Business Insights

SBA loans for small business owners: A complete guide

Ready to learn how a Small Business Administration (SBA) loan could potentially give your business a boost? Our overview provides the information you need, not to mention dispels any misconceptions you might have.

How SBA helps small businesses get loans

Loans from the SBA help fund businesses and may offer better terms than regular small business loans. They often have lower interest rates, longer repayment periods and possibly offer larger loan amounts.

Since 1953, the SBA has been an essential partner for millions of small businesses. They help entrepreneurs find funding and support that might otherwise not be available.

Taylor Franco, Regions SBA Large Dollar Originations Manager, is a strong advocate for how instrumental the SBA has been for countless would-be business owners.

“I think more than ever, the program serves as a reminder of the importance of small business growth and job creation,” says Franco. “It’s kept that focus since its founding, making it an amazing tool to help businesses grow with the right access to capital.”

Further, the SBA isn’t all about lending money. The SBA offers valuable free courses on entrepreneurship. It also provides support through local Small Business Development Centers. The SBA is a reliable source of ideas and resources for any small business — the kind of support that could mean the difference between survival and growth.

What is an SBA loan?

First, the fundamentals.

• An SBA loan isn’t always a loan from the government. It’s typically a loan issued by a private lender that is backed by the U.S. Small Business Administration.
• The SBA helps pave the way for small businesses by providing guaranteed support to lenders and favorable terms for business owners to access capital.
• It’s not just for new businesses. Any established small business can potentially qualify if it meets the SBA eligibility and size requirements. Many businesses continue to rely on it for a variety of capital needs — years after opening their doors.

Because of this guarantee, the lender enjoys lower risk. In turn, this makes it easier for small businesses to qualify for funding, even when it is relatively new or potentially has a lower credit score.

However, it’s important to remember that it’s still a loan, one that requires proper documentation for the application process as well as your commitment to repay. To qualify, you apply through an SBA lending partner, one well-versed in the requirements for loan approval.

What are the types of SBA loans?

There are three primary types of SBA loans, each tailored to meet a specific need on the part of borrowers: 504 loans, SBA 7(a) loans and microloans.

Which loan program best suits your needs?

According to Franco, that’s when an experienced lender becomes indispensable.

“The right loan option is the one that best fits a business’ goals,” says Franco. “I always encourage a potential borrower to openly explore their needs with me and to consider the options. It’s important they understand all the credit solutions on the table, and when an SBA loan makes sense.”

Speaking of options, what are they? Here’s a quick overview of various SBA loan options.

• The 7(a) loan program is the SBA’s primary business loan program, providing financing of up to $5,000,000 for a range of specific requirements including:
  • Acquiring, refinancing or improving real estate and buildings
  • Short- and long-term working capital
  • Refinancing current business debt
  • Purchasing and installation of machinery and equipment, furniture, fixtures and supplies
  • Changes of ownership (complete or partial)
  • Multiple purpose loans, including any of the above (The SBA publishes a listing of all 7(a) loans)
• The 504 loan program provides long-term, fixed rate financing for major fixed assets such as buildings, real estate and equipment.
• The microloan program provides loans up to $50,000 to help small businesses and select not-for-profit childcare centers start up and expand.

Other available SBA loans include:

• The SBA CAPLine line of credit gives small business owners the flexibility to meet their short- and long-term needs for working capital.
• SBA Export Working Capital helps business owners compete in the international marketplace.
• SBA International Trade loans can be used to finance operations or aid in expansion and development for international trade.

Eligibility requirements

Just the same as any loan, there are specific qualifications that must be met to take advantage of SBA funding. These criteria vary depending on the type of loan. Here are a few general eligibility requirements:

For all SBA loans you must:

• Be in the United States
• Have revenue that falls within SBA size guidelines
• Possess qualified management expertise
• Have a feasible business plan, good character and the ability to repay the loan
• Have a tangible net worth of less than $20,000,000
• Have an average net income of less than $6,500,000 after federal income taxes for the two years preceding your application

In addition, different SBA loan types have specific requirements. Here are just a few of the requirements for each major type of loan.

