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How to apply for an SBA loan in 7 simple steps

Apply for an SBA Loan7 Simple Steps

Detailed step-by-step process, Qualification Criteria, Application Process and Forms

Quick access to 7 steps 

1. Make sure you qualifies for an SBA Loan 2. Check your preparations
3. Select the right type of SBA loan 4. Gather the key documents
5. Choose your lender 6. Submit the loan application
7. Post application process

If you are a small business entrepreneur in the United States, SBA loans are a great choice for your business. SBA loans are an effective source of finance for small businesses in the US to grow your business. SBA loans have tight lending standards, but their flexible terms and low-interest rates can make them one of the best ways to fund a business.

What is an SBA Loan?

SBA loan is simply a small business loan that is partially guaranteed by the US government’s Small Business Administration (SBA). The SBA loan eliminates some of the risks for the financial institution that is issuing the loan. SBA-guaranteed loans are made by a private lender and guaranteed partially by the SBA, which helps reduce the lender’s risk and helps the lender provide financing that’s otherwise unavailable at reasonable terms.

Therefore, the overall loan application procedures under SBA Loans are entirely different from other business loans. This article will help you to follow the essential steps that are required to be completed while applying for an SBA Loan. Let’s discuss this step by step how to apply for an SBA loan.

How to apply for an SBA loan?

Please keep in mind that you apply for these loans with private financial institutions. But they’re backed by the SBA and offer unique benefits to both the borrower and lender. So the SBA loan procedures are lengthy and a bit complicated. how to apply for an SBA loan

Step 1: Make sure you and your business qualify for an SBA loan

As we discussed earlier, SBA loans have tight lending standards. So, every borrower needs to satisfy the following conditions:

  1. The business must be a small business within the SBA’s definition of a small business.
  2. 2+ years of operating business history under your belt.
  3. The business must be physically located and operating in the U.S. or its territories.
  4. It must be an officially registered for-profit business.
  5. A 690+ personal credit score for all the business owners.
  6. The business owner must have invested their own equity (time or money) in the enterprise.
  7. $100,000+ in annual revenue for your business.
  8. To have the required personal or business collateral to secure a large percentage of the requested loan.
  9. To have tried and failed to find financing elsewhere.

The above fundamental criteria to qualify for an SBA loan must be ensured before you proceed to the next step.

Step 2: Make sure you are well prepared

Apart from the qualification checklist discussed above, the following also should be ensured before you apply for an SBA loan

A business plan– You need to have a strong business plan before you go for any SBA loans. You need to ensure the areas to cover in your business plan are well managed. The SBA offers tips on how to make a business plan. If you need any professional assistance, feel free to contact us.

Calculate your total capital requirements– Before your business opens its doors, you’ll have bills to pay. Understanding your expenses will help you launch successfully. You must have a clear idea of how much funding is required and a clear plan on how to utilize the same.

Have a healthy credit score– Maintaining a healthy credit score is essential to qualify for SBA loans. While the SBA doesn’t have a set minimum credit score, most lenders require a minimum credit score of 690 to get an SBA 7(a) or Express loan.

Project your financials– A perfect projection of your revenue and cash flows is something essential that every lender wants to see. It is also called financial modelling. A financial projection will help to plan your repayments, estimate profitability and make future development plans.

Make sure assets can be kept as collateral: We already discussed this above. There is no collateral requirement for SBA loans up to $25,000. However, if your loan requirement is above $25,000, you may need to place the assets as a guarantee for the loan. This can be your personal properties, business properties, accounts receivables, inventories, business equipment etc.

Step 3: Select the right type of SBA Loan

The selection of the type of loan depends on:

  • the purpose for which you apply for the same.
  • Loan amount required
  • The tenure required to repay the loan

You cannot use every type of SBA Loan for all purposes. There are several different SBA loan programs, and each program carries its own guidelines describing how funds can and can’t be used.

There are “acceptable” or “allowable” use of proceeds or use of funds prescribed by the SBA. Loan program guidelines also include “prohibited use of proceeds”, or things you can’t spend funds on.

For example, SBA’s 504 loans can’t be used for working capital, and its microloans can’t be used for real estate purchases. So, make sure you apply for the loan that matches up with your financing needs.

Some of the most common SBA Loans include:

Types of SBA Loans
Loan Type

Min and Max, Loan Term

Uses

Best for

SBA 7(a) Loans $50,000 to $5 million.

