an SBA loan, it’s not so easy getting approved. If you aren’t careful with your application, you can get rejected and lose out on millions in low-cost, government-backed financing.
In 2020, don’t let your business miss out on low-interest funding. With the average SBA loan exceeding $370,000, it’s crucial that you nail your application forms and check every box properly before you apply for an SBA loan. In this guide, we’ll show you how.
SBA Loans 101
Unlike banks and traditional institutional lenders, the SBA is an agency of the US federal government. Therefore, all loans offered by the SBA are made with public funds, and about 90 percent of all loans offered by the agency are secured.
The SBA partners with banks and other creditors to facilitate low-cost loans and financing for Americans looking to get their business off the ground. As a government agency dedicated to domestic business development, the SBA provides some of the most accessible loans for business owners in the United States.
Types of SBA Loans
Not all SBA loans are the same. There are several types of SBA loans that you can apply for depending on your business’s needs. We’ve listed the various SBA loans available to small business owners below.
- SBA 7(a) Loans: The most common type of SBA loans, the SBA 7(a) loan is the perfect solution for business owners who need long-term working capital or needs financing to purchase equipment. The SBA issues roughly 50,000 SBA 7(a) loans every year.
- CDC/504 Loans: These are high-value loan types that are used to purchase large fixed assets and finance capital projects that would otherwise be unaffordable to business owners (i.e., purchasing an office, factory, or new renovations). CDC/504 loans usually cover about 15 percent of the project’s total cost.
- Disaster Loans: If your business has been affected by a natural disaster, you may qualify for special SBA Disaster Assistance that is used to replace lost property, equipment, or real assets lost to natural causes.
- CAPLine: The SBA CAPLine is used only for construction projects for small businesses and is valued up to $5 million and is 85 percent guaranteed (secured) by the SBA.
- SBA Microloan: The SBA is also a source for microfinancing, with loans available in denominations as small as $5,000. These loans are offered to non-profits, charities, and social enterprises that need small amounts of working capital at a low cost.
Source: SBA FY2018 Year-End Report
In the chart above, you can see that the average SBA 7(a) loan size was $420,401 in the Fiscal Year 2018. However, you can apply for larger (CDC/504, CAPLine) or smaller (SBA Microloan) loans depending on your business’s capital requirements.
SBA Loan Minimum Requirements
Qualifying for an SBA loan is generally easier than a standard secured bank loan. The SBA is slightly more lenient on certain criteria than a bank or a credit union. However, the SBA maintains a few broad standards that all applicants must meet if they want to get approved for a loan. We’ve listed them below:
- Eligible businesses must be legally incorporated and for-profit
- Eligible businesses cannot receive funding by other means
- Eligible businesses must be operated by an owner with equity in the business
- Eligible businesses must be located and operated in the US
Regarding your credit score, it’s likely that you will need a minimum score of about 600 on your credit report to have your application approved. In some cases, FICO scores in the high 500s can also get green-lit if other aspects of your application are strong. Generally, the higher your credit rating the more likely your application will get approved.
Source: Windsor Advantage
In the chart above, you’ll notice that the number of active lenders in the United States has been in sharp decline since FY2014. Due to several issues, such as limited liquidity, the number of lenders to small businesses is becoming increasingly concentrated. Therefore, the SBA provides an invaluable service to business owners who otherwise may be shut out from accessing startup capital.
A Note on How The SBA Works
The SBA isn’t a typical lender. In fact, it’s not a lender at all! Instead, the SBA partners with traditional lenders, financial institutions, and online or alternative lenders to secure loans for which you apply separately. In other words, the SBA steps in to help minimize the risk that lenders assume whenever they issue you a loan.
If you default on the loan, the SBA provides the capital for the banks or lender to help them recoup their losses. Therefore, the SBA makes it easier for you to qualify for a regular bank loan because they minimize the risk for the lender. Only “preferred lenders” that the SBA partners with are eligible to issue SBA-backed loans.
Applying For An SBA Loan in 5 Steps
Now that you know what your options are, let’s get started with the SBA loan application process. Below, we’ve segmented the process into five steps that make it easy to apply for a loan through the SBA. We’ll cover everything from the pre-planning stage to the pitch presentation that you’ll make to a loan officer.
Step 1: Find Your “Why”
Ask yourself: why do I need a small business loan? Chances are, it’s because your business needs money to get off the ground or to scale its operations. However, the SBA and the lender are both going to require you to be more specific.
