How SBA Loans Work

What’s an SBA loan?

The US Small Business Administration (SBA) offers loan programs to help small business owners finance their businesses. But here’s where some people get confused – they don’t actually lend you the money themselves.

They offer loan programs in partnership with banks. We are still the source of the loan and lending you the money. But the SBA will guarantee the loan to us.

SBA loans are really handy for business owners who might have trouble qualifying for a traditional loan. If you don’t have enough collateral, or years in business to justify the loan, the SBA can help, but the money is still coming from us.

Is an SBA loan right for my business?

That depends on what you want the money for. The SBA offers a number of different loan programs, from general lending to funds for disaster recovery. If you didn’t qualify for a traditional loan, depending on what you want it for, we may guide you towards the SBA.

The main programs include:

Basic 7(a) Program
Certified Development Company (CDC) 504 Program
Microloan Program
Disaster Loan Programs
Export Working Capital
International Trade Loans

It’s important to review your business carefully before deciding to apply for an SBA loan. You should only borrow the money if you really need it. It’s a loan – it’s not free money – so if you have alternatives to borrowing you should consider them.

Eligibility

Apart from meeting our criteria, there are some SBA-specific conditions your business will have to meet in the case of most of the loan programs. For the SBA’s most common loan program (general small business loans), you’ll have to:

Have reasonable equity invested and operate as a for-profit business.
Be defined as ‘small’ by the SBA (primarily you need to be independently owned, you’re not nationally dominant and you’re physically located and operate in the US).
Show a need for the loan and use the funds soundly.
Have no debt obligations to the US government.
660+ FICO score (see below paragraph on credit checks).
2+ years in business.
Collateral – as mentioned above, the loan doesn’t need to be 100 % collateralized, but it will be easier to get the loan the more business and personal cash you bring to the table.

The SBA website has a section on eligibility for the 7(a) loan (by far the most common) which is worth reviewing.

The application process

It really depends on what loan you’re applying for as to the process, but any business owner who’s considering an SBA loan needs to be prepared for a bit more than the usual amount of paperwork. SBA has its own criteria and application processes, and although they work with us, we’ll have processes you’ll need to follow as well.

You need to be prepared to fill in quite a few forms and provide certain documentation. Because you’re applying with both the SBA and us, there’s bound to be some duplication. You can streamline your process by having as much of the documentation as you can ready – and some of the main items you’ll need are:

Business plan – all loan programs need a thorough business plan that should include projected financial statements.
Personal background information – such as your educational and business background, criminal record, and previous addresses.
Resumes – showing evidence of management or business experience, especially if you’re starting a new business.
Bank statements – one year of personal and business bank statements is common.
Income tax returns – personal and business returns for the last three years.
Collateral requirements – you may need to offer a collateral document to secure the loan.
Legal documents – we might also ask for some legal documents like a business license and registration, copies of contracts with any third parties, and commercial leases, depending on what’s required.

SBA’s application process is renowned for being time-consuming and sometimes complicated. Though they’re working on ways to streamline the process, you should grit your teeth and brace yourself for a lot of paperwork and red tape. Having as many of the required documents on hand as possible will help.

Check your credit rating

As a business owner, you want to be confident your credit rating is sound so it’s important you’re aware exactly where you stand. Staying on top of your credit rating can help identify any blemishes on your personal and business credit report and fix or clear up any inaccuracies.

Here’s what we recommend:

Request your credit report from AnnualCreditReport.com. They collect data from the three major credit bureaus: Equifax, Experian, and TransUnion. You have the right to obtain one free credit report per year. Fill out the online request form with your personal information, select which credit bureau’s report you want to access (you can choose one at a time or all three).
You’ll receive your credit report online. Review it carefully to ensure all information is accurate and up to date. Check for any errors, such as incorrect account information, late payments that you believe are inaccurate, or accounts that may not belong to you.
Your credit score is a numerical representation of your creditworthiness based on the information in your credit report. You may check your FICO^® Score for free on Experian. The credit score calculated on Experian is based on FICO Score 8 model. Keep in mind that your lender may use a different model. Many credit card companies may also provide free credit scores to their customers.
If you find errors on your credit report, contact the credit bureau in writing to dispute the inaccuracies. They are required to investigate and correct any errors within a reasonable timeframe.

Checking your credit rating regularly helps you stay informed about your financial health and ensures that your credit information is accurate. This knowledge is crucial when applying for loans, mortgages, credit cards, or other forms of credit, as lenders use your credit history and score to assess your creditworthiness and determine loan terms.

Summary

The money’s coming from us, but the SBA will step in and guarantee it. The criteria for each one differs, as do the repayment terms. If you use the Microloan option, you’ll be expected to repay the loan earlier than you would for a 7(a) loan. Loans that have been obtained to purchase real estate will take longer to pay back than one that’s been used for buying a few new computers.

The most important thing to remember is that you’re still borrowing from us, not from the SBA itself.