Small business loans can be difficult to come by. Either you don't have enough years in business, perhaps not enough revenue, lack of collateral, all factors that prove hindrances when you go to apply for a loan. This is precisely why SBA loans are in place—to help small businesses who may not otherwise qualify for business financing. The question is, is it hard to get an SBA loan? Basically, that will depend. Understanding the process and keeping tabs on the loan status can put you in a better position to actually receive SBA financing. In this article, we will look at some of what is entailed as far as the SBA loan process goes as well as how to understand and interpret your SBA loan status.
Understanding the SBA Loan
First off, SBA loans are lower interest than many other types of commercial loans. This is in part what makes them quite attractive. They also tend to have longer repayment terms. Keep in mind that with an SBA loan, it is not the SBA that is actually loaning the money, rather they are working with lenders who are eligible to issue such loans. The SBA will secure the loan up to a certain percentage—this way if the borrower defaults, the lender is at least able to recoup a percentage of the funds. This, in turn, helps make the applicant less of a risk to the lender.
So, you can easily see why SBA loans are so popular with small businesses. The SBA makes business loans more affordable, accessible, and overall less of a risk for the lender, as noted. Depending on the type of SBA loan, the amount can be as high as 5 million. Repayment terms generally range from 5 to 25 years. Traditional term loans on the other hand usually fall into the one to five-year category—again, it is easy to see why an SBA loan might better accommodate a smaller business.
Who Can Receive an SBA Loan?
In terms of the overall difficulty of receiving an SBA loan, again that will depend on a variety of factors. In assessing your application, the lender will review several key things, to include:
- The number of years in business. There is a requirement with the SBA loan that a business be in operation for at least two years. If you are a startup this might cause an issue in trying to attain an SBA loan. They really do want to see a revenue history as well as some experience prior to approving a loan of this nature.
- Annual business revenue. As mentioned, the lender is going to ask to see a history of revenue for the business. Generally, for an SBA 7(a/) loan, you need to have at least a revenue of 100k or more for the most recent reporting period.
- Credit History. In terms of personal and business credit, both the lender and the SBA will review this carefully in making a final determination. This is why you want to ensure that both your personal and business credit (if applicable/) are as strong as they possibly can be prior to applying. Go over your credit report thoroughly. Call regarding any errors you might see. And start taking steps to improve your credit if it isn't where it needs to be.
- Down payment. Depending on the SBA loan type, there may be a down payment requirement—anywhere from 10 to 20%. This isn't necessarily the case across the board; each lender will have their own requirements in this respect.
Beyond these requirements, there are also eligibility requirements that every business must have; these include:
- Fall into the category of small business as defined by the SBA
- Be for-profit
- Operate primarily in the US
- Not owe any debt to the government
- Show a need for the funds
Getting an SBA Loan
If you meet the basic eligibility requirements that is certainly a good start; however, you want to provide the strongest application possible, which means the business needs to show cash flow as well as solid credit history. If you can't demonstrate these things, then it is likely you will have a difficult time obtaining an SBA loan.
This is also why when you apply you want to present an organized and comprehensive loan application packet. Every lender will have their own requirements in terms of what documents they want to see; be prepared to submit your license, bank statements, tax returns (2-3 years/), financial statements to include your balance sheet, income statement and cash flow statement, resume and proof of relevant experience and proof of collateral if applicable.
In reviewing your application, the lender will be able to determine how much you can borrow comfortably. Once the application is under review, you can check on your status periodically to determine where it might be in the underwriting process.
As far as the difficulty of approval once you do get to loan application review, yes, an SBA loan can be on the more difficult side to get approved for. This is because you are undergoing scrutiny by both the lender and with some elements, the SBA itself. The process, for this reason, is also lengthier and so status updates may be less frequent. It can actually take several weeks if not longer to receive a decision on your application.
So why might business be turned down in terms of their SBA loan status? As noted earlier, if you are just starting out and haven't accrued a measurable number of years in business, this will likely disqualify you for a loan through the SBA. If your credit score is subpar and you, therefore, seem like more of a risk, this could also get your application rejected. This is why you want to stay on top of that credit score. Do what is necessary to keep it in good standing.