Small Business Administration (SBA) loans are ideal for many borrowers who may not qualify for traditional senior lending due to lack of collateral within their businesses.
What is an SBA loan?
An SBA 7(a) loan is a loan that is partially guaranteed by the SBA and is intended to help small businesses get the financing they need to start or expand their operations. SBA loans are offered by banks and other financial institutions, and are typically used for things like purchasing equipment, purchasing real estate, and refinancing existing debt. SBA loans have more favorable terms than many other types of loans, including longer repayment terms and lower interest rates, making them a good option for small businesses that may have difficulty getting financing through traditional channels. SBA loans are created by SBA-approved and SBA preferred lenders. Unlike some of its other loan programs, the SBA does not make direct loans under the SBA 7(a) program.
Pluses and minuses of SBA loans
Pluses:
1. Longer repayment terms: SBA loans often have longer repayment terms than traditional bank loans, which can make it easier for small businesses to manage their cash flow. Traditional bank loans usually amortize over five years, seven years tops. Most SBA loans have ten-year terms; real estate SBA loans have 25-year terms.
2. Flexible collateral requirements: The SBA doesn’t require collateral for all its loan programs, which can make it easier for small businesses to qualify for financing. Traditional senior lenders generally require collateral. As a result, senior loans are referred to as asset-back loans (“ABLs). That’s a challenge for many small businesses, which may have great cash flow but lack hard assets on the balance sheet.
3. More lenient credit requirements: The SBA has more lenient credit requirements than many traditional lenders, which can make it easier for small businesses with less-than-perfect credit to get approved for a loan. An individual credit score of 650 is adequate in many cases for an SBA loan. A credit score of 700+ is ideal.
Minuses:
1. Long application process: The SBA loan application process can be lengthy and complex, which can be a barrier for some small businesses who lack good accounting and tax records.
2. Strict eligibility requirements: To be eligible for an SBA loan, small businesses must meet certain criteria, such as being for-profit and operating in the United States.
3. Fees: SBA loans often come with fees, such as closing costs and origination fees, which can add to the overall cost of the loan.
Where do I find an SBA lender?
There are hundreds of lenders around the country that make SBA loans, but many banks are not well-versed in the inner workings of the SBA 7(a) loan program. Many banks view SBA loans as a necessary evil product they must provide in situations where the borrower does not qualify for a traditional commercial and industrial (“C&I”) loan. As a result, most SBA loans in the country of distributed by a few dozen SBA lenders who focus almost exclusively on SBA loans. These SBA banks know the SBA’s program very well and typically move through the paperwork and SBA channels faster than the thousands of lenders who only make a handful of SBA loans a year.
At SBALenders.com, we focus on provide a no-cost matchmaking service to borrowers through our Find Me a Lender feature, whereby we can introduce you to banks who express interest in your project/business after learning high level details about your opportunity.
Alternatively, SBA.gov has extensive resources online regarding where to find SBA lenders.
How long does it take to obtain an SBA loan?
Our experience at SBALenders.com is a typical loan may take 60 – 120 days to complete – shorter if under $350,000; longer if real estate is involved, which may require environmental assessments and real estate appraisals.
Besides the type of loan and the loan amount, the other factor that has a big impact on how long it takes to obtain an SBA loan is how fast the borrower can generate the required documentation. SBA banks can usually close on a loan within 30 days of having a “full file” – all the requested documents.
What documents are needed to apply for an SBA loan?
Most SBA banks will require some form of the following at a minimum (in order of importance):
1) Business Financial Statements (Income Statements and Balance Sheets) – Last 2 or 3 years plus interim year to date
2) Business and Personal Tax Returns – Last 2 or 3 years
3) Bank Application Form. Every SBA bank has its own unique application form
4) Borrower Information Form (SBA Form 1919 is required on all SBA loans)
5) Personal Financial Statement (for all 20%+ owners). Bank’s own form or SBA Form 413.
