For many small business owners, finding the funding they need for various projects, for expansion, or even for just weathering more difficult times, can be a challenge. Traditional bank standards are often too high. A company's credit score is either too low, they don't have enough collateral, or perhaps they haven' been in business long enough. SBA loans were designed to assist those small businesses in need of financing. And depending on what type of loan it is, the money can be used for pretty much any need a company might have. The Small Business Administration (SBA/) is a government department that will guarantee loans for small companies thereby making the prospect less risky for a bank. What exactly is required when applying for such loans? Getting an SBA loan can be a bit involved, so in this article, we go into the overall SBA loan process and look at some of the requirements.
Understanding SBA Loans
As mentioned, an SBA loan is designed to help small businesses access needed funds. By securing the loan, the SBA offers greater peace of mind to the lender. So that in the event a company does default, the lending institution can recoup some of the money. The SBA also offers fairly low rates in comparison to some other such loan products out there. There are a few different types of SBA loans available:
- 504 Loan: These are generally used for real estate and/or equipment purchases. Most often these are done in conjunction with a certified development company and can range as high as 5.5 million.
- 7(a/) Loan: Available in amounts as high as five million, a 7(a/) loan can be used for a variety of purposes: from working capital to equipment purchases.
- Community Advantage: A relatively new loan product, this type of loan is given to those small businesses in underrepresented markets—they can be up to 250k.
- Microloan: A microloan, as its name suggests, is a smaller loan given to companies-the cap for this one is 50k, with an average amount of right around 15k.
Qualifying for an SBA Loan
Qualifying for a small business loan is easier than some more traditional business loan financing programs; that said, there still is quite a bit involved with the process. So being organized and prepared ahead of time is key. If upon applying for a commercial loan, you do not qualify based upon the lender's criteria, then you can seek to get an SBA loan. These loans are not available directly through the SBA, rather the SBA backs the loan. In order to qualify, you have to meet the following requirements:
- The company has to be US based and owned/by a US citizen or someone with resident status.
- The company has to be a for-profit entity and fall into one of the SBA's eligible categories.
- You must meet the size requirements. The size requirement varies according to industry and number of employees.
- You have to have enough equity in the business and be on sound financial footing.
More About SBA Loan Requirements
Remember, though you may meet the SBA requirements, the lender will also have their requirements within the context of the SBA loan structure. Again, the key here is to be prepared with all relevant documentation. Usually, a lender and the SBA are going to want to see the following to determine if your company is, in fact, worth the risk:
- Cash flow projections
- If you are a relatively new business, they may ask to see a business plan
- Profit and loss statement
- Articles of the organization if applicable
- Any needed licenses
- Personal financial statements for any 20% or more owner of the company
- 3 years worth of tax returns (business and personal/)
- Any real estate documentation
The lender will also be searching for anything that could suggest that your company is too much of a risk. So for example, bankruptcies, a UCC filing, tax liens, and anything else that might indicate that you've had some financial issues in the past. They will check your credit score—likely your score as well as the business's score. The SBA almost always will use the FICO Small Business Scoring Service.
One issue that many small businesses run into on this front is the fact that they have not yet built up a business credit history. This can certainly hurt your chances of being approved for an SBA loan. And this is why it is so important, once your company is up and running, to actively work on building up that business credit history. Also, you always want to keep on top of that credit score so that when you do go to apply for a loan there are no surprises.
The Chances of Getting Approved
While the SBA loan programs were designed to help small businesses who might otherwise have difficulty getting approved going the traditional route, it still can be challenging to qualify. Business history and credit are hugely important. The documentation you provide will be a significant factor in whether or not your loan goes through. Beyond this documentation and the financial statements provided, some of the other things that both lenders and the SBA evaluate in this process include your business reputation as the company owner, relevant managerial experience, if your business earnings are sufficient to repay the loan, the potential for the company's success and sustainability, the overall strength of your business model, and the value of any pledged collateral if applicable.
Preparing to Apply for an SBA Loan
We can't stress enough how important having everything prepared and ready to go is in this process. As an SBA loan can take longer than some other loans, the slightest hold up can lead to even longer delays and potentially the rejection of your business loan application. As a newer company having that business plan in place and fully fleshed out could be a key component of a successful loan application. To this end, you want to make sure all necessary financial information is contained within the plan. And make sure all relevant sections are completed. If for example, the market analysis is missing, the lender may ultimately reject you.
Once you do have all the paperwork and other such information ready to submit, you can search for a lender through the SBA online matching tool.
First Union Lending works with numerous small business owners, helping them secure SBA funding. If you need additional cash for expansion, to hire on more staff, or simply to weather this challenging economic period, we can help. Call today!