Learn important information and review criteria for SBA Small Business Administration loans.
SBA Small Business Administration loans (“SBA loans”) partially guaranteed by the federal government have relatively favorable, flexible terms, low down payments, and long repayment periods. As a result, these types of loans are more accessible and attractive than traditional bank loans for small businesses looking for capital. In 2019 alone, small businesses in the U.S. received more than $28 billion in SBA loans. To explain the nature of SBA loans and how they can help businesses grow and develop, Brandon Day, SBA Small Business Office Lending Practice Manager at East West Bank, is here to answer some frequently asked questions about SBA loans.
Why choose an SBA loan?
The main advantages of SBA loans compared to traditional loans are the low down payment and long loan term. Therefore, this type of loan program is more feasible for small businesses that want to expand their business and are in dire need of capital.
The down payment on SBA loans can be as low as 10% of the loan amount, while traditional loans can be up to 35%; at the same time, the repayment period of SBA loans can be as long as 25 years, which keeps the monthly payment for small businesses low level, the company can thus retain more working capital.
In addition, SBA loans are fully amortized in monthly repayments, so not only do borrowers not have to pay a large balloon loan at the end of the loan, but they also do not need to refinance, eliminating the need to apply for a new loan Time, money and trouble.
What can SBA loans be used for?
SBA loans can meet the different financing needs of small businesses, including commercial real estate purchases or refinancing, equipment purchases, debt refinancing, rental unit repairs or renovations, business mergers, acquisitions of shares, engineering, purchase of inventory, working capital, and more. In addition, SBA loans can finance businesses that have difficulty accessing traditional financing, including restaurants, hotels, auto repair facilities, self-storage, gas stations, car washes, and assisted living.
“SBA loans can provide capital to businesses that struggle to obtain traditional financing.”
What are the common types of SBA loans?
Currently, the most popular type of SBA loan is the SBA 7(a) loan program, which is the most versatile and has the most flexible review requirements. With more than 60,000 SBA 7(a) loans approved each year, it is the flagship loan program of the U.S. Small Business Administration. At the same time, it provides qualifying small and medium-sized businesses with loans of up to $5 million and can be used for many business purposes, such as commercial real estate purchases and refinancing business acquisitions, renovations, purchasing new or used equipment, expanding business operations, and debt refinancing financing.
What are the review criteria for SBA loans?
- What are the main eligibility requirements?
- Businesses that want to receive an SBA loan must be for-profit, operating in the United States or its territories, and must meet Small Business Administration size criteria. Specifically, first of all, the tangible net worth of the enterprise cannot exceed $15 million, and the average net income cannot exceed $5 million; in addition, the enterprise also needs to have sufficient cash flow to demonstrate the ability to repay the loan; thirdly, there is a reasonable business purpose; finally, its owner must be a U.S. citizen or a permanent resident with a good lending history (credit score). The vast majority of businesses in the United States are eligible for SBA loans.
- What documents and financial statements are required?
- While the exact documentation depends on the SBA loan program and the lender, to initiate the loan application process, the borrower must provide the lender with detailed business information, loan request, federal tax returns (both business and personal) for the past three years, and Recent corporate financial statements. This information can help lenders understand the business’ business, plans to use the loan funds, and ensure that the business can repay the loan. Additionally, borrowers must complete the SBA loan application form provided by the lender, which includes a personal financial statement.
- Do all businesses need to provide a business plan?
- In general, most small businesses do not need to provide a formal business plan when applying for an SBA loan, except for start-ups and companies looking to use the loan for business expansion, and the lender will notify you if needed.
How much is the down payment?
The down payment amount depends on the type of SBA loan and the lender. Down payments on SBA 7(a) loan programs can be as low as 10%. In some cases, the Small Business Administration may require a slightly higher down payment or some additional collateral from the borrower.
Do I need collateral to apply for an SBA loan? Are businesses without collateral still eligible to apply?
The Small Business Administration will require borrowers to provide loan collateral, although businesses with limited collateral may still qualify for SBA loans.
How do I apply for an SBA loan?
Businesses should choose to work with a lender that is experienced in SBA lending and has a qualified SBA loan officer. Confirming that the partner lender is a Small Business Administration-accredited Preferred Lender (PLP), which means the institution has a proven track record of successfully processing SBA loans and has the authority to unilaterally approve SBA loans, thereby expediting the process. When applying for an SBA loan through a bank, businesses should contact the bank’s SBA Business Development Director or Relationship Manager, who can explain the loan application process, provide the necessary application forms, and assist with other related issues for the business owner. After the business owner submits all relevant documents and application forms to the lender, the lender will approve the data, approve it, and disburse the loan.
How long does it take to apply for an SBA loan?
The approval process for an SBA loan depends on the loan program applied for and the type of lender you work with. Taking the SBA(7) loan program as an example, if a business works with an experienced PLP lender, the fastest approval time is 45 days. However, the process can be significantly longer if the business is partnering with a non-PLP lender, as non-PLP lenders need to send relevant documents to the Small Business Administration for review and approval, while PLP lenders have the sole discretion to make the final credit decision power, thereby speeding up the review process. PLP lenders can typically make an initial credit decision within a few business days after receiving full data and loan application from a borrower, while the entire process (from application to disbursement) typically takes 45 to 60 days.
“Confirming that the partnered lender is a Small Business Administration-accredited ‘Preferred Lending Bank’ means that the institution has a proven track record of successfully processing SBA loans and has the authority to unilaterally approve SBA loans, thereby expediting the process.”
Can SBA loans be used to refinance debt?
Can. SBA loans are great for refinancing existing business debt. Many online and traditional lenders on the market offer short-term, high-interest business loans, and SBA loans can help businesses significantly reduce monthly payments by extending loan terms and lowering interest rates on existing loans, thereby improving cash flow.
Can I apply for multiple SBA loans? If so, what are the eligibility requirements?
Can. Businesses can apply for multiple SBA loans as long as they meet the eligibility requirements of the Small Business Administration and lenders. However, the total loan amount cannot exceed the limits of the SBA loan program (varies by loan type). For example, the SBA 7(a) loan program has a limit of $5 million.
Can SBA loans be combined with other types of loans?
Can. SBA loans can be combined with traditional loans or other types of non-SBA loans to assist business growth.
What is the biggest misconception about SBA loans in the market?
Probably the biggest misconception people have about SBA loans is that getting an SBA loan is a lengthy process due to the amount of paperwork to prepare and the length of time it takes lenders to get approved. In fact, with the assistance of PLP lenders and experienced specialists, businesses should be able to obtain SBA loans in the fastest and most efficient way possible.