When it comes to small business lending, SBA loans are hot. In fact, in fiscal year 2019, the U.S. Small Business Administration (SBA) guaranteed over $28 billion to entrepreneurs who otherwise would not have had access to capital to start, grow, or expand their small businesses. Business loan approval, in general, is the highest it’s been post-recession.
SBA loans appeal to entrepreneurs because they tend to have longer payment terms and lower interest rates than many other types of business financing and loans. But, like any low-cost business loan, getting an SBA loan can seem overwhelming. Don’t let it be.
“The biggest misconception is that there’s a lot of paperwork, but this is just a regular business loan,” says Bob Coleman, publisher of The Coleman Report, the leading SBA intelligence report for lenders. He adds, “The bank deals with the government, not the entrepreneur.”
Here are five things you should know to help land one of these coveted loans:
1. Do your homework
The more you know about your financial situation (i.e., your credit history, credit scores, risk factors) as well as your industry and competition, the better positioned you will be to apply for—and get approved for—that SBA loan.
Kathryn Primm, DVM, CVPM is owner/veterinarian of Applebrook Animal Hospital, and she took out an SBA loan to remodel a residence and equip it as a functional animal clinic.
“I did a lot of demographics studies myself before even applying. I knew it was a low-risk loan because I know what a hard worker I am, and I know what a good veterinarian I am,” she says. “The area was able to support a veterinary hospital as well, according to my research.”
Primm was able to pay off her loan in five years. “The SBA was like my ‘behind the scenes’ investor and I bought them out!” she says.
It’s also helpful to understand how SBA loans work and familiarize yourself with basic requirements. A free guide to SBA loans is available from SCORE, a resource partner of the SBA. The SBA doesn’t make loans—it guarantees them. Each lender must meet the SBA’s minimum requirements, but beyond that a lender may have its own requirements as long as it doesn’t discriminate on a prohibited basis.
2. Know how much you need
There are several different SBA loan programs, each with a specific focus. The 504 loan is for land, building, and renovations, for example, while Export Express loans help small businesses develop or expand their export markets with streamlined financing. The most popular, by far, is the 7(a) loan program, which allows you to borrow up to $5 million, with a 10-year repayment period (loans for equipment or real estate may be extended to 25 years).
Maximum SBA loan amounts
Up to $5 million: 7(a), CAPLines, Export Working Capital loans, International Trade loans, 504 loans.*
Up to $2 million: Disaster loans
Up to $500,000: Export Express loans
Up to $350,000: 7(a) loans and SBA Express loans
Up to $250,000: Community Advantage
Up to $50,000: Microloans
*Note there is no project size limit for 504 loans but the maximum SBA debenture (loan amount) is generally $5 million. Certain small manufacturers or energy projects may qualify for up to $5.5 million.
If you haven’t already, write out a budget for what you’ll do with the money if you secure a loan. Not only will this help you understand how that money can best benefit your business, but it may also come in handy when talking to a lender who, naturally, will want to know you have a plan for the funds.
3. Know your numbers
Good credit and solid financials are often key to getting an SBA loan. Chester Gordon is president of M.A.C.-Tech Fabrication and Repairs, Inc. in Queens, New York, a custom fabricating shop specializing in architectural metals and finishes. He recently closed on his second SBA 504 loan.
The first loan allowed him to purchase the building from which he operates; the second allowed him to expand by building a second adjacent building and doubling the square footage of the enclosed space. He says his SBA loans “gave me the capability of expanding.” In addition to the physical space, the financing allowed him to hire more employees and to grow his business.
When it comes to the application process, Gordon says, “They are very thorough, so keep your credit in good standing.” He says his loans required three years of financials, so he’s very methodical in his approach to keeping his financial information organized, relying on his accountant, his office manager, and his wife, who works in the business and handles administrative work.
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The SBA generally doesn’t have a minimum personal credit score requirement, but individual lenders may. In addition, certain SBA loans—7(a) loans up to $350,000 and Community Advantage loans—require lenders to prescreen applicants with their FICO SBSS score. This score can take into account the owner’s personal credit data as well as information from a business credit report and financial data. The SBA requires a minimum score of 140 (on a scale of 0-300), though many lenders require a score of 160 or above.
And speaking of numbers, make sure you’re keeping up with taxes. “If the business has a profit, please report it on your tax returns,” says Rosa Figueroa, director of the Queens-LaGuardia Small Business Development Center. “The lender looks for repayment ability and repayment ability is proven by the business’s profit.”
4. Ask for help
Entrepreneurs tend to try to “DIY” it all, but if that describes you, know you don’t have to go it alone in applying for your SBA loan.
Chris Petropoulos of General Auto Recycling, located in Tiverton, Rhode Island, took a commercial loan for an employee stock ownership plan for $5 million. He quickly realized he would need to provide a lot of reports and documents for the loan. That’s why he recommends bringing a financial expert on to streamline your application process.
“A commercial financial consultant walked me through the process. I would not recommend doing this without a representative who has experience with this type of loan,” Petropoulos says.
There are a variety of professionals who can help you prepare a business plan and create financial projections. These include:
- A SCORE mentor and/or an SBDC (Small Business Development Center) advisor. Professionals from these organizations can provide free assistance to entrepreneurs.
- A CPA, enrolled agent (EA), or accounting professional who works with small business owners. They can help make sure your financials are well organized and lender-ready.
5. Invest in key person insurance
Insurance might be the last thing on your mind when applying for an SBA loan, but it could be the tool that ensures your business thrives, no matter what might happen to you.
Sa El, co-founder of Simply Insurance, says that one of the requirements of an SBA loan is having a life insurance policy that is greater than or equal to the amount of your loan, and that you have a term length that is greater than or equal to the term of your loan.
This requirement applies to loans for which, per SBA guidelines, the lender determines the viability of the business “is tied to an individual or individuals. In those situations, the lender must require life insurance.” Getting a life insurance policy on yourself, however, does not provide the same benefits that a key person policy does.
“Getting a loan through the SBA is a great idea for any small business; however, it is critical that you have a plan for paying it back. If you have a key person that your business couldn’t survive without, then you need to get a key person insurance policy,” El says. “Without this, you open your business and yourself up for financial ruin, especially if you can’t pay back the loan.”