SBA – the U.S. Small Business
Administration – is an independent federal government agency created to aid, counsel,
assist, and protect the interests of small business concerns, to preserve free
competitive enterprise, and to maintain and strengthen the overall economy.
- The SBA offers a variety
of loan programs to small businesses – including general small business loans,
microloans, real estate & equipment loans, and disaster loans.
- The SBA itself does not lend to businesses. It sets the
guidelines for loans and guarantees that these loans will be repaid. The loans are then
made by its partners – including banks, community development organizations, and micro
lending institutions.
- When you apply for an SBA loan, you’re actually applying
for a commercial loan structured according to the SBA requirements with an SBA guaranty.
- Lenders are willing to offer the loans at a reduced
interest rate because of the SBA guaranty.
- Conventional loans can have high interest rates, sometimes
as high as 15% and stringent loan requirements. The SBA sets interest rate for their
loans at prime plus 2.75% for working capital and prime plus 2.25% for real estate.
Conventional loans are often limited to 5 year terms. SBA loans are from 10- to
25-years.
Who Qualifies For an SBA
Loan?
- The SBA defines a small
business by its gross sales amount among other definitions, for all for-profit
industries. The numeric values vary to reflect industry differences and are revised
periodically to stay in line with the economy.
- Typically, if your small business earns less than $5
million annually after tax profits, you qualify to apply.
- Good credit history and healthy cash flow are also key
qualification factors.
What Do I Need To Submit To Get An SBA
Loan?
- Three years of business
tax returns
- Current year-to-date interim financials
- Three years of personal tax returns
- Articles of business formation/incorporation
- Credit authorization form
- Business History
- Debt Schedule (if applicable)
- Equipment list (if applicable)
- Real Estate Schedule (if applicable)
- Personal Financial Statement (Form 413)
Any missing or incomplete documentation could slow down the
process or cause the rejection of your SBA loan application altogether.
How Does the SBA Loan Application Process
Work?
Finding A Local Lender: Even though SBA guarantees
your loan, you still need to find a local lender, e.g. a bank, to kick-start the
process.You can visit your local SBA District Office to help identify a few SBA lenders
in your area that may be a good fit for you.
Different banks offer different terms and rates, even for SBA
loans, so you may need to speak to quite a few banks in order to find the best option
for your unique business needs.
Application: Next, you need to complete your SBA loan
application and prepare for your meeting with the bank.
Factors Considered By The Bank: Debt payments, cash
flow projections, debt-to-worth ratio, good standing with your state treasury and the
IRS, collateral, and working capital. Supporting documentation is critical.
Business Plan: Part of the review process by the bank
includes having a well prepared business plan with at least three years of financial
projections, an overview of how you plan to utilize the loan funds, and a solid
understanding of your industry and market.
What Are the Pitfalls?
Spending all the time and energy to put together a lengthy
loan application only to be rejected can be a very frustrating and discouraging
experience, not to mention the time lost as you have to start the process all over
again.
Make sure you do your due diligence to avoid the following
pitfalls:
Incomplete Documentation: Make sure you gather all the
required documentations before you submit your application. Any missing item could delay
your application process or disqualify your application.
Errors In The Application: The application form
requires in-depth information and can be complicated. Errors, even made unintentionally,
can cause the bank to dismiss your application.
Failure To Adhere To Rules And Regulations: The SBA
has over 400 pages of rules and regulations for its loan programs so make sure you don’t
overlook these important guidelines.
Applying For The Wrong Loan Program: The SBA offers a
variety of loan programs so make sure you pick the best option for your unique business
needs.
Choosing The Wrong Lender: If you don’t take the time
to shop around and speak to a good number of banks or financial institutions, you may
not get the best rate or payment terms for your loan.
If your application is denied by one bank, you will have to
start the process over again so make sure you follow all the guidelines and submit all
required materials.