6) Business Debt Schedule. Bank’s own form or SBA Form 2202
7) Business Asset List. Schedule listing description and value of the assets
8) Use of Proceeds
9) Resumes/bios of owners and key management personnel
10) If buying a business, Acquisition documents – Purchase Agreement or Letter of Intent
11) If buying real estate, Real Estate Purchase Agreement and/or Construction Contract or cost estimates
12) If buying a franchise, Franchise Agreement and FTC Disclosure Statement
The documentation we see lacking that most that prevents borrowers from accessing SBA loans from our network of lenders is two full years’ worth of federal tax returns. If the business has not been in business long enough to generate two federal tax returns, our bankers do not have, in their opinion, sufficient data with which to make an underwriting decision.
Who is eligible for an SBA loan?
To be eligible for an SBA 7(a) loan, a business must meet the following requirements:
1. Size requirements: The business must be small, as defined by the SBA’s size standards. These standards vary by industry and are based on the number of employees or annual revenue of the business, but as a rule of thumb 500 employees or less.
2. For-profit: The business must be a for-profit organization.
3. Unable to obtain financing elsewhere: The business must be unable to obtain financing through traditional sources, such as banks or credit unions.
These businesses are generally not eligible for SBA loans:
1. Non-profit organizations: SBA 7(a) loans are only available to for-profit businesses.
2. Passive businesses: Businesses that are primarily engaged in passive activities, such as holding real estate or investments, are not eligible for SBA 7(a) loans.
3. Certain types of businesses: Businesses that engage in illegal activities or are engaged in lending, gambling, or investment in securities are not eligible for SBA 7(a) loans.
4. Businesses with access to other sources of financing: Businesses that already have access to other sources of financing, such as venture capital, equity financing, insurance, or any business that makes money of its money, are generally not eligible for SBA 7(a) loans.
5. Speculative business ventures – medical research, biotech, ground up spec construction.
What are the key financial metrics needed to obtain an SBA loan?
We see hundreds of SBA loan inquires a year. The successful ones meet or exceed the following criteria:
Credit score: 680+
SBA loan / cash flow: 5x or less. Was 6x in 2021
Years in business: Two full tax years
Personal liquidity: 10% or more after the loan closes
Bankruptcies: No personal or business bankruptcies
Lawsuits/tax liens: None
Loan type: Not working capital loans unless <$150K
If acquisition, experience: Owner with industry experience
If acquisition, down payment: Owner can fund 10% – 20% of purchase price
Because these are the key data points for obtaining an SBA loan, we ask these questions at our Find Me a Lender tool. Even though it only takes a few minutes to complete this inquiry form, we are able to pre-screen potential borrowers within a few hours and get them on a phone call with an SBA bank usually within one business day.
We provide more explanation of the above metrics in our SBA Loan Eligibility Criteria article.
What is an SBA preferred lender?
The SBA Preferred Lender Program (PLP) is a program offered by the Small Business Administration (SBA) that allows certain banks and other financial institutions to process, approve, and close SBA-guaranteed loans more quickly and efficiently than non-PLP lenders. To become a PLP lender, a financial institution must demonstrate a track record of successfully processing and closing SBA-guaranteed loans and must meet certain other requirements set by the SBA.
As a PLP lender, a financial institution can make lending decisions on behalf of the SBA and has the authority to close and disburse loans without prior SBA review. This allows PLP lenders to offer more streamlined and efficient service to small businesses seeking SBA-guaranteed loans.
SBALenders.com only refers borrowers to SBA Preferred Lenders since these lenders know the SBA 7(a) program better and move faster than non-PLP lenders.
Will I have to personally guarantee the SBA loan?
All owners of greater than 20% of the business must guarantee the SBA loan.
Personal guarantees are typically required because the SBA views the loan as a partnership between the government and the small business owner. The personal guarantee is intended to demonstrate the borrower’s commitment to the success of the business and to ensure that the borrower has a vested interest in the repayment of the loan.