Complete Guide to Getting a Small Business Administration (SBA) Loan

What is Small Business Administration Loan?

SBA Loan Website

A Small Business Administration loan or SBA Loan is a type of government-backed loan in the US that can help small businesses obtain financing for various purposes, such as starting or expanding a business, purchasing equipment or inventory, or refinancing debt.

SBA loans are not issued by the SBA itself, but by participating lenders who follow the SBA's guidelines and requirements. The SBA guarantees a portion of the loan in case of default, reducing the risk for lenders and making it easier for borrowers to qualify.

SBA loans offer several benefits for small businesses, such as lower interest rates, longer repayment terms, and flexible eligibility criteria.

Prerequisites for an SBA Loan in General

25975251 businessman loan handshake

Different lenders and lending programs have different standards for Small Business Administration loans. The U.S. Small Business Administration's small-business loans demand great credit, financials, and jobs in an approved industry.

There is a standard set of criteria that must be met regardless of the SBA provider or credit program you choose.

Managing a Company

It must be a legitimate, profit-seeking company that has been duly established and is in operation. Must be engaged in a suitable line of work.

Firms engaged in financing operations, companies whose primary activity is gaming, and religious groups are not qualified for SBA business loans.

Location

You need to be operating out of, or planning to expand into the United States proper.

Investment

Business ownership requires money or human commitment.

Funding is required

SBA loan applicants must first exhaust all other funding choices. Loans must be justified. You gotta have a good reason for spending that cash.

Industry scale SBA-qualified small business. Tiny companies are usually defined by employee count or income. SBA's web exam determines eligibility.

Business size

Not be in default on any outstanding federal debt. Yo, if you own 20% or more of the company, you can't be locked up, on probation, or facing criminal charges.

Qualifications for an SBA Loan

The SBA doesn't mandate a certain minimum credit score, but banks must do so to ensure that a company loan from the government will be repaid.

Here's what a provider is likely to consider when deciding whether to give you any short term small business loans:

Financial background

You'll need excellent credit, defined as a number of 690 or greater. It's worth repeating that the SBA doesn't set a minimal credit score requirement, so your options may be open based on the provider and other factors.

The Company's Credit Report

Firm credit matters like personal credit. The SBA uses FICO Small Business Scoring Service to evaluate your company's solvency and prescreen 7(a) loan applications. Prescreening requires 155 or higher. (scores vary from 0 to 300). If you fail the prescreen, a supplier can reject your application. SBA SBSS minimum is 600. Individual lenders may set higher limits.

Timing in Commerce

Some banks will finance ventures, but most require two years of business.

Money and business.

Annual income and financial flow forecasts must be solid. You shouldn't already owe so much money that you can't afford this new loan. A debt service coverage ratio (DSCR) of 1.15 or greater indicates that you have sufficient working revenue to handle your debt service payments.

Collateral

Lenders must fully collateralize SBA loans when possible. Acceptable security includes property, equipment, and goods. Credit applications cannot be denied because the client lacks security.

Documents Required for an SBA Loan Application

You'll need a lot of paperwork to apply for a small business administration credit. The specific paperwork and information your lender requests will depend on the specifics of your lending program, but here are some examples of the most frequently requested items:

  • SBA Application for Loan, Form 1919.
  • Statement of Background Information, SBA Form 912.
  • Budgeting and spending plan (you can use SBA Form 413).
  • Unconditional Guarantee, either on SBA Form 148 or the lender's counterpart. If you own 20% or more of the company, the SBA will ask you to give a personal assurance that is limitless in amount. A complete or partial assurance can be provided by proprietors with less than 20% control. (SBA Form 148L).
  • Cash flow forecasts, balance accounts, and revenue statements are all part of a company's financial records.
  • Reports for tax purposes.
  • Collateral list with all the details.
  • Timeline for paying off existing debt, if any.
  • Validation documents for commercial operations.
  • The record of your loan request.
  • Each company owner's resume.
  • Contextual analysis and company background.
  • Tenancy agreements for commercial purposes.

Additional documentation, such as acquisition agreements and assessments or company values, may be needed if you plan to use your Small Company Administration credit to buy real estate or an established business.

How to apply for Small Business Administration loan?

There are six main types of SBA loans, each with different terms, interest rates, and eligibility criteria. The most common ones are 7(a) loans, 504 loans, and microloans. Chose the one that suits you best by matching your needs with costs and conditions.

You need to meet the general SBA eligibility requirements as discussed above.

Then you need to find an SBA loan provider.

You can apply for an SBA loan through a participating lender, such as a bank, credit union, or online lender. You can use the SBA Lender Match tool to find lenders that offer the type of loan you need. You can also contact your local SBA district office for assistance.

On the lender website or form, you will have to submit your application and provide the required documents. You will need to fill out an SBA loan application form and provide various documents to support your loan requests, such as your business plan, financial statements, tax returns, personal resume, and legal documents.

The exact documents you need may vary depending on the lender and the type of loan you want. You may also need to pay some fees, such as a guarantee fee, an origination fee, or a closing fee.

The application process can be lengthy and complex. Depending on the type and size of the loan, borrowers may need to provide a detailed business plan, financial statements, tax returns, personal and business credit reports, collateral, and other documents. The lender may also require a personal guarantee from the owner or a co-signer.

The approval process can take several weeks or months, depending on the lender and the SBA's workload.

Loan Fees and Other Costs

The loan may have fees and closing costs. In addition to the interest rate, borrowers may have to pay an upfront guarantee fee to the SBA, which ranges from 0.5% to 3.75% of the guaranteed portion of the loan.

There may also be other fees charged by the lender or third parties involved in the loan transaction, such as origination fees, appraisal fees, legal fees, etc. These fees and costs can add up to a significant amount and reduce the net amount of funds available to the borrower.

Restrictions and Conditions of Using the SBA Loan

The loan may have restrictions and conditions. Borrowers must use the loan proceeds for the specific purpose stated in the application and comply with the SBA's rules and regulations regarding how they operate their business. For example, borrowers must maintain a certain level of equity in their business, limit their dividends and salaries, avoid conflicts of interest, and report any changes in their business situation to the lender and the SBA. Failure to do so may result in default or termination of the loan.

About Gaurav Tiwari

Gaurav Tiwari is a blogger, influencer and designer with expertise in brand regeneration and growth hacking. He is the co-founder of Gatilab, a successful digital agency focused on content and design.