How to Secure an SBA Loan

In response to the recent economic downturn, the federal government has increased the incentives for lenders to make loans to small businesses through the Small Business Administration (SBA). If you operate a startup, recently established, or other small business, it's a great time to investigate the benefits of an SBA loan. But even though the lending environment has eased somewhat, you still need a solid business plan and a thorough understanding of the application process.

What is an SBA Loan?

Although the name might suggest otherwise, commercial lenders, not the government, make SBA loans. The SBA gets involved by guaranteeing up to 85% of the loan amount, thus making the loan less risky to the lender and presumably encouraging approval. But even with the guaranty, the SBA cannot force a lender to make a loan--another key reason for complete and accurate preparation. Interest rates are negotiated between the borrower and the lender but are subject to SBA restrictions (details below).

It's also important to understand that SBA loans are for business owners that do not have access to traditional lending facilities. That is, if a bank or other institution will provide you a commercial loan at reasonable terms, you do not qualify for an SBA loan.

What Qualifies as a Small Business?

SBA size standards vary from industry to industry. Most size standards are based on the average number of employees over the past year or average annual revenues over the past three years. The most common limits are:

• 100 employees for wholesale trade industries
• 500 employees for most manufacturing and mining industries
• $750,000 for most agricultural industries
• $7 million for most retail and service industries
• $14 million for specialty trade contractors
• $33.5 million for heavy construction industries

For a complete list of standards, see the SBA's Table of Small Business Size Standards.

What Types of SBA Loans are Available?

If your small business has been turned down for a commercial loan through normal lending channels, the SBA offers several types of loans.

7(a) Loan Program

7(a) loans are the most common SBA loans because they are a "general purpose" type of loan. According to the SBA, financing can be used for "working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction)," and other general business purposes. There are several types of 7(a) loans, including special programs for veterans, exporters, and other unique circumstances.

Loan Details: $2 million maximum, with a term no longer than 25 years. Interest rates can be fixed or variable, pegged to the prime rate, LIBOR, or other rate.

CDC/504 Loan Program

The CDC/504 Loan Program is designed for small businesses that need "brick and mortar" financing, including funds for construction, building and street improvements, machinery and equipment, and other capital needs.

Loan Details: $1.5 million maximum in most cases; $2 million when meeting a "public policy goal." Terms are either 10 or 20 years. Interest rates are pegged to a level above the current market rate for five-year and 10-year U.S. Treasuries.

Microloan Program

This program is designed for small businesses and not-for-profit child-care centers that need funds for inventory, supplies, furniture, fixtures, or other equipment.

Loan Details: $35,000 maximum, with a term no longer than six years. Interest rates typically vary between 8 and 13 percent.

America’s Recovery Capital (ARC) Loan Program

The SBA's newest loan program provides interest-free short-term relief for small businesses (not startups) struggling to make principal and interest payments on existing debt. At present, ARC loans will be offered as long as funding is available or until September 30, 2010, whichever comes first.

Loan Details: $35,000 maximum, interest- and fee-free. Repayment can extend up to five years.

Get Approved

The government's guarantee doesn't mean that lenders will approve your SBA loan without considering the health of your business (or viability of your business plan), the earnings potential of the business, your creditworthiness, and other financial factors. Applications (and applicants) for SBA loans need to be just as "buttoned down" as those for traditional commercial loans.

Here are the most important factors that go into a successful application:

Debt serviceability

One of the basic responsibilities of a lender is to assess whether a company's debt is manageable. A lender will analyze expected cash flow, as well as the predictability of those earnings, compared to the total debt load. And similar to the down payment on a mortgage, lenders prefer that you have a personal stake in the business, which makes it more likely you will do everything possible to help the business succeed.

Credit history

Not surprisingly, every lender will examine a credit report as part as the application process. A solid borrowing history is one of the best indicators of future repayment.

Assets-to-liabilities

Lenders also analyze the ratio of current assets (those most easily convertible to cash) to current liabilities (obligations due within one year).

Collateral

Any loan is more likely to be approved when there is sufficient collateral backing it up. However, the SBA takes pains to say that inadequate collateral is not typically a deal breaker when it is the only unfavorable factor in an application. But again, it's important to understand that the SBA cannot compel a lender to make a loan.

Character

It might seem surprising, but number crunchers do take subjective factors into consideration when processing a loan. Just like a job interview, you want to make a good personal impression on the lender, highlighting your business experience, skills, and references. One important nuance: The smaller the business, the more closely the person behind it will be scrutinized.

How to Apply

The following list includes a typical (but not exhaustive) selection of the paperwork required for an SBA loan application. Be sure to consult the SBA's Application Process page, as well as your financial advisor, to ensure the best chance for approval. Good luck!

• SBA Form 4 (Application)
• SBA Form 4-a (Schedule of Collateral)
• SBA Form 413 (Personal Financial Statement)
• Balance sheets, income statements, and accounts-related documents
• Projected income, expenses, and cash flow (for startups)
• Business and personal income tax returns for the previous three years
• Resumes and business histories of the principals