SBA Loans – What You Need To Know

Small business owners who are in the market for low-interest, long-term loans may be eligible for an SBA loan. But what is an SBA loan and is it the right choice for your business? SBA loan requirements can be difficult to meet and the application process can be time-consuming. However, for most borrowers, the hassle is worth it to get cheap loans that you can’t get elsewhere. Continue reading to learn more about SBA loans to determine if this is the right financing option for you.

The Small Business Administration (SBA) is an invaluable resource for entrepreneurs in need of business financing. The SBA offers a myriad of loan programs based on the particular needs of businesses. Its flagship is the 7(a) loan program, which offers loans for the most common business purposes. The SBA also offers special programs such as microloans and disaster loans.

What can an SBA Loan be used for?

Among its four main loan programs, SBA loan products can be used for most business purposes. Borrowers can use their loan to cover business expenses that include the following:

• Working capital
• Fixed assets
• Furniture and fixtures
• Supplies and inventory
• Real estate purchases and upgrades
• Refinancing of existing debt
• Start-up costs

Note: The SBA does not issue business loans.  Instead, the agency guarantees part of the loans offered by partner banks, credit unions, non-profit organizations and other financial institutions.  If the borrower defaults, the lender can recover the lost money from the SBA.  Because SBA guaranteed loans are associated with lower risk, banks and other partners can offer low interest rates and fees.

What are the eligibility requirements?

To qualify for an SBA loan, a borrower must meet certain requirements. These eligibility requirements are as follows:

1. Strong credit history and credit score
2. Run a for-profit business (although non-profit daycares may qualify for SBA microloans)
3. Conducting, or planning to conduct, business in the United States or US territories
4. Have owner equity available for investment
5. Have tried securing financing elsewhere first

Your SBA partner lender may also have additional requirements that must be met in order to qualify for an SBA loan.  Along with your application, you will be required to submit financial documents that demonstrate your ability to repay the loan.  Startups that do not have the required documents, such as tax returns from previous years, must submit business plans, industry experience and other information. The SBA and your lender will evaluate your credit history and score.  Business owners with bad credit typically have a hard time acquiring an SBA loan.  Most eligible SBA borrowers have a credit score in the 600s or even higher.

Is an SBA loan my best option?

The SBA may not be the best choice if you need a loan quickly or if you do not meet the requirements set by the SBA and its partner lenders.  Fortunately, if you fall into one of these camps, you do have alternate options.  Many of the best small business loans are available for businesses that do not qualify for SBA or bank loans.  Many of these lenders have lower credit score requirements and faster approvals than SBA loans.

How do I apply?

To qualify for an SBA loan, you must prove that you are willing and able to repay your loan. This is proven by sending your financial documents along with the completed loan application. Begin the SBA application process by applying directly from SBA partner lenders. If you’re not sure which lender to apply for, the SBA offers Lender Match, a platform that matches borrowers with the lenders best suited for their business. The required documents will depend on your business and the specific type of loan you are applying for.

The SBA and the lender will process your information to determine if you qualify for the loan. At this point, you may be asked to provide additional documentation.  By submitting these financial records and responding to the lender in a timely manner, you can avoid delays in getting your loan approved, processed and funded.  After you apply, the lender and the SBA will also evaluate your creditworthiness by pulling your credit score and report.  If all parties approve you, the financier will send your loan and you can then utilize the money for your business.

How long does the process take?

The term of an SBA loan varies, but the process usually takes a few months.  In addition to requiring documents and paperwork, the SBA and your lender must process your loan application before approving or denying your application.  All these institutions usually take some time to process and ultimately disperse the funds to you.

Borrowers seeking $500,000 or less have a number of options to expedite the process.  Quick loans are 7(a) loans where the SBA offers an accelerated payment period.  An approval decision is guaranteed within 36 hours. However, processing and dispersement will take several weeks.  In addition, interest rates are higher than conventional 7(a) loans and loan amounts are smaller. Another option is to use a lender like SmartBiz, an SBA loan broker that offers standard 7(a) loans. This lender uses technology to speed up and simplify the application process so you can get the funds you need in less time.

Conclusion

Although securing an SBA loan can be a lengthy process compared to alternative financing vehicles, qualified business owners are rewarded for their patience with low interest rates, long repayment periods, and large loan amounts.  While SBA loans may be easier to obtain than traditional bank loans, not all businesses are eligible.  Before applying, be sure to evaluate your credit profile and ability to repay the loan in addition to making sure you meet all the SBA requirements.