SBA loans are low down payment, long-term small business loans 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 funding, rather than conventional bank loans. In 2018 alone, small businesses received more than $30 billion in SBA loans. To explain the nature of SBA loans and how they can help business owners grow and expand, Brandon Day, SBA business development team manager at East West Bank, answers the most commonly asked questions asked about SBA loans.
One of the big advantages of SBA loans is that they offer lower down payments and longer loan terms compared to conventional loans. Because of that, 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 little as 10 percent, versus up to 35 percent on conventional loans. The loan repayment is stretched over a longer period of time (up to 25 years), which keeps the monthly payments low and allows business owners to keep more working capital in their business.
Additionally, all SBA loans are fully amortized, and no balloon payments (large lump sums that are significantly higher than all the payments made before) are required at the end of the loan term. And, with a fully amortized loan, you never have to refinance, which saves the borrower time and money, as well as the hassle that goes along with having to apply for a new loan.
SBA loans can support different financing needs of small businesses, including commercial real estate purchases and refinancing, equipment purchases, existing debt refinancing, tenant improvements, business acquisitions, partner buyouts, construction, inventory purchases, working capital and more. Additionally, SBA loans can provide financing for businesses that often find it difficult to obtain 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 find it difficult to obtain conventional financing."
By far, the most popular type of SBA loan is the SBA 7(a) program, which allows for the widest variety of loan uses and has the most flexible underwriting guidelines. The SBA 7(a) program accounts for more than 60,000 small business loans each year and is the SBA’s flagship loan product. It provides loans to qualified small and medium-sized businesses in amounts of up to $5 million. It can be used toward a wide range of business purposes, such as commercial real estate purchases and refinancing, buying a business, renovations, purchasing new or used equipment, expanding a business and refinancing existing debt.
To be considered for an SBA loan, the business must be for-profit, must operate and be physically located in the U.S. or its territories, and must meet the SBA size standards. A vast majority of businesses in the United States are eligible to apply for SBA loans. To qualify, 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 should also have sufficient historical cash flow to show that it can pay back the loan, have a sound business purpose, and its owners must be U.S. citizens or permanent residents who have a strong borrowing history (credit score).
While the exact paperwork depends 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 has to provide a lender with detailed business information, a loan request, a copy of their last three years’ federal tax returns (both business and personal), along with their most recent business financial statements. The goal is to get an understanding of what the business is, how a borrower intends to use the funds, and to ensure that the business can pay back the loan. In addition, a borrower has to complete the lender’s SBA loan application forms, which include a personal financial statement.
Formal business plans are not usually required to apply for an SBA loan. They are only necessary for start-up or expansion loans. The lender will let the borrower know if a business plan is necessary.
“SBA loans are more accessible to small business owners who want to grow their business and have access to much-needed capital.”
The exact amount of down payment depends on the type of SBA loan you are looking to get and the financial institution you are working with. For SBA 7(a) loans, a down payment can be as little as 10 percent. In some cases, the SBA may require the borrower to provide a slightly higher down payment or some additional collateral.
The SBA will require that the borrower pledge available collateral to help secure the loan. However, business owners with limited collateral may still be eligible to apply for an SBA loan.
To apply for an SBA loan, you should work with a lender that is experienced in making SBA loans and has a qualified staff of SBA lending professionals. Make sure that the lender you choose has an SBA Preferred Lender (PLP) designation. That means they have a proven track record of successfully processing SBA-guaranteed loans and have the authority to approve SBA loans unilaterally, which speeds up the process. If you are applying for an SBA loan through a bank, you should contact an SBA business development officer or relationship manager. They will explain the process, provide all the necessary loan application forms, and help you with any questions you might have. After gathering all the paperwork and filling out the application forms, you submit your loan application to your lender so that they can underwrite, approve and close your SBA loan.
The approval process for an SBA loan depends on the type of the loan you are applying for and the type of lender you are using. For an SBA (7) loan, the turnaround time can be as little as 45 days if you use an experienced PLP lender. However, the process can take much longer if you work with a lender that doesn’t have a preferred lender designation.
"Make sure that the lender you choose has an SBA Preferred Lender (PLP) designation as they have a proven track record of successfully processing SBA-guaranteed loans and have the authority to approve SBA loans unilaterally, which speeds up the process.”
While non-preferred lenders have to send the paperwork to the SBA for review and approval, preferred lenders have the full authority to make the final credit decision on their own, which allows for faster approvals and expedites the overall process. Once a preferred lender receives the borrower’s final information and loan application forms, they can usually make a preliminary credit decision within a few business days. The entire process (from loan application to funding) typically takes about 45-60 days.
Yes, SBA loans work very well for refinancing existing business debt. There are quite a few online and traditional lenders who provide short-term business loans that feature high interest rates. SBA loans can help by increasing the loan term and lowering the interest rate of the existing loan, which can significantly reduce the borrower’s monthly payments and help improve business cash flow.
Yes, a borrower can have multiple SBA loans over the course of the lifetime of a business, given that a business meets the SBA’s and the lender’s eligibility requirements for every loan that it takes. However, the combined amount of those loans must not exceed SBA program borrowing limits, which varies based on the type of SBA loan. For example, the borrowing limit for SBA 7(a) loans is $5 million.
Yes, SBA loans can be combined with conventional loans or other types of non-SBA loans to assist business owners and amplify business growth.
Probably the biggest misconception people have about SBA loans is that obtaining an SBA loan is a lengthy process due to the amount of documentation that is required and the amount of time needed to review an SBA loan request. If you are working with a preferred lender that has a seasoned staff who know the process and have experience in the SBA industry, you should be able to get an SBA loan in a fast and efficient manner.