How to Get an SBA Loan: A Step-by-Step Guide

SmartBiz Loans has helped thousands of business owners acquire a low-cost SBA loan. In this short video, real small business owners discuss how SmartBiz makes SBA loans easy:

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What is an SBA loan?

Created in 1953, the U.S. Small Business Administration (SBA) helps entrepreneurs pursue the American dream. SBA is the only cabinet-level federal agency fully dedicated to small business and provides counseling, capital, and contracting expertise as the nation’s only go-to resource and voice for small businesses.

This bipartisan organization is a valuable resource for aspiring or current business owners. Here’s some stats showing why entrepreneurs need this government entity in their corner:

  • Small businesses are a vital component of the overall economy accounting for 99.7% of all businesses in the U.S.
  • Businesses in America with fewer than 100 employees account for 98.2%, and those with fewer than 20 employees account for 89%.
  • In July 2021 private sector jobs increased by 330,000 with small businesses contributing 91,000 new jobs to that total.
  • In small businesses with fewer than 50 employees, jobs grew by 54,000 in companies with 20-49 employees and by 37,000 in companies with 1-19 employees.

In 2021, Isabella Casillas Guzman was named the administrator of the SBA in the Biden administration. In an SBA press release, Guzman says:

Growing up in an entrepreneurial family, I learned firsthand the ins and outs of managing a business from my father and gained an appreciation for the challenges small business owners face every day.  Throughout my public and private sector career, I have been dedicated to helping small businesses grow and succeed. Now more than ever, our impacted small businesses need our support, and the SBA stands ready to help them reopen and thrive.”

Helping business owners secure funding is an important aim of the SBA. The agency works with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. SBA reduces risk for lenders and makes it easier for them to access capital, making it easier for small businesses to get loans. Since 2009, the SBA has backed over $150 billion through its various programs, listed below.

Types of SBA loans

  • The 7(a) loan program

This is the SBA’s most popular loan program because of low rates, long terms, and very low monthly payments. Established small business owners with healthy credit scores are the best candidates for an SBA 7(a) loan. Most 7(a) term loans are repaid with monthly payments of principal and interest. There are also various fees associated with this type of government program. Insist on transparency so you won’t be surprised by added costs. Even after fees, SBA7(a) loans are vastly cheaper than most of the alternative financing and alternative lender options. For an overview of SBA loans, visit the SmartBiz Loans website here: Get the gold standard in small business lending.

  • The CDC/504 loan program

This program is described by the SBA as a win-win-win for the small business, the community, and participating lenders. Created to give small businesses low-cost funds for expansion or modernization, up to 50% of project costs are funded by a lender backed by the SBA. CDCs (Community Development Corporations) typically fund up to 40% of the project cost. The final 10% is a cash down payment expected to come from the small business owner.

  • The Microloan program

The SBA Microloan Program is different from other SBA loans. The SBA loans money to intermediary nonprofit lenders who then fund business loans to startups and small businesses, up to $50,000. In 2017, the average microloan was approximately $14,000. Many of these loans are granted to businesses run by women, minorities, or veterans. If you need less than $50,000 with good credit and have a business plan, a microloan might be a fit to fund your business. If you need more than $50,000 or have poor credit, a microloan is not for you.

  • SBA disaster loans

SBA provides low-interest disaster loans to help businesses and homeowners recover from declared disasters. These types of loans include: physical damage loans, mitigation assistance, Economic Injury Disaster Loans (EIDL), and military reservist loans. For a comprehensive overview of these types of loans, visit the official SBA website.

  • SBA express loans

SBA express loans are a simple way to receive expedited, amortized government-guaranteed financing for your small business. Entrepreneurs can be granted up to $350,000 of capital in the form of either a term loan or line of credit. Once received, this capital may be used for various business purposes.

  • SBA lines of credit

With an established line of credit through the SBA, business owners can draw funds from it by making a direct deposit into your business checking account, or by using a convenience check linked to the credit line account.

