SBA Loan Application: How to Apply for an SBA Loan
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Loans secured by the Small Business Administration (SBA) may be a great option for your business, considering they tend to have relatively high limits and low rates. They’re good for business owners who aren’t able to access traditional bank loans, since the SBA’s backing allows lenders to take risks on a greater range of borrowers.
SBA loans are administered by private institutions — banks, credit unions and community organizations — that partner with the SBA to disburse loans ranging from $500 to $5.5 million. These loans can support most business needs, including purchasing long-term fixed assets and providing operating capital.
There are three overarching SBA loan programs: the 7(a) loan program, the CDC/504 loan program and the microloan program. The 7(a) program offers borrowers up to $5 million for almost any business purpose. Administered by Certified Development Companies (CDCs), the CDC/504 program provides funds to help businesses acquire fixed assets for expansion or modernization. The microloan program supports small businesses with loans up to $50,000 for start up and expansion.
The 6 essential documents for an SBA loan application
A successful SBA loan application will include at least three parts: a statement of purpose, a business plan or excerpts of a business plan and financial statements. There are at least four financial statements required: cash flow statement, income statement, balance sheet and personal financial statement.
Other documentation may be needed as well; the SBA has a set of official forms to use in applying for each loan type. While these are available online through the SBA’s Document Lookup tool, it’s best to get up-to-date guidance from your lender about which forms to submit, because the requirements are complex, depend on which loan type you’re pursuing and can periodically change.
Regardless of what else the SBA requires, a lender will not consider your funding request without this core set of information in your package:
Statement of purpose
The statement of purpose acts as a kind of textual introduction of the borrower to the lender. It should describe the business and the specific ways a loan will help the business grow or improve, as well as discuss the capital invested by the owners — in dollars or “sweat equity.” The statement of purpose can take a variety of formats, but usually appears as a letter addressed to a specific lender or as an executive summary attached to the business plan. With its prominent place in the SBA loan application, the statement must be straightforward, clear and informative.
Your business plan shows your potential lender that your business is well managed and has a clear pathway to success. As such, a lender is unlikely to lend to a borrower who lacks a thorough, well-articulated business plan — in fact, it’s recommended that you develop a business plan before even reaching out to lenders for initial consultations. In some cases, excerpts of your plan may suffice, as long as what you provide includes a description of your business and its vision, a market definition and analysis, a description of your products and services and an overview of your company’s management structure.
A cash flow statement tracks and predicts incoming and outgoing cash, usually on a monthly basis. You should include a 12-month cash flow statement that projects out to at least six months. This document is essential for loan applications because it allows your lender to assess your business’s cash reserves and expectations. A negative cash flow is a red flag for lenders, since it signals a potential inability to pay your bills. It’s essential to present accurate numbers — if your statement is full of red flags, do some work on your business management before applying for a loan. There are many cash-flow statement models online, including on the SBA website.
Your application should include an income statement, also called a profit and loss statement, or P&L. This document shows your business’s performance over a certain period, usually six months or one year. All expenses are subtracted from income for the period in question, which shows the profit or loss generated by your business for the period. If possible, you should include income statements from the last three years. If you’re a new business without a long track record, then include a projected income statement that predicts your income for the next 12 months. There are many good income statement templates online to help you create a clear document that will satisfy lenders.
Your balance sheet records your business’s financial situation at a certain point in time: assets minus liabilities equals net worth. Think of this as a business snapshot that gives lenders a quick reference regarding the health of your company’s financials. If you’ve been in business a while, include balance sheets covering the last three years. If you’re just starting up, the balance sheet you include should show your assets and liabilities that will be in place on your planned opening date, as well as the same numbers projected 12 months later. You can find many balance sheet templates online to get you started.
Personal Financial Statement
Considering that most SBA lenders require a personal guarantee as collateral for a business loan, it’s essential for your SBA loan application to include a personal financial statement. This is a simple balance sheet showing your net worth, including personal assets and debts. The lender will likely want this information to judge the value of the personal guarantee you can provide.
How the SBA loan process works
Getting an SBA loan is a multi-step process, particularly because the options are more complex and the application process more extensive than the process for many private loans. Here’s an overview of the steps you’ll need to take to pursue SBA-backed financing for your business.
Figure out your needs and research your options: It’s essential to get good advice and assistance as you begin the process. There are a variety of types of SBA-backed loans with different goals and particulars. Luckily, there is also a variety of resources to help you learn everything you need to know.
SBA has district offices in every state and more than 900 Small Business Development Center (SBDC) service points around the country. SBDCs provide management assistance to current and prospective small business owners. SCORE, a nonprofit resource partner of the SBA, provides free small business advice and makes volunteers available to advise small businesses. The Small Business Learning Center offers a suite of online training courses about starting and running a small business. The SBA also oversees Women’s Business Centers and Veterans Business Outreach Centers around the country that assist women and military veterans in business.