Exactly how much money do you need, and for how long will you need it? These are the questions you should be asking yourself if you want to get approved for an SBA loan. Make sure that you weigh all your options before deciding on an SBA loan. After all, there are many standard bank loans and lines of credit available to small business owners.
You should never apply for an SBA loan unless you need it. Otherwise, you’ll be on the hook for a loan with interest, which will bleed your business of cash in the long-run. Furthermore, you should strongly consider which SBA loan is best for you. If you only need short-term financing of $25,000 or less, it makes more sense to apply for a microloan than a standard SBA 7(a) loan.
Source: Harvard Business School
In the chart above, it’s clear that most small business owners need small loans of $50,000 or less. If your business falls under this category, do not apply for a long-term debt financing option like an SBA 7(a) or CDC/504 loan. If you do, you may find your business straddled with debt for 10 or 20 years—this can ruin your business’s prospects for lasting success.
Step 2: Start Your Search
Once you’ve analyzed the various debt financing options available to you, and you’ve settled on a specific type of SBA loan, then you can move forward with the application process. To begin, look for the best lender on the market for your business’s needs—ideally, one which caters to your industry and has experience lending to your competitors.
Start your search with a Google search for a qualified, SBA-preferred lender that serves your niche. For example, you can search “Best SBA lenders for electricians” to find the best-qualified lenders who partner with the SBA and have a history of approving small electrical businesses.
Once you’ve found a list of potential lenders, you should look into the eligibility criteria for each of them. Typically, large multinational banks tend to have the strictest requirements when it comes to small business lending. Often, applicants must meet a series of high standards, including a FICO score above 600, and high-value assets with which the loan can be secured.
Also, ensure that you give yourself plenty of time to apply for the loan and have the loan reviewed. The larger the institution (say, Wells Fargo or JP Morgan Chase), the more likely you will have to wait longer due to the sheer size of their organization. Smaller lenders typically approve or reject loan applications within 90 days of receiving them.
Step 3: Boost Your Credentials
Don’t bother applying for an SBA loan unless you’re prepared to put in some legwork to get the loan approved. Before filing your application, make several consecutive on-time payments on your outstanding loans or lines of credit. If you’re lucky, your timely payments will be reflected in your FICO score, which will increase—and, with it, so will your chances of approval.
Unfortunately, sometimes you only get one chance to apply for an SBA loan through an individual lender. If you aren’t approved the first time, you won’t get approved during subsequent attempts. So, minimize your chances of disappointment by making your SBA 7(a) or CDC/504 loan application as rock-solid as possible.
If you aren’t worried about getting approved for an SBA loan because your FICO score already exceeds 600, it’s never a bad idea to still boost your numbers. If you have an excellent credit score (i.e., 750 or higher), you might qualify for a lower interest rate or a better term, which can save you thousands of dollars in the long-run.
Step 4: Collect The Documents
After you’ve settled on a loan type, the institution you want to apply through, and your FICO score is as high as it can be, you can gather the necessary documents. Although the documents and paperwork required will vary from lender to lender, virtually all financial institutions will ask for the following documents when you apply for an SBA loan:
- Government ID (1 piece)
- Last year’s tax returns and financial statements
- Articles of Incorporation
- Permits and license certificates
- Proof that you own the business
Never show up to apply for an SBA loan without at least the basic documents listed above. No matter where you choose to apply, you will require these documents so the loan officers can authenticate your identity, prove that you’re a part of the business, and assess the risk of lending to you.
Step 5: Apply and Pitch
You’re finally ready to apply for an SBA loan. Believe it or not, this part is actually the easiest of them all. By this point, you’ve done your homework and you know exactly what your business needs from the lender, and you’ve collected all the paperwork to prove it.
You can either apply in-person at your local bank branch or online via an alternative lender. When you visit the bank, you will have to schedule an appointment with a loan officer, to whom you will provide the various documents you’ve collected and you will present a pitch.
During the pitch, you will “sell” your eligibility for the loan to the officer by explaining why you need the loan, your 10-year financial forecast, and the scope of the project for which you need the loan. You should also present the loan officer with a business plan to demonstrate the viability of your business model—this will help minimize the risk of issuing you the loan from their perspective. Try rehearsing your presentation multiple times before delivering it in-person.
Are You Ready For An SBA Loan?
Although it may seem difficult, applying for a loan is a straightforward process. If your credit score is strong, then you can visit your local bank or financial institution to apply for a loan within hours, and you can present a pitch to a loan officer within days. With a strong and informative pitch prepared, you can secure an SBA-backed loan in no time, and take your business to new heights in 2020.