If you’re seeking a loan for your small business, SBA loan programs with their lower down payments and longer repayment terms than those offered by conventional banks are often a favorable choice for small business owners.
But how do SBA loan programs work? How do you find the right program for your needs, and what steps are involved in applying for one?
Here are six FAQs about SBA loans and the loan application process.
What is an SBA Loan?
It’s a common misperception that the SBA lends money to small business owners. In fact, SBA loan programs are not loans. Instead, the SBA develops guidelines for loans, which are then made by SBA-approved lenders (like First Bank SBA). The SBA also guarantees that these loans will be repaid, alleviating the risk that a lender might otherwise take. This is good news for business borrowers who’ve struggled to secure a bank loan in the past due to strict criteria and high down payments.
The SBA has developed a range of loan programs that meet key financing needs such as debt refinancing, long- and short-term working capital, real estate financing, and more.
The most popular loan program is the 7(a) loan program. 7(a) loans can be used to start a new business or to acquire, expand, export, and more.
Which Loan is Right for My Business?
The list above is just the tip of the iceberg. There are many SBA loan programs that can benefit small businesses and a range of criteria can impact your choice of loan, including how you intend to use the proceeds, what stage your business is at (start-up or established), where your business is located (rural or otherwise), whether you are a minority, veteran, native American, or a woman, and more.
What’s the Role of an SBA-Approved Lender?
While SBA.gov and your local SBA office provide information and resources about SBA loan programs, the process of finding the right loan for your needs and applying for one starts with an approved SBA lender.
SBA-approved lenders meet several key requirements, as set by the SBA, based on their experience, reputation, and regulatory compliance. Their track record in processing and servicing SBA loans is also critical.
What Should I Look for in a Lender?
In addition to being SBA-approved, the lender’s familiarity with the small business market (your needs and challenges) and their ability to provide value-add services above and beyond loan processing is also something to look for when selecting a bank.
Depending on your needs and values, here are some questions to ask a potential SBA-lender:
- What are their loan processing times?
- How experienced are their SBA loan experts? Are they dedicated exclusively to the SBA loan market?
- Are they familiar with your industry and have they worked with similar businesses in the past?
- Can they give you strategic advice beyond the financials, even after the loan has closed?
- How accessible are their staff? What are their work/communication methods?
- How involved are they in the community? Do they give back?
What Can I do to Increase my Chances of Getting an SBA Loan?
As with any loan application, your lender will analyze your financials, business history, and plans for use of the proceeds, as well as your ability to repay the loan.
Good credit, cash flow, a solid business plan, a strong balance sheet, profit versus loss, and other factors can all help boost your loan chances. SBA loans also have their own specific eligibility requirements. These vary by loan program, but can include factors such as net worth, operating for-profit, use of proceeds, even your relevant management experience. First Bank SBA will guide you through what’s required in terms of eligibility.
What’s Involved in the Loan Application Process?
Once you’ve decided on the right SBA loan program for your needs and your eligibility is established, you’re ready to begin the application process. This is done directly with First Bank SBA, not the SBA.
In addition to completing SBA-required forms, prepare key financial statements and business documents. The following is a guideline of the steps you’ll need to take:
- Be clear about how you intend to use the proceeds. Use your business plan to build a case for the loan and how you’ll repay it.
- Gather key information about the history of your business. Who’s on the management team? What products and services do you provide? Who’s your target market/customer? What’s the competitive landscape?
- Pull your financial statements (past and projected). This includes you balance sheet, profit and loss statement/forecast, cash flow projections, and bank statements.
- Tie all the above together in your business plan – this is critical. Your plan is both a roadmap for your business but will also show a lender that you understand your business, the market, and how to run it.
- Pull tax returns (personal and business) for the past three years.
- Check your credit score and history.
- Collate any business documentation such as leases, articles of incorporation, business license, resumes, etc.