Benefits of an SBA 7(a) loans

SmartBiz Loans offer flexible and low-cost SBA 7(a) loans. Our financial professionals are on hand to explore how the loan will positively impact your business, walk you through the streamlined, online application, and answer questions that might arise. The advantages of SBA loans include:

  1. Low interest rates

Interest rates for SBA loans are essentially as low as they get. Your interest rate will depend on your own creditworthiness and the qualifications you demonstrate. Unlike other types of term loans, it’s unlikely that you will see interest rates climbing into the double digits.

  1. Low monthly payments

Because of the long terms of an SBA 7(a) loan, monthly payments are very small. This helps you manage cash flow and avoid struggling to meet your obligations.

  1. Capital availability

An advantage of SBA loans is the access to capital allowed. You can borrow up to $5 million, which means that borrowing the capital you need is possible.

  1. Repayment terms

One key advantage to SBA loans is their terms: longest repayment terms, (10 years for a working capital loan, 25 years for a commercial real estate loan) and a payment schedule that shouldn’t put financial strain on your business.

  1. Flexible fund use

With an SBA 7(a) loan, you can use the funds for almost anything. The terms of use for SBA 7(a) funds are broad—you can refinance existing debt, buy land, purchase inventory, make upgrades.

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How to get an SBA loan

Before you start the loan process, check your eligibility for an SBA loan. Requirements include:

  • 2+ years in business
  • Business owners must be U.S. citizens or legal permanent residents
  • Business owners’ personal credit score must be above 650 (675 for an SBA commercial real estate loan)
  • Business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
  • No bankruptcies or foreclosures in the last 3 years
  • No outstanding tax liens
  • No delinquencies and/or default on government loans

It’s a good idea to have required paperwork in order before you start the loan process.  No matter which lender you’re working with, having all the necessary documentation is crucial to obtaining your funds as quickly and efficiently as possible. Some of the most common documents that bank partners in the SmartBiz network request include:

  • Personal & Business Tax Returns
  • Personal Financial Statements, required from each individual owning 20% or more of the company
  • Profit and Loss Statement – Tips to prepare this statement can be found here
  • Balance sheet – Learn how to prepare a balance sheet on the SmartBiz Blog
  • Collateral – Details about collateral requirements can be found on SmartBiz University

Choose your lender

Although SmartBiz Loans is not a lender, we work with multiple banks to help match you with the lender most likely to fund. This can help you save time when selecting a lender. You won’t have to go from bank to bank to find the right funding fit.* Here are some guidelines when you’re searching for the best way to secure an SBA loan:

Transparency

Lenders should disclose an annualized interest rate or APR in an easy-to-understand manner. Although APR is widely recognized as the standard for loan cost, SmartBiz recommends using the "Loan Constant" to discover the true cost of a loan. Learn more about the loan constant here.

No Hidden Fees

When researching loans, don't forget about additional packaging or other types of fees. Lenders should clearly state the fees that will be due before a loan is funded and during the life of a loan. Fees normally included are a guarantee fee, origination fees, packaging fees, and closing costs.

Easily understood terms 

You shouldn’t need a degree in finance to understand the terms of your loan agreement. Be sure to review closely before you sign on the dotted line and ask questions if anything is unclear. Find a glossary of small business loan terms on the SmartBiz Small Business Blog.

Stellar customer service 

Is there a quick and easy way to reach your lender? If you’re working with an online lender, can you pick up the phone for any questions or concerns? When you call your lender, you should have a dedicated representative that is familiar with your business and your application. An unresponsive lender could be a red flag.

Final thoughts

Once your loan is approved, estimates are that it should take approximately 5-7 business days for your funds to become available. Look at your finances and determine how to best use the proceeds to stabilize or grow your business. SBA 7(a) loans can generally be used for working capital or debt refinance. Your business plan can help you best allocate the funds. It’s also a good idea to check in with your accountant or another financial professional to discuss.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.  

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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