When it comes to small business loans, SBA loans are in great demand. In fact, in the 2019 financial year the US Small Business Administration (SBA) guaranteed over $ 28 billion to entrepreneurs who would otherwise have no access to capital to start, grow, or expand their small businesses. Business loan approval is generally the highest since the recession.
SBA loans are attractive to business owners because they typically have longer payment terms and lower interest rates than many other types of corporate finance and loans. But like any low-cost business loan, an SBA loan can seem overwhelming. Don’t let it be
“The biggest misconception is that there is a lot of paperwork, but this is just a normal business loan,” says Bob Coleman, editor of The Coleman Report, the leading SBA intelligence report for lenders. He adds: “The bank negotiates with the government, not the entrepreneur.”
Here are five things you should know in order to get one of these coveted loans:
1. Do your homework
The more you know about your financial situation (e.g., your creditworthiness, creditworthiness, risk factors) as well as your industry and competition, the better off you will be in applying for and getting approved for this SBA loan.
Kathryn Primm, DVM, CVPM is the owner / veterinarian of Applebrook Animal Hospital, and she took out an SBA loan to remodel a residential home and turn it into a functional veterinary clinic.
“I did a lot of demographic studies myself before I even applied. I knew it was a low risk loan because I know what a hard worker I am and I know what a good vet I am, ”she says. “According to my research, the area was also able to support a veterinary clinic.”
Primm was able to pay off her loan in five years. “The SBA was like my ‘behind the scenes’ investor, and I bought it!” She says.
It is also helpful to understand how SBA loans work and become familiar with the basic requirements. A free guide to SBA loans is available at GAME BOARD, a resource partner of the SBA. The SBA does not grant loans – it guarantees them. Every lender must meet the minimum requirements of the SBA, but a lender can also set their own requirements as long as they do not discriminate on a prohibited basis.
2. Know how much you need
There are different SBA loan programs, each with a specific focus. the 504 loan is for example for land, buildings and renovations while Express export Loans help small companies to develop or expand their export markets with optimized financing. The most popular is by far the 7 (a) Loan Programthat allows you to borrow up to $ 5 million with a 10 year repayment period (loans for equipment or real estate can be extended to 25 years).
Maximum SBA loan amounts
Up to $ 5 million: 7 (a), CAPLines, Export Working Capital Loans, International Trade Loans, 504 Loans. *
Up to $ 2 million: Catastrophe loans
Up to $ 500,000: Export express loans
Up to $ 350,000: 7 (a) Loans and SBA Express Loans
Up to $ 250,000: Community benefit
Up to $ 50,000: Microloans
* Note that there is no project size limit on 504 loans, but the maximum SBA bond (loan amount) is generally $ 5 million. Certain small manufacturers or energy projects can qualify for up to $ 5.5 million.
If you haven’t already, budget what you will do with the money when you get a loan. Not only will this help you understand how this money can best benefit your business, but it can also come in handy when talking to a lender who, of course, wants to know that you have a plan for the funds.
3. Know your numbers
Good creditworthiness and solid financial records are often the keys to obtaining an SBA loan. Chester Gordon is President of MAC-Tech Fabrication and Repairs, Inc. in Queens, New York, a custom manufacture specializing in architectural metals and surface treatments. He recently completed his second SBA 504 loan.
The first loan enabled him to purchase the building in which he works; the second allowed him to expand by building a second adjoining building and doubling the square footage of the enclosed space. He says his SBA loans “gave me the opportunity to expand”. In addition to the physical space, the funding allowed him to hire more people and grow his business.
Regarding the application process, Gordon says, “You are very thorough so keep your credit in good standing.” He says that his loans required finance for three years, so he is very methodical in his approach to organizing his financial information, and relies on his accountant, office manager and his wife, who works in the company and takes on administrative tasks.
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The SBA generally does not have minimum personal creditworthiness requirements, but individual lenders can. In addition, certain SBA loans – 7 (a) Loans up to USD 350,000 and Community Advantage Loans – require the lenders to advance with their applicants FICO SBSS result. In addition to the personal creditworthiness data of the owner, this score can also take into account information from a business credit report and financial data. The SBA requires a minimum score of 140 (on a scale of 0-300), although many lenders require a score of 160 or more.
Speaking of numbers, make sure you keep up with taxes. “If the company is making a profit, please state this on your tax return,” says Rosa Figueroa, director of the Queens-LaGuardia Small Business Development Center. “The lender seeks repayment ability and repayment ability is demonstrated by the company’s profits.”
4. Ask for help
Business owners tend to try “do it yourself”, but if this describes you, you know you don’t have to go alone when applying for your SBA loan.
Chris Petropoulos from General auto recycling, based in Tiverton, Rhode Island, took out a commercial loan for a $ 5 million employee share option plan. He quickly realized that he had to submit many reports and documents for the loan. That’s why he recommends bringing in a financial professional to streamline the application process.
“A commercial financial advisor guided me through the process. I would not recommend doing this without a representative who is experienced with this type of loan, ”says Petropoulos.
There are a variety of professionals who can help you create a business plan and make financial projections. These include:
- A SCORE mentor and / or an SBDC (Small Business Development Center) advisor. Professionals from these Organizations can help entrepreneurs for free.
- A CPA, Registered Agent (EA), or Accountant who works with small business owners. They can help keep your finances well organized and ready for lenders.
5. Invest in key person insurance
Insurance may be the last thing on your mind when you apply for an SBA loan, but it could be the tool that will ensure your business thrives no matter what might happen to you.
Sa El, co-founder of Simply insurancesays that one of the requirements for an SBA loan is a life insurance policy that is greater than or equal to the amount of your loan and that you have a term that is greater than or equal to the term of your loan.
This requirement applies to loans for which per SBA guidelines, the lender determines the viability of the company “is tied to a person or individuals. In these situations, the lender must request life insurance. ”However, taking out life insurance does not offer the same benefits as a policy for key individuals.
“Getting a loan through the SBA is a great idea for any small business. However, it is important that you have a repayment plan. If you have a key person without whom your business could not survive, you need to get key person insurance, ”says El. “Without this you will run your business and yourself into financial ruin, especially if you cannot repay the loan.”