SBA Loans: What They Are and How to Get One
Small businesses often have difficulty getting bank loans. In large part, this is because banks are required to make sure down payments, profits, and ability to repay meet regulatory standards. This situation can be frustrating, especially when that next big job or new piece of equipment will put you over the hump financially.
This is where the U.S. Small Business Administration (SBA) comes in. Since 1953, its mission has been to make capital more accessible to small businesses through SBA loans. The agency’s main role is as guarantor — a bank makes the loan but the SBA guarantees payback of most of it should the business fail. This guarantee makes it possible for banks to make riskier loans.
The core SBA loan program is the 7(a) Loan Program. The SBA will guarantee loans up to $5 million, with no minimum amount. 7(a) loans can be used for all business purposes, including working capital, real estate, equipment, and inventory. Fees of up to 3.5 percent are assessed on the guaranteed portion on any loan over $150,000. Interest rates are subject to a SBA maximum based on bank cost of funds. Terms are from seven years for working capital to 25 years on real estate. In the fiscal year that ended September 30, 2014, SBA 7(a) loans totaled $5.4 billion, according to the 2014 report. $500 million was loaned in amounts under $150,000 and 28 percent of borrowers were new businesses.
The SBA also has special programs under 7(a). One is the CAPLines program, often used by the construction industry and manufacturers. CAPLines provides credit for seasonal build-up of inventory and materials or funds assignable contracts, which serve as collateral. This type of loan may “revolve,” or renew. Another special program is the Export Loan Program, which helps businesses expand export activities.
SBA doesn’t make direct loans, so the first step is to ask your banker if they work with the SBA. If not, you may need to approach another lender. To find one, go to the page for your state’s district office on the SBA website. Although there will be some additional paperwork, the SBA is working to simplify the process. Small loans and those through a preferred lender have been streamlined and have a fast turnaround time.
On the SBA website, you can also find the Loan Application Checklist. This will help you prepare your package for the bank. Along with the application, items required include:
- Last three years of business and personal tax returns.
- Last three years of business financial statements.
- Overview and history of the business.
- Financial projections.
- Personal financial statement and background.
- Contracts or project information relevant to a line of credit loan.
Getting a loan for your small business isn’t always easy. The SBA has programs that can help.