SBA loans can be a great option for small business owners looking for affordable financing.
Loan application includes the following steps: understanding the minimum qualifications, choosing the right SBA lender, gathering the necessary documents, and completing all the required SBA documents. It can take between one and two months to receive the loan proceeds, and there may be a significant amount of paperwork required.
To help, the following article will show you how to get an SBA loan, in more step-by-step detail. This should save you time and headaches and let you get back to running your business.
Here are the detailed step by step for getting an SBA loan:
Step 1: Qualify for an SBA Loan
Before investing your time and energy into applying for an SBA loan it’s important to know if you’re likely to qualify. SBA financing typically requires that you meet two sets of qualifications: the lender and SBA qualifications. We will discuss both in detail below.
First, let’s take a look at the eligibility requirements for SBA 7(a) loans. SBA 7(a) loans may be used for various business purposes such as funding working capital needs like purchasing supplies, inventory, or covering salary and wages. These SBA loans can also be used to buy another business and even purchase commercial real estate.
SBA 7(a) Loan Qualifications
| Credit Score | At least 680 or more for all primary business owners |
| Downpayment | 10% or more for loans intended for purchase of business or commercial real estate |
| Collateral | May not always be required, but it’s easier to get the loan approved when collaterals are available. |
| Time in business | At least 2 years or more. SBA 7(a) loans may be available for startups though it would be more difficult to have it approved. Startups need to pass all three qualifications above, plus have business management with past industry experience. |
| Business Size | Be a small business as defined by the SBA. |
| Business Credit Background | Cannot have delinquencies, loan defaults, or existing debt obligations to the U.S. government. |
| Nature of Business | The business must operate for profit, be incorporated in the United States, and operate in an eligible industry. |
Other requirements include:
- Must use alternative financial resources from personal assets before seeking financial assistance
- Must be able to justify a need for loan proceeds using a qualified business purpose
If you need to take a loan for the purchase of fixed assets such as commercial real estate or long-lasting equipment, you may want to consider applying for CDC / SBA 504 loan. For these types of loans, the following qualifications must be met:
CDC / SBA 504 Loan Qualifications
| Credit Score | At least 680 or more for all primary business owners |
| Downpayment | 10% or more for loans intended for purchase of business or commercial real estate |
| Collateral | The commercial property or equipment to be purchased is used as collateral. |
| Time in business | At least 3 years or more. |
Business Size | Must be profitable. Has a tangible net worth less than $15 million and less than $5 million average net income after taxes for the past two years |
| Business Credit Background | Cannot have delinquencies, loan defaults, or existing debt obligations to the U.S. government. |
| Nature of Business | The business must be in the United States and engaged in an eligible industry. |
Other CDC / SBA 504 qualifications include:
- The business must occupy at least 51% of its commercial property.
- The business cannot have other financial sources available.
- The business must be able to create or retain jobs and meet policy goals in line with CDC and SBA goals.
Step 2: Choose an SBA Lender
Once you’ve established that your business is good candidate for an SBA loan, the next step is to choose an SBA lender to work with. The best SBA lenders will be experienced and efficient and will help get the funding you need quickly.
There are typically 2 options are available when finding an SBA loan provider:
- Direct lender
- Loan broker
Let’s look at each one in a little more detail.
Direct SBA Lenders
Direct lenders include banks, credit unions, and non-bank SBA lenders. You’ll typically want to work with a direct lender that’s part of the SBA Preferred Lenders Program (PLP). PLP lenders are generally able to process SBA loans more quickly than other lenders due to the fact that they’re typically more experienced.
The following information may help you narrow down your list of potential lenders:
- Lender’s total SBA loan volume
- Lender’s average SBA loan size
- Lender is part of the Preferred Lender Program
- Standard turnaround time for pre-approval and funding
SBA Loan Brokers
SBA loan brokers can assist you when it comes to documentation and communication requirements. Their experience and industry connections can help you save time and headaches because they directly deal with the lender. They’ll also help present your business and loan request in the strongest possible light. However, working with a broker might increase the cost of borrowing.
