By Yulia Idemenko
March 18, 2019
Due to their favorable and flexible terms, SBA loans are popular with small business owners who want to take their business to the next level. (Photo credit): Gettyimages.com/krisanapong detraphiphat
Everything you need to know about SBA loans, and how your business can qualify.
SBA loans are long-term small business loans with a low down payment that are partially guaranteed by the federal government. Because of their favorable and flexible terms, SBA loans tend to be more accessible and attractive to small business owners looking for financing, rather than conventional bank loans. In 2018 alone, small businesses received over $ 30 billion in SBA loans. To explain the nature of SBA loans and how they can help business owners grow and grow, Brandon Day, Head of the SBA Business Development Team at East West Bank, answers frequently asked questions about SBA loans.
1. Why apply for an SBA loan?
One of the great advantages of SBA loans is that they offer lower down payments and longer loan terms compared to conventional loans. For this reason, SBA loans are more accessible to small business owners who want to grow their business and have access to much-needed capital.
The down payment for an SBA loan can be as low as 10 percent, compared to as much as 35 percent on conventional loans. The loan repayment is spread over a longer period (up to 25 years), which keeps monthly payments low and allows business owners to keep more working capital in their business.
In addition, all SBA loans are fully amortized and no lump sum payments (large lump sums significantly higher than any payments made before) are required at the end of the loan term. And, with a fully amortized loan, you never have to refinance, saving the borrower time and money, as well as the hassle of applying for a new loan.
2. What can SBA loans be used for?
SBA loans can meet the different financing needs of small businesses, including commercial real estate purchases and refinancing, equipment purchases, existing debt refinancing, leasehold improvements, business acquisitions, partner buyouts, construction, inventory purchases, working capital, etc. Additionally, SBA loans can provide financing for businesses that often struggle to secure conventional financing. These businesses include restaurants, hotels, auto repair facilities, self-storage facilities, gas stations, car washes, and assisted living facilities.
“SBA loans can provide financing for businesses that often struggle to obtain conventional financing.”
(Photo credit): Gettyimages.com/krisanapong detraphiphat
3. What is the most common type of SBA loan?
By far the most popular type of SBA loan is the SBA 7 (a) program, which allows the widest variety of loan uses and has the most flexible underwriting guidelines. The SBA 7 (a) program represents over 60,000 small business loans each year and is the SBA’s flagship loan product. It provides loans to eligible small and medium-sized businesses up to $ 5 million. It can be used for a wide range of business purposes, such as buying and refinancing commercial real estate, buying a business, renovations, purchasing new or used equipment, l expanding a business and refinancing existing debt.
4. How do I qualify for an SBA loan?
- What are the main eligibility conditions?
- What documents and financial statements do you need?
- When it comes to business plans, what should they include? Do all businesses have to submit a business plan?
To be considered for an SBA loan, the business must be for-profit, must operate and be physically located in the United States or its territories, and must meet SBA size standards. A vast majority of businesses in the United States are eligible to apply for SBA loans. To be eligible, the business must have a tangible net worth of $ 15 million or less and have an average net income of $ 5 million or less. The business must also have sufficient historical cash flow to show that it can repay the loan, have a strong business purpose, and its owners must be U.S. citizens or permanent residents with a strong borrowing history (rating of credit).
Although the exact documents will depend on the type of SBA loan program you are applying for and the lender you are working with, to start the loan application process, the borrower must provide the lender with detailed business information, a loan application. , a copy of their federal income tax returns for the past three years (business and personal), as well as their most recent business financial statements. The goal is to understand what the business is, how a borrower intends to use the funds, and to ensure that the business can repay the loan. Additionally, a borrower must complete the lender’s SBA loan application forms, which include a personal financial statement.
Formal business plans are generally not required to apply for an SBA loan. They are only needed for start-up or expansion loans. The lender will notify the borrower if a business plan is needed.
(Photo credit): Gettyimages.com/Weekend Images Inc.
“SBA loans are more accessible to small business owners who want to grow their business and have access to much-needed capital.”
5. What down payment is required?
The exact down payment amount depends on the type of SBA loan you are looking for and the financial institution you are working with. For SBA 7 (a) loans, a down payment can be as low as 10%. In some cases, the SBA may require the borrower to provide a slightly larger down payment or additional collateral.
6. Is collateral required for an SBA loan? If a business does not have a guarantee, can it still qualify?
The SBA will require the borrower to pledge collateral available to help secure the loan. However, business owners with limited collateral may still be eligible to apply for an SBA loan.
7. How do I apply for an SBA loan?
To apply for an SBA loan, you must work with a lender who is experienced in providing SBA loans and has a trained staff of SBA loan professionals. Make sure the lender you choose has an SBA Preferred Lender (PLP) designation. This means that they have a proven track record in successfully processing SBA guaranteed loans and have the authority to unilaterally approve SBA loans which speeds up the process. If you are applying for an SBA loan from a bank, you should contact a business development manager or SBA relationship manager. They will walk you through the process, provide you with all the necessary loan application forms, and help answer all of your questions. After you have gathered all the paperwork and completed the application forms, you submit your loan application to your lender so that they can take out, approve, and close your SBA loan.
8. How long does it take to get an SBA loan?
The process for approving an SBA loan depends on the type of loan you are applying for and the type of lender you are using. For an SBA loan (7), the turnaround time can be as short as 45 days if you use an experienced PLP lender. However, the process can take significantly longer if you are working with a lender who does not have a Preferred Lender designation.
While non-preferred lenders must send the documents to the SBA for review and approval, preferred lenders have the full authority to make the final credit decision themselves, which allows for faster approvals and speeds up the overall process. Once a preferred lender receives the final information and loan application forms from the borrower, they can usually make a preliminary credit decision within a few business days. The entire process (from loan application to financing) typically takes around 45-60 days.
9. Can SBA loans be used to refinance existing debt?
Yes, SBA loans work great for refinancing existing commercial debt. There are many online and traditional lenders that offer short term business loans with high interest rates. SBA loans can help by increasing the term of the loan and lowering the interest rate on the existing loan, which can significantly reduce the borrower’s monthly payments and help improve the cash flow of the business.
10. Can you take out multiple SBA loans? If so, what are the eligibility conditions?
Yes, a borrower can have more than one SBA loan over the life of a business, as a business qualifies for SBA and lender eligibility for each loan it takes. However, the combined amount of these loans should not exceed the SBA program borrowing limits, which vary depending on the type of SBA loan. For example, the borrowing limit for SBA 7 (a) loans is $ 5 million.
(Photo credit): Gettyimages.com/skynesher
“Make sure that the lender you choose has an SBA Preferred Lender (PLP) designation as they have a proven track record in processing SBA guaranteed loans and have the authority to unilaterally approve SBA loans, which speeds up the process. process. ”
11. Can an SBA loan be combined with other types of loans?
Yes, SBA loans can be combined with conventional loans or other types of non-SBA loans to help business owners and amplify business growth.
12. What is the biggest misconception about SBA loans?
Probably the most common misconception about SBA loans is that obtaining an SBA loan is a lengthy process due to the amount of paperwork required and the time required to review an SBA loan application. If you are working with a preferred lender who has a seasoned staff who know the process and have experience in the SBA industry, you should be able to get an SBA loan quickly and efficiently.
Learn more about how SBA loans can help your business grow.