Establishing a good working capital ratio can be challenging when operating a small business — sometimes, despite an owner’s best efforts, there’s a need for extra funding. Luckily, that’s where SBA loans come in.
The U.S. Small Business Administration (SBA) was created in 1953 to help American citizens receive funds to own and operate small businesses. While the application process can feel intimidating, obtaining an SBA loan is not difficult if you have the proper guidance and meet the eligibility criteria.
This article will detail everything business owners can expect during the SBA process and offers a step-by-step guide for completing the application process.
What You Need to Know about SBA Loans
The U.S. Small Business Administration is dedicated to helping for-profit businesses thrive in America’s economy by providing public funds to increase a company’s working capital and fill in cash flow gaps.
As of early 2022, the approval rates for SBA loans are rising. Currently, large financial institutions approve 15.3% of SBA applications, and small bank lenders approve 21.2%. It’s important to note that the pandemic negatively affected SBA lenders, so these approval rates may increase as the economy recovers.
But generally, there seems to be positive movement. The chart above shows the average dollar amount for SBA 7(a) loans from 2014 to 2018. As you can see, there’s an upward trend.
In addition to understanding what the SBA is for, there are basic requirements and loan types that you should become familiar with before beginning your application process.
SBA Loan Requirements
There are four general SBA loan requirements small businesses need to meet to qualify:
- The business must be owned and operated in America
- A for-profit business must be legally recognized through articles of incorporation
- Owners must operate and have equity within the company
- You cannot receive funding from other alternative lenders
Business owners can ask for the maximum loan amount is $5 million, but SBA loan program participants generally borrow far less than that, with averages hovering under $500 thousand.
Types of SBA Loans
The SBA offers several types of loan products to qualifying businesses. You’ll need to decide what kind suits your business needs before moving forward and applying for an SBA loan. Here are some standard loan options for a small business owner based in the United States:
- SBA 7(a) Loans: With over 50 thousand SBA 7(a) loans given yearly, this is a popular option to increase a company’s working capital.
- CDC/504 Loans: This option is a good fit for expanding businesses that need to acquire fixed assets, make renovations, or receive funds for large-scale projects.
- Disaster Loans: This loan is ideal if you’ve been hit by an unexpected natural disaster that affects the functionality of your business. Specific government programs, like the Economic Injury Disaster Loan, also provide disaster loans due to the COVID-19 pandemic.
- SBA CAPLine: Apply for this loan if you need money to fund a construction project for your small business.
- SBA Microloans: A microloan is a small, low-cost loan dedicated to helping improve a company’s working capital.
Quick Tip: Still unsure about which SBA loan is right for you? Check out our article How to Choose the Right SBA Loan Program for more details on each loan and additional programs to help your company flourish.
How to Get an SBA Loan
Completing the application process is the most challenging part of getting an SBA loan. However, it’s not impossible — thousands of businesses receive these loans every year. For the best chance at success, follow this step-by-step process when completing your application.
Step #1: Consider How an SBA Loan Will Help You
Before starting the SBA application process, consider how this loan will help your small business grow. During your application and pitch, lenders will want to hear all the details, such as:
- How will this money help you?
- What will you use it for?
- How much do you need?
- How long will it take to pay back?
Determine the right amount for you and the appropriate type of loan. You’ll also need to provide specific details on how the business plans to allocate these funds. The more specific you are, the better your chance of obtaining an SBA loan.
For example, most companies apply for small business loans of less than $100 thousand. If this is the case for you, applying for an SBA 7(a) and CDC/504 loan is not recommended; these loans have 10- to 20-year terms, which could jeopardize a company’s future success.
Step #2: Find the Right SBA Lender for Your Business
Now that you’ve figured out why you need a loan, it’s time to find a potential lender. The official government website for SBA funding offers a Lender Match service where small business owners can find a financial institution to meet their needs.
Unfortunately, the number of active lenders participating in the SBA loan program has been downward since 2014. That’s why small business owners should find a lender who frequently works with small to mid-sized businesses (SMBs). Since these lenders are familiar with servicing smaller companies, they will be more likely to approve your loan application.
Every lender has different application requirements, so research what documents are needed for each financial institution. Some may ask for a personal financial statement or inquire about your personal loans. They’ll also look at your business credit history and financial statements.
Remember that a large financial institution will take longer to process your application and require higher credit scores to get an SBA loan. You’ll likely experience a quicker turnaround if you apply with a credit union or small bank offering SBA lending services.
Step #3: Boost Your Credit Report
Make sure your business is current on any outstanding bills and loans. A bad credit score will not look good and can harm your chances of obtaining funds from most lenders.
The best practice is to make consecutive, on-time payments. In turn, your credit score will increase, and lenders will be more likely to approve your loan application. Also, borrowers with high credit scores can qualify for lower interest rates and financing options.
The minimum credit score requirement to receive a small business loan is around 690 to 800. If your personal credit history does not meet these standards or if you have a low business credit score, it’s best to wait on applying for an SBA loan until you can increase your score through consistent, on-time payments.
Quick Tip: Many lenders will only accept one application, so if you are denied the first time, you likely won’t be successful on the next attempt.
Step #4: Collect the Required Documents
The application requirements vary depending upon the company you apply with, but there are a few documents that are consistent throughout the SBA application process. Here’s what you’ll need to supply:
- Proof of business ownership
- A form of ID, such as a government ID or a driver’s license
- Any permits and licenses the business holds
- Articles of incorporation
- Business tax returns and financial documents for the past year
Having these documents ready will save you time and show potential lenders that you are serious about getting a loan.
Step #5: Apply and Pitch
Once you’ve completed steps one through four, applying and pitching your case to a lender should be a breeze. You’ve already gathered your materials for the loan application; the only thing left is to sell your business ideas to your lender.
On the day of the appointment, you’ll want to look professional. Consider wearing your best business attire to make an excellent first impression. During your pitch, be sure to present as firm and confident. (It doesn’t hurt to practice rehearsing your pitch and anticipate potential feedback and questions from the lender.)
Is it hard to get an SBA loan? Not necessarily.
If you are well-prepared when you apply, you can quickly get the funds you need to propel your small business forward. Make sure you have a good credit score, essential documents, and a proposed business plan ready for review.
If you’re ready to see if you qualify for an SBA loan, contact AdvancePoint Capital today for a free quote. We are dedicated to supporting small companies and guiding business owners through the application process, so what are you waiting for? It’s time to help your business grow into what it’s meant to be.