SBA Does Not Lend
The SBA just helps small businesses get loans. It does this by setting guidelines for lenders and then partners with lenders to provide funds.
When a lender is partnered with the SBA to provide funding the SBA will guarantee the loan and by doing this it reduces the risk to lenders.
When you are interested in an SBA backed loan you will be working with an approved SBA lender.
There are five simple things you can do to make it easier to get an SBA Loan
- Understand the different types of loans
- Pick the one that fits your needs
- Have the required documentation
- A plan to repay the loan
- Create a list of potential lenders
1. The Different Types of SBA Loans
- 7a loan
- 504 loan
- Micro loan
Understand the 7(a) loan
This is the SBA’s most common loan. It can be used to:
- Purchase basic office equipment like computers, furniture, fixtures, supplies
- Finance short and long term working capital. (Short term is usually considered to be repaid in the first year. Long term working capital is usually set up to be repaid over a multi year period.)
- It can be used to refinance current debt, for lower interest rate or for better repayment terms.
- Acquire a business for up to five million dollars.
Key eligibility factors lenders consider for 7(a) loan:
- How the business generates revenue
- How long the business has been operating
- The business credit history
- If purchasing a business your credit history and score. Generally a credit score below 700 tends to create issues.
- Business must be a for profit entity
- Your business must be categorized as a small business by SBA Check your business
- Do business in the US
- Reasonable invested equity (Often determined by lender, but usually 10-20% f loan amount)
- Demonstrate a need for the loan
- Show a business plan that illustrates that the funds will be used for sound business purposes
- No debt delinquencies to US government
Understand the 504 loan
This program provides a type of Term loan with fixed interest rate financing up to five million for fixed assets that promote growth and job creation.
The 504 funds are available through something called CDCs (Certified Development Companies).
There are 230 CDCs around the country, each with a specific regional focus. They work in conjunction with conventional financial institutions to provide funding for businesses that would otherwise have less access to high-quality financial resources. TMC Financing
Key eligibility factors for 504 funding
The business must:
- Be a for profit organization
- Net worth of less than 15 million
- A net after tax income of less than 5 million for 2 years preceding the application date.
These loans are intended to provide funding for a range of assets that promote business growth and job creation.
Understand Microloans
These loans are intended to help startups and small businesses including certain not for profit child care centers expand.
The average loan amount according to the SBA is $13,000. The SBA will provide funds to designated lenders that tend to be nonprofit organizations with lending experience.
Key eligibility factors for Microloans
The designated community lenders set up the criteria for these types of loans and they can vary widely depending on locale. Generally they will require collateral as well as personal guarantees. The loan amount cannot exceed 50,000.
Examples of how these funds can be used include:
- Working capital
- Inventory
- Supplies
- Furniture
- Fixtures
- Machinery
- Equipment
2. Pick The Loan That Fits Your Needs
Picking the right type of loan depends on your specific needs. How much you will require and what you will use the funds for.
- If your loan will not exceed 5 million dollars then you can look at the 7(a) or 504.
- If the loan is to purchase an existing business then you are looking at the 7(a)
- If it is for fixed assets then you can use the 7(a) or the 504 and shop for terms.
- If your after tax income exceeds 5 million dollars then you may have to use the 7(a).
- If the loan amount is less than 50,000 then the microloan is the correct choice.
3. The Required Documentation
Documents to prepare for any type of loan.
- Resume that details your experience as it relates to the business
- Credit history
- Business plan that shows how the funds will be used and how they will be paid back
- Profit and loss statements for existing businesses
- Balance sheet for existing business
4. A Plan To Repay The Loan
This should be a basic pro forma statement that includes monthly projections for the first year and up to five years of annual projections.
The information included in the projections should be substantiated by marketing plans, growth projections, or cost savings.
5. Your Lender List
When looking for funding it is important to realize that the first application you make or get approved from may not be the one you want to go with.
It is always best to review your options. Check with your preferred bank to see if they are familiar with SBA funding first.
If it is not something they do a lot of you are most likely better off with another bank that specializes in SBA lending.
That being said if the bank you do business with does do SBA loans they should work with you to get you funded.
A good place to start the search is the SBA lender match
Always keep in mind that it is a buyer beware market. There are no shortage of lenders that skirt the boundaries of the law and regulations to take advantage of you.
Red flags to pay attention to:
- Very high interest rates. These would be much higher than what your local bank would charge.
- Fees that exceed 5% of loan value
- Look for hidden charges
- Annual percentage rates or payment reschedules that are obscure or hard to understand
- If they imply you can lie on paperwork or can leave signature blocks unsigned
- Getting pressured to take a loan. This may come in the form of: “this offer is only good for the next 24 hours “
Always remember to get any loan contract reviewed by your accountant and attorney. A bad loan can severely hurt your business.
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