Note that most SBA loans are limited to 10 years, working capital loans are generally limited to seven years, and the SBA sets a maximum rate on its guaranteed loans. The SBA is a U.S. government-backed term loan that is available at most banks and commercial lending institutions. In any given year, the SBA can guarantee tens of billions of dollars – worth of loans that support tens of thousands of small businesses.
The SBA guarantee gives banks some comfort room to approve loans or allow borrowers to repay loans over a longer period of time. In the United States, you might want to consider an SBA loan if you are looking for a loan with a longer term and lower payments – or have loan application barriers related to inadequate collateral or limited operating history.
When you apply for an SBA loan, you submit your application to the lending institution, and that lender then applies to the SBA for a loan guarantee. That means if you default on the loan, the SBA pays the lender the guaranteed amount. The SBA also requires an unconditional personal guarantee from every owner of the business with at least a 20 percent ownership stake. This guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
The SBA’s primary lending program – the 7(a) Loan Program – guarantees as much as 85 percent of loans up to $150,000 and 75 percent of loans of more than $150,000. According to reports, the maximum loan amount is $5 million. Meanwhile, loan terms can last up to 25 years for real estate, up to 10 years for equipment (as long as the equipment is likely to stay useful during that time) and usually up to seven years for working capital.
Even though the SBA over the years has tried to make it better, the time – consuming paperwork and red tape surrounding SBA loans can be discouraging. You might move hills and yet not prove that you have the requirements for a 7(a). One potential solution might be to find a bank participating in the SBA Express program, which promises a 36 – hour turnaround in return for only guaranteeing half of a loan’s value. The maximum loan amount of $350,000 is also a fraction of the 7(a).
Bigger U.S. banks such as San Francisco – based Wells Fargo and Minneapolis-based U.S bank are also some of the most active SBA lenders. It might be ideal to research or check out local community banks with a focus on business lending. Note that such banks are a good bet in general for business financing because they have more leeway when it comes to approving loans, and their officers can be a wellspring of business financing advice.
How to Qualify for an SBA Guaranteed Business Loan
In the United States, SBA 7(a) loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks. Since these loans are guaranteed by a federal agency, they can have more flexible terms and lower interest rates than traditional bank loans, making an SBA loan one of the best ways to finance your business.
However, it can be very daunting to get a loan from the SBA due to tight lending standards, but with a little know – how, you can maximize your chances.
Ensure that your business is eligible
Have it in mind that if your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the ineligible categories, such as charitable and religious institutions, you should not apply. In the United States, lenders always want to see at least two years in business, strong annual revenue and a good credit score, which starts around 690.
Put together your application documents
Once you think you qualify, the best place to start is the SBA website, which includes a loan application checklist. Use this to gather your documents, including your tax returns and business records. Here are some of the documents you will need before applying:
- SBA’s borrower information form.
- Statement of personal history.
- Personal financial statement.
- Personal income tax returns.
- Business tax returns.
- Business license.
- Lease agreement if applicable.
- One – year cash flow projection.
Decide on a lender
Also note that the SBA provides a convenient Lender Match tool to match potential borrowers with lenders within two days. If you’re applying through a traditional bank, it is advisable to work with one that has a track record of processing SBA loans. Ask your potential lender these questions:
- How many SBA loans do you make?
- How often do you fund SBA loans?
- How experienced are your staff in the process?
- What is the dollar range of the loans you make?
Generally, always remember that a bank with multiple years of SBA experience will be able to better guide you, including letting you know your chances of being approved. Banks are also expected to follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.
The time it takes to get approved for an SBA loan will depend on the lender you choose. With a bank, the entire process — from approval to funding — can take from 30 days to a couple of months. The SBA also has another financing program called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50 percent.
The 7(a) loan program continues to be the SBA’s primary way of providing financial assistance to small businesses. Once approved, your lender is responsible for closing the loan and disbursing the loan proceeds. You repay the lender directly, usually on a monthly basis. SBA loans can be used for many reasons, such as starting your business, managing expenses (think inventory and payroll), expanding your operations or increasing your safety net.