Establishing a good working capital ratio can be challenging when operating a small business — sometimes, despite an owner’s best efforts, there’s a need for extra funding. Luckily, that’s where SBA loans come in.
The U.S. Small Business Administration (SBA) was created in 1953 to help American citizens receive funds to own and operate small businesses. While the application process can feel intimidating, obtaining an SBA loan is not difficult if you have the proper guidance and meet the eligibility criteria.
This article will detail everything business owners can expect during the SBA process and offers a step-by-step guide for completing the application process.
What You Need to Know about SBA Loans
The U.S. Small Business Administration is dedicated to helping for-profit businesses thrive in America’s economy by providing public funds to increase a company’s working capital and fill in cash flow gaps.
As of early 2022, the approval rates for SBA loans are rising. Currently, large financial institutions approve 15.3% of SBA applications, and small bank lenders approve 21.2%. It’s important to note that the pandemic negatively affected SBA lenders, so these approval rates may increase as the economy recovers.
But generally, there seems to be positive movement. The chart above shows the average dollar amount for SBA 7(a) loans from 2014 to 2018. As you can see, there’s an upward trend.
In addition to understanding what the SBA is for, there are basic requirements and loan types that you should become familiar with before beginning your application process.
SBA Loan Requirements
There are four general SBA loan requirements small businesses need to meet to qualify:
- The business must be owned and operated in America
- A for-profit business must be legally recognized through articles of incorporation
- Owners must operate and have equity within the company
- You cannot receive funding from other alternative lenders
Business owners can ask for the maximum loan amount is $5 million, but SBA loan program participants generally borrow far less than that, with averages hovering under $500 thousand.
Types of SBA Loans
The SBA offers several types of loan products to qualifying businesses. You’ll need to decide what kind suits your business needs before moving forward and applying for an SBA loan. If you are considering the easiest SBA loan to get, you may first need to understand the various types of SBA loans there are to consider. Here are some standard loan options for a small business owner based in the United States:
- SBA 7(a) Loans: With over 50 thousand SBA 7(a) loans given yearly, this is a popular option to increase a company’s working capital.
- CDC/504 Loans: This option is a good fit for expanding businesses that need to acquire fixed assets, make renovations, or receive funds for large-scale projects.
- Disaster Loans: This loan is ideal if you’ve been hit by an unexpected natural disaster that affects the functionality of your business. Specific government programs, like the Economic Injury Disaster Loan, also provide disaster loans due to the COVID-19 pandemic.
- SBA CAPLine: Apply for this loan if you need money to fund a construction project for your small business.
- SBA Microloans: A microloan is a small, low-cost loan dedicated to helping improve a company’s working capital.
Quick Tip: Still unsure about which SBA loan is right for you? Check out our page about Small Business Loans for more details on each loan and additional programs to help your company flourish.
How to Get an SBA Loan
Completing the application process is the most challenging part of getting an SBA loan to qualify for an SBA loan. However, it’s not impossible — thousands of businesses receive these loans every year. For the best chance at success, follow this step-by-step process when completing your application.
Step #1: Consider How an SBA Loan Will Help You
Before starting the SBA application process, consider how this loan will help your small business grow. During your application and pitch, lenders will want to hear all the details, such as:
- How will this money help you?
- What will you use it for?
- How much do you need?
- How long will it take to pay back?
Determine the right amount for you and the appropriate type of loan. You’ll also need to provide specific details on how the business plans to allocate these funds. The more specific you are, the better your chance of obtaining an SBA loan.
For example, most companies apply for small business loans of less than $100 thousand. If this is the case for you, applying for an SBA 7(a) and CDC/504 loan is not recommended; these loans have 10- to 20-year terms, which could jeopardize a company’s future success.
Step #2: Find the Right SBA Lender for Your Business
Now that you’ve figured out why you need a loan, it’s time to find a potential lender. The official government website for SBA funding offers a Lender Match Service where small business owners can find a financial institution to meet their needs.
Unfortunately, the number of active lenders participating in the SBA loan program has been downward since 2014. That’s why small business owners should find a lender who frequently works with small to mid-sized businesses (SMBs). Since these lenders are familiar with servicing smaller companies, they will be more likely to approve your loan application.
Every lender has different application requirements, so research what documents are needed for each financial institution. Some may ask for a personal financial statement or inquire about your personal loans. They’ll also look at your business credit history and financial statements.
Remember that a large financial institution will take longer to process your application and require higher credit scores to get an SBA loan. You’ll likely experience a quicker turnaround if you apply with a credit union or small bank offering SBA lending services.
Step #3: Boost Your Credit Report
Make sure your business is current on any outstanding bills and loans. A bad credit score will not look good and can harm your chances of obtaining funds from most lenders.
The best practice is to make consecutive, on-time payments. In turn, your credit score will increase, and lenders will be more likely to approve your loan application. Also, borrowers with high credit scores can qualify for lower interest rates and financing options.
The minimum credit score requirement to receive a small business loan is around 690 to 800. If your personal credit history does not meet these standards or if you have a low business credit score, it’s best to wait on applying for an SBA loan until you can increase your score through consistent, on-time payments.
Quick Tip: Many lenders will only accept one application, so if your application is denied the first time, you likely won’t be successful on the next attempt.