For 7(a) loan assistance, your business must:

• Be an operating for-profit business
• Not be classified as an ineligible business
• Be unable to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources
• Meet SBA size standard or alternative size standard requirements

Visit the SBA.gov website for full list of 7(a) loan requirements.

For 504 loan assistance, your business must:

• Be an operating for-profit business
• Not be classified as an ineligible business
• Meet SBA size standard or alternative size standard requirements

Visit the SBA.gov website for a full list of 504 loan requirements.

What documentation is needed?

Just the same as traditional loans, an SBA loan requires documentation to prove credit worthiness. While different types of SBA loans may have different requirements for documentation, you will need to be able to produce the following:

1. Three years of both personal and business tax returns
2. Business financial statements, both income statements and balance sheets
3. Any business plans and objectives
4. A Borrower Information Form (SBA Form 1919)
5. A Personal Financial Statement (SBA Form 413)

However, depending on the loan type and the discretion of the lender, be prepared to supply other documents such as resumes, legal documents and bank statements. Your SBA lender will be able to provide you with a list of specific needs when you begin the application process.

What questions should you be ready to answer?

When it comes to lending, Franco notes that businesses in various stages of formation and growth have diverse needs. With that in mind, it’s important to have a clear understanding of how any funding is to be used.

“As one example,” Franco notes, “a startup is the most challenging for a lender, because there’s no historical data to prove the ability to repay any type of loan. That’s why the entrepreneur really needs to be thoughtful about the business they are trying to get off the ground.

“That means knowing how to organize the entity, understanding the hiring process and grasping the entire spectrum of business building. That makes a business plan critical and realistic projections essential, as well as how solid the borrower’s personal finances are.”

Once a business gets on its feet and begins to enjoy stability, then the questions to answer turn more to growth and profitability. As Franco points out, “Once your business reaches a certain point, it’s important to understand where your efficiencies and inefficiencies are.

“That’s the first step to knowing how to get to a desired level of profitability and the working capital needed to get you there.”

And, finally, if a company enjoyed maturity and stability, how can SBA loans help the owner reach his or her end goals?

“When it comes to an established company, the primary question we ask is, ‘What’s your goal? Are you growing to expand or to sell? Or are you trying to stabilize financing? At this point, we want to see a client be very strategic in how funds will be used.”

How to keep the loan process moving

The sooner you obtain funding, the better, right? If you’re ready to move forward on an SBA loan, then preparation before application is your best strategy. That way, you can look forward to the loan review taking place within a shorter period. Let’s break down the steps you can take to expedite a decision on your application.

1. Check your credit record to address any problems with past payments or loans. Address any outstanding issues.
2. Collect tax returns, financial statements, and have a comprehensive business plan, ensuring all are accurate, up-to-date and complete.
3. Choose an SBA Preferred Lender. Experience matters. A lender who knows the unique ins and outs of SBA lending will be better able to decide on your application and provide any guidance needed about potential issues.
4. Be prompt and responsive to any additional requests for information and documentation.

Especially for businesses in formation, it’s important to pay careful attention to every detail before first meeting the lender.

“We always tell startups how important it is to prepare,” Franco says. “That means building the right team with experts in the field. Working with a Small Business Development Center can really nail down the details, including business plans and corporate entities. Further, the other thing to have is the accounting, lawyers and tax advice lined up. By laying that groundwork, you create a good deal more confidence on the part of the lender.”

A great solution for many businesses

In short, with the right guidance from a qualified lender, an SBA loan can provide your business the capital it needs. Further, in the right circumstances, it can offer considerable advantages over traditional lending.

If you’re ready to learn more, contact an SBA banker today and explore if an SBA loan is right for your business.