Starting your own business is exciting, but it is also a lot of hard work and requires a lot of research to make sure you are successful. If you need a loan to help finance your new dream, then you have probably considering getting an SBA 7(a) Loan.
Getting approved for an SBA 7(a) loan from a bank has unfortunately gotten tougher over the years and many banks are wary to loan money to single business owners who do no bring in a lot of money. Here is what you need to know about the SBA loan application process to give yourself the best shot of getting a loan.
Here are 5 steps to getting an SBA 7(a) Loan:
Step 1: Check Your Eligibility
The first thing you should, of course, is to check your eligibility for this kind of loan. No sense going through all the paperwork if you are not even eligible. The SBA 7 (a) loan requirements include:
- All major owners have good or excellent credit
- Your company is a for-profit, US-based business in an eligible industry (vice and loan packaging typically won’t qualify).
- Your business must be at least two years old.
- You must have proof that your business has tried and failed to get funding from other lenders
- Your business must meet the SBA’s definition of a small business
- Owners must have invested a reasonable amount of equity in the business.
Note that with the SBA 7(a) loan program specifically, you could still qualify if you don’t quite meet the credit score and age requirements. Keep in mind that some SBA lenders will also require you to provide collateral in the form of the business or business owners’ assets. This will back the portion of the loan that the SBA doesn’t cover which can be anywhere from 15% and 50%.
Step 2: Choose the 7(a) program
The SBA 7(a) program covers several different types of SBA loans. The standard 7(a) loan is a term loan of up to $5 million. SBA CAP lines falls under the umbrella of the 7(a) program and is the SBA’s standard line of credit up to $5 million.
Keep in mind though that just because that is the most popular loan program the businesses go for, doesn’t mean it is the right choice for you. Explore all your options carefully first.
Here are other SBA programs:
- SBA 504. This is generally used for buying fixed assets like equipment or real estate to help a business expand. This program requires a down payment of around 10% to 20% and your business needs to apply through a Certified Development Company (CDC).
- Disaster assistance. This is for businesses who need help getting back on their feet after suffering physical damage after a natural disaster. Loans up to $2 million are offered at extra low rates.
- SBA Export programs. These programs were specifically designed for small export businesses which typically have trouble getting a business loan. The three programs offered are the SBA Export Express program, Export Working Capital program and the International Trade loan program.
Step 3: Find a lender
You actually don’t go to the SBA directly for the loan so you need to find a lender who will provide the loan and process your application for you. It will be the lender who sets the credit requirements and determines your eligibility so the results could vary a little, vendor to vendor.
To find the right lender for your needs, you can do all the legwork yourself or go through a referral service. Either way, keep these questions in mind as you search:
- Does it offer the SBA program I need?
- How much can I borrow? Is it too high or low for what I really need?
- Do I qualify?
- What are the interest rates? While the SBA caps its interest rates usually around 9%, it can vary a little between lenders so be aware of what you are exactly agreeing to.
- Is there a down payment?
- Is it an SBA Preferred Lender?
- How much and what kind of collateral will I need to provide?
- How is their customer service? Is it easy to get your questions and concerns addressed? How long will it take for your application to go through and the money in your hand?
Step 4: Gather all your paperwork
There are certain pieces of information that you will need to provide so it is best to get your paperwork in order as early as possible. Here is what you will need:
- How much your business will want to borrow
- A detailed plan of how the money will be used
- Your business’ financial projections for the next one to three years.
- A cash flow statement
- A current profit and loss (P&L) statement
- A current balance sheet
- Two years of business tax returns
- Two years of personal tax returns from each owner
- Personal financial statements for each business owner
- Resumes of each owner
- A business plan which needs to include an overview and history
- Proof of ownership
- Business licenses and leases
If any of the owners also own 20% or more in another business or if you are using the loan to buy another business, then you need to provide financials on them too.
Step 5: Fill out the application and forms
You will need to fill out an application and several different forms. For the application, most the information needed will already be laid out in your business plan, including an executive summary, ownership breakdown, details on any government-issued debt and your plan for using and paying back the SBA loan.
Then you must fill out the following forms:
- The SBA Form 1919: Borrower Information Form
- The SBA Form 413: Personal Financial Statement. Each business owner or co-signer needs to fill this out. It includes all your debts, real estate, life insurance policies and even inheritances.
- The SBA Form 159: Fee Disclosure Form. This actually to protect you from paying unnecessary fees from any agent who helped you.