Term:

  • 25 years for real estate
  • 10 years for equipment
  • 10 years of working capital or inventory loan
Most of the business purposes Long-term capital requirements, equipment finance and working capital
504 Loans/ CDC $25,000 to $5 million. For energy projects up to $ 5.5 million. Terms are 20 years for real estate and 10 years for equipment. Acquisition or construction of the real estate, modernization of existing facilities, heavy equipment etc long-term, fixed-rate financing for major fixed assets
Microloans Up to $50,000. Maximum term of 6 years Purchase of fixed assets, inventory, working capital etc Start-up and expand small businesses and certain not-for-profit childcare centers.
Economic Injury Disaster Loans (EIDL) Up to $2 million. Up to 30 years, with repayment term to be determined by the ability to repay the loan Working capital and normal expenses such as the continuation of health care benefits, rent, utilities, and fixed debt payments Small businesses, small agricultural cooperatives and non-profit organizations suffered a substantial economic injury during Covid 19.

 

Read more on what are the allowed uses of SBA Loans.

Step 4: Gather the key documents

What your lender requires for your application package can vary depending on the program type but it’s often quite extensive and can easily take a few weeks to compile.

List of documents required to apply for SBA Loans

The lender usually provide a list of documents required to be submitted, depending on the loan program you have chosen. The below given are the list of docs required for a 7(a) loan.

  • SBA application form (Form 1919)
  • Your personal identification details via SBA Form 912
  • Certificate or license for the business
  • Proof of business ownership
  • A list of any business ownerships and affiliations
  • A personal financial statement and personal background statement via SBA Form 413
  • Business financial statements, such as current profit and loss statements and a one-year financial projection statement
  • 2 years of business tax returns
  • 2 years of personal tax returns
  • History of any past loan applications and decisions
  • Personal resumes for each principal of the business
  • An overview and history of your business
  • A copy of your business lease

Lenders may require more information depending on the type of loan you apply for. If you are purchasing an existing business, you generally need to provide additional documentation for an SBA loan.

Step 5: Choose your lender

As the key step towards applying for an SBA loan, you need to start with a Lender Match. SBA website provides a convenient Lender Match tool to match potential borrowers with lenders within two days. The lender Match page will help you with the following:

Describe your needs: Answer a few questions about your business in as little as five minutes. These are the basic details that help the lender to take a decision.

Get matched in two days: Receive an email with the contact information of lenders who express interest in your loan.

Talk to lenders: Compare rates, terms, fees, and more.

When looking for where to apply for an SBA loan, you can contact a financial institution or use the SBA 100 most active lenders list.

While choosing your lender, you need to consider the following:

  • The SBA programs the lender offers (e.g., PPP)
  • How much you need to borrow
  • Qualifications for the program
  • Interest rates for the loan you’re applying for
  • Any down payments required for the loan
  • If you need collateral and what kind, if applicable
  • How long the application process takes

Make sure to choose an SBA preferred lender as they have a history of providing loans to small businesses and understand the application process

Step 6: Submit the loan application

Submit loan applications and paperwork using SBA Form 1919- Borrower Information form. You’re well on your way to securing a business loan!

The purpose of Form 1919 is to collect information about the Small Business Applicant (“Applicant”) and its principals, the loan request, indebtedness, information about current or previous government financing, and certain other topics. The information also facilitates background checks as authorized by section 7(a)(1)(B) of the Small Business Act, 15 U.S.C. 636(a)(1)(B).

Fee disclosure form

SBA Form 159 is the fee disclosure form borrowers complete if they receive help from an agent. If you apply for a 7(a) loan, 504 loan, or SBA disaster loan assistance, the SBA requires you to submit this form. The form protects applicants from paying unnecessary fees or overpaying for services. This form must be completed and signed by the SBA Lender and the Applicant whenever an Agent is paid by either the Applicant or the SBA Lender in connection with the SBA loan application.

Step 7: Wait for the approval

The SBA Express loan program is designed for fast approvals. Once the lender submits your SBA Express loan application and supporting documentation, the SBA will respond to your application within 36 hours. They may follow up with questions or requests for additional documents as they process your loan application. They then begin the initial underwriting process to review your application and decide whether to proceed.

The following steps usually follow once they decide to move forward:

  • You will receive a document called a “loan proposal” or “letter of intent.” The document outlines your request and the loan’s terms, plus information on any required deposits or fees, and closing details.
  • Once you accept the loan proposal and sign it, the lender starts a more formal underwriting process. In most cases, the lender and the SBA thoroughly analyze your application, credit history and the documentation you provided.
  • Once you loan gets approved, you will receive a “commitment letter.” You must accept if you want to proceed.
  • You’ll receive closing documents, and your lender will guide you through the closing process, which can take two to four weeks. Once you sign these final loan documents, the loan is closed and the money is disbursed.

The SBA doesn’t enforce strict guidelines on how quickly your lender needs to return a decision on a loan application or disburse funds. So depending on your lender, you may need to factor a longer waiting period into your timeline. All in all, SBA loans can take two to three months from beginning to end, though time can vary depending on how organization your application is and what type of loan it is.

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