When vetting SBA loan brokers, make sure you get the following information:
- The number of loans they have successfully closed
- The standard turnaround time for pre-approval and funding
- How many lenders they are directly working with
- The processes they will handle for you
- How they make their money
- Their level of experience working with a business like yours
Whether you decide to work with direct lenders or an SBA loan broker, it’s important to make sure that you understand the interest rates and fees before you proceed with applying for the loan. Though the SBA sets the maximum interest rates, the exact rates vary from one provider to another, and small differences on the rates can make a big impact on your cost of capital.
Step 3: Prepare the Necessary Documentation
After you choose a SBA lender or loan broker to work with, the next thing you should do is to get your application ready. That means preparing all the necessary paperwork and documents. Remember, getting SBA funding can take a while, and if you’re not organized or prepared, the process will move much slower.
SBA provides a list of required documents. The following are the standard documents and information that you’ll need to prepare:
- Amount of loan & detailed allocation of funds
- YTD Profit and Loss (P&L) statement and Balance Sheet
- Business Tax Returns for the last 2 years
- Personal Tax Returns for the last 2 years
- Personal Financial Statement
When purchasing commercial real estate, you’ll also need:
- Real estate purchase agreement
- Rent rolls and leases if the property has tenants
- Property appraisals will be ordered by the lender prior to closing
- Environmental studies which shows any environmental issues with the property
- Any plan for remodeling or build outs, including timeline and costs
- List of ongoing maintenance expenses
- Report on the general condition of the property
- Current leases on the property (your business must occupy at least 51% of the property)
If you’re using the SBA loan to buy an existing business, you may need to provide:
- YTD P&L statement and balance sheet of the business you are buying
- Their business tax returns for the last 2 years
- Purchase Agreement
For startups, the following may be needed:
- Owner CV
- Business Plan with 3 years financial projections
- Credit Score
- Proof of Down Payment
Being ready with the documentation requirements will help speed up your loan application pre-approval.
Step 4: Complete the Required SBA Forms
Aside from the documentation requirements enumerated earlier, there are SBA Forms that you need to complete for the loan application to be processed.
SBA forms that will be required for all loans include:
- SBA Form 1919 – Borrower Information Form
- SBA Form 912 – Statement of Personal History
- SBA Form 413 – Personal Financial Statement
SBA Loan Application Timeline
SBA loans typically take a long time to fund because SBA lenders typically require a 5 step process from the start of the application to receiving the funds. Below are the 5 stages involved in the loan application process:
- Preparation and actual application
- Complete the 4 steps mentioned above
- Prepare to apply for the SBA loan that you need
- Letter of Intent
- After submission of application and requirements, you will receive feedback in 1 to 2 weeks.
- The lender will provide you with initial proposal called the Letter of Intent (LOI), indicating how much you qualify for, the loan terms, and interest rates.
- You will sign the LOI and send it back to the lender if you find the rate and terms agreeable.
- A small deposit around $2,000 (refundable, minus 3rd party fees, if the loan isn’t funded) is usually required by the lenders to move forward with underwriting.
- Underwriting
- SBA loan underwriting typically takes 2 to 3 weeks
- Further verifications may be done about your financials and plans for loan proceeds
- Be prepared to submit additional documents when necessary
- Commitment Letter
- You will receive a commitment letter outlining the terms of your loan and the remaining steps to take before closing.
- An additional deposit (typically around $5000 or 5% of the loan) may be required to show the lender that you are committed and ready to move towards the closing.
- Closing
- Loan terms are finalized and paperworks are done by lawyers.
- Loan agreement is ready to be signed.
- All closing costs and SBA guarantee fees will be paid.
- Loan proceeds will be disbursed.
Though it can be a tedious process, applying for an SBA loan can be quick and painless when you’re prepared with all the required documents and information.
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