Step #4: Collect the Required Documents
The application requirements vary depending upon the company you apply with, but there are a few documents that are consistent throughout the SBA application process. Here’s what you’ll need to supply:
- Proof of business ownership
- A form of ID, such as a government ID or a driver’s license
- Any permits and licenses the business holds
- Articles of incorporation
- Business tax returns and financial documents for the past year
Having these documents ready will save you time and show potential lenders that you are serious about getting a loan.
Step #5: Apply and Pitch
Once you’ve completed steps one through four, applying and pitching your case to a lender should be a breeze. You’ve already gathered your materials for the loan application; the only thing left is to sell your business ideas to your lender.
On the day of the appointment, you’ll want to look professional. Consider wearing your best business attire to make an excellent first impression. During your pitch, be sure to present as firm and confident. (It doesn’t hurt to practice rehearsing your pitch and anticipate potential feedback and questions from the lender.)
Why Small Businesses Struggle Getting SBA Loans
Although the Small Business Administration, a federal government agency, provides a guarantee to approved SBA lenders, the guarantee is typically up to 75%, so the remainder, the lender is on the hook and with high delinquency and default rates on SBA loans, lenders are cautious when offering SBA loans to small businesses.
6 Reasons SBA Loans are Denied
Applicants find that the SBA approval process is arduous with various obstacles. The SBA loan application can be declined for many reasons, but the following are 6 most common reasons small business owners get denied for an SBA loan.
- Time in Business
The length of time in business plays an important role in the credit decision. Business history is a factor that is not overlooked. SBA approved lenders consider startup businesses very risky because 1 out of every 2 businesses fail in the first year and by the 5th year less than 20% survive. The longer the time in business in which you can show financial success with consistent cash flow over years, not months, the better chance of approval. Lenders will need to see at least 2 years of financial history before they will consider approval.
What is the solution to a time in business denial?
Although denial for time in business is hard to remedy in the short term, there are alternatives to SBA loans to secure business funding. Alterative lenders offer short term loans and merchant cash advance to those businesses who lack time in business with offers available after as littles as 6 months track record of sales in business.
- Cash Flow
When the SBA approved lender evaluates the ability of a company's cash flow to repay the loan they look to profit and loss, the balance sheet of course, but ultimately the cash flow consistency on a month to month basis and annual revenue dictates ability to repay the monthly payments.
What is the solution to a cash flow denial?
The best thing to do to resolve cash flow issues is to find alternative business financing options to help improve cash flow over a sustained period of time so that in 6 months to a year you can re-apply and garner reconsideration if you can demonstrate some cash flow consistency. Online and alternative lenders offer short-term business loans and cash advances that will consider volatile cash flow if minimum monthly revenue is met and other qualifications are acceptable.
- Financial Documentation
The SBA loan application process is notorious for requiring a lot of documentation for there business loan approval factors. The loans require multiple years business and personal tax returns, year to date profit & loss, balance sheet, accounts receivable & accounts payable aging reports as well as a plethora of other financial documents to obtain approval.
What is the solution to a denial related to your financial documents ?
The repair to this problem requires time and performance of the business and guidance from a financial advisor and/or accountant to establish a sound footing for future reconsideration. Admittingly this will take time to get in the good graces of SBA to get an SBA loan. In the meantime, alternative lenders have a variety of business resources with small business financing for those businesses who cannot provide satisfactory financial statements to acquire a traditional term loan like an SBA loan.
- Business Owner Personal Credit
The business owners personal credit history and personal credit score are very important in the businesses credit worthiness in the eyes of the SBA. It's important to have excellent credit history and a good personal credit score, with a standard minimum credit score of at least 680 to have the best chance of approval.
What is the solution to a denial related to personal credit ?
If you don not have good credit, engage with building credit and repair any negative credit. As you know, improving credit can take months if not years, so you may want to seek alternatives to a traditional small business loan. There are many business funding alternatives that consider poor credit score such as merchant cash advances.
- Business Credit
Business credit comes in the form of prior business debt that shows a good pay history. There is know per say "business credit score", but a recording history of the business repaying debt. Without any history it can be difficult for SBA lenders to determine ability to repay successfully.
What is the solution to a denial related to business credit ?
Building business credit is key by establishing credit with venders or perhaps taking on multiple business credit cards. If you have bad business credit, its time to get it repaired and resolved if you hope to get an SBA loan. Other business funding is available that are more tolerant to a lack of business credit or some delinquency.
Collateral of real estate, equipment and other business assets can be an asset in acquiring financing from SBA. Additionally, personal assets also can be used as collateral or down payment. The lack of collateral will not be viewed kindly by SBA lenders.
What is the solution to a denial related to collateral ?
If you have personal collateral that you can put up, you may want to offer such to the SBA lender for reconsideration. If you don't have any collateral or unwilling to provide personal collateral you will need to consider small business funding options from other than traditional lenders, that don't require collateral or personal guarantee, which do exist via short-term business loan, merchant cash advances and other revenue-based financing options.
Is it hard to get an SBA Loan? Well, yes, if you are well-prepared when you apply, many small business owners can quickly get the funds you need to propel your small business forward. Make sure you have a good credit score, essential documents, a proposed business plan ready for review, and an experience business loan originator.
If you’re ready to see if you qualify for an SBA loan, or would like to consider some alternatives to SBA loans, contact AdvancePoint Capital today to get a free quote. We are dedicated to supporting small business owners and guiding business owners through the application process, so what are you waiting for? It’s time to help your business grow into what it’s meant to be.