Find a lender. Once you’ve researched the type of loan right for you, developed your business plan and properly reported or predicted your financials, it’s time to find a lender. Consult your local SBA District Office to get referrals for a few SBA lenders in your area. Which one you choose will have as much to do with your personal preferences as the lender’s offerings. You want a lender that offers the type of loan you’re looking for and has a straightforward application and funding process — at least as much as possible. But factors such as transparency, support options, reputation, and location may also play into your decision. What’s important is to find a lender that best fits your specific needs.
Approach your lender. Before you go to the bank, get your ducks in a row. Know the answers to the following questions, which the loan officer will most likely ask:
- “What is the purpose of the loan?”
- “How much money are you requesting?”
- “When and how long will you need the funding?”
- “How will you repay the loan?”
- “What collateral do you have that can secure the loan?”
- “Are you willing and able to provide a personal guarantee?”
You should also have the following business information handy before you approach your chosen lender:
- Your business plan
- Your credit history
- Financial projections
- Proof of available collateral
Package your application. The lender will go over the specific application requirements with you. These vary by institution, so the lender must be your source for this information. Whatever the specifics are, the final result should be a package that tells the story of your business, makes it clear why you want funding and how you’ll repay it, and answers most questions a lender would have.
Beyond its contents, there are some characteristics that any good loan package should have. It should:
- Be succinct, straightforward, easy-to-read and typo-free
- Emphasize your good management skills to convince the lender you have what it takes to succeed
- Present accurate numbers and realistic projections based on stated assumptions
- Make clear specifically how you can repay the funding
Overall, your package should make it clear to the lender that supporting your business is a risk worth taking.
What kind of SBA loan is right for you?
The SBA has a variety of loan programs with their own purposes, requirements and target audiences. The following three are the main programs that borrowers consider, with the 7(a) program being the most popular for small business loans.
7(a) loan program
The 7(a) loan program provides general-purpose business funding of up to $5 million and is popular with a wide variety of borrowers. These loans are frequently used for general business costs, equipment or supply purchases, debt refinancing or purchase of an existing business, among other purposes.
There are several specialty loan options within the 7(a) program:
- 7(a) Small Loan: A streamlined version of the 7(a) loan with a maximum loan amount of $350,000.
- SBA Express: An accelerated 7(a) loan of up to $350,000 with a maximum SBA guarantee of 50 percent.
- Export Express: SBA-backed financing of up to $500,000 specifically for exporters.
- Export Working Capital: Loans of up to $5 million for businesses that need extra funding to support export sales.
- International Trade: Financing up to $5 million to enable business growth due to expansion exports or to update operations in the face of foreign competition.
- Veterans Advantage: Loans with reduced fees for veteran-owned businesses.
- CAPLines: Short-term and cyclical working capital to help with seasonal fluctuations and assignable contracts and construction projects.
The CDC/504 Loan Program
CDC/504 loans are administered by Certified Development Companies (CDCs), nonprofit organizations dedicated to community economic development. The SBA certifies and regulates these CDCs, which offer long-term, fixed-rate financing to help small businesses expand or modernize. These loans are meant to help businesses acquire fixed assets or refinance debt in connection with an expansion. Borrowers of these loans benefit from 90 percent financing, lengthy amortizations and fixed interest rates.
Through the SBA microloan program, nonprofit SBA partners give out loans up to $50,000 for startup and expansion, with a maximum loan term of six years. These microloans, which average around $13,000, are expanding rapidly in popularity—the total amount loaned under the program has increased nearly 50 percent since 2010. Most of these loans are used as working capital, or to purchase new equipment, inventory or supplies. They are targeted at women, and at low-income, veteran, and minority business owners, though anyone who qualifies can apply.
Who determines if you’re eligible for an SBA loan?
Both the lender you’re applying to and the SBA itself must approve most loan applications. The microloan program is an exception: In the case of these small loans, the local intermediary has authority to approve a lender’s application.
All SBA loans must follow strict guidelines set by the agency. Included in those guidelines are eligibility requirements: A successful SBA borrower must be a for-profit small business of a certain size that operates within the United States. Potential borrowers must have invested in their business, whether that through time or money. Business owners can only apply for SBA financing when they’ve exhausted all other financing options.
The lender will also have its own requirements or standards. For example, most lenders will require a personal guarantee to secure the loan. They may also have their own requirements when it comes to your credit and may decide on a case-by-case basis whether circumstances beyond your control that damaged your credit may be overlooked.
The bottom line
SBA loans are a great option for small businesses of all kinds, but are particularly useful for those who have a hard time getting funding from traditional sources. While your lender is the ultimate resource for your application process, following the steps outlined here will put you in a good position to succeed in getting this desirable form of business financing.