How do I get an SBA loan to start a new business?

Entrepreneurs who find themselves hitting brick walls with regular banks may try the Small Business Administration. SBA loans are available for new and established businesses. This government agency doesn’t lend money directly to small-business owners, though. It provides guarantees to banks. The biggest of these SBA programs lets qualified borrowers obtain loans up to $5 million.

You’ll need to meet a host of requirements, and there’s plenty of paperwork to fill out. If this whole process is unfamiliar to you, follow these steps to make sure you hit all the right targets along the way.

Before you can get any financing, you have to decide how much you need and what you will use it for. And when you’re talking about a newly formed company, it’s vital to be realistic about your startup costs. As with other facets of business planning, it’s wise to err on the high side. A thorough budget of startup expenses helps you compile the details of what you need to purchase before opening day. Keep in mind that revenue won’t be established right away. Don’t neglect to include the cost of processing payroll for employees as well. This total determines how much money you require. Set a goal of obtaining a loan to meet that budget.

General Requirements for 7(a) Borrowers

What works for one program might not for another, and it varies from lender to lender. However, the U.S. Small Business Administration has some general requirements for 7(a) borrowers.

• The company must be a for-profit entity within the United States.
• There are SBA size standards that apply, depending on the industry in which your company operates.
• Ability to demonstrate financial need.
• You must have a reasonable investment stake in the business.
• SBA rules also require you to have tapped other reasonable means to obtain financing on your own, such as personal assets.
• The purpose of the loan must be a qualifying business-related reason.
• The borrower can’t be delinquent on any federal debt.

A new business is a risky investment for a lender. An existing business has years of numbers to show where revenue comes from, and that gives lenders some confidence it can repay. A startup is a promise that hasn’t been proven yet. A detailed plan that spells out how and when it will earn revenue lowers risk to lenders and makes qualification more likely.

Plans vary by industry, but usually open with an executive summary of the company and its prospects. That’s followed by a company description, an industry outlook and a market analysis. Then, the plan usually lays out the company’s legal and management structure, along with its products and services.

Several Loan Programs

The U.S. Small Business Administration has several loan programs, and not every one works for a newly formed company. If yours is a startup, a few of these programs can meet your needs; they each have their own rules. Here’s how they compare.

The SBA Microloan program, which limits borrowing to $50,000, is a possibility for startups, though loans average only $13,000. Terms can be as long as six years and rates run from 8% to 13%. But don’t use these loans to repay existing debts or buy real estate.

Another group of loan offerings is geared to underserved groups such as women, minorities and veterans. It provides SBA guarantees ranging from 75% to 85% of the value of the loan. Borrowing can reach as high as $250,000. They carry a maximum rate of prime plus 6% (about 7% to 9%) and don’t come as a line of credit.

The SBA 7(a) program consists of loans made by participating lenders. These range from small 7(a) loans up to $350,000, to the standard 7(a) program, which has a maximum of $5 million. If you need money fast, the SBA Express program speeds the process. In all three programs, the borrower’s interest rates vary by lender, though the SBA sets a cap on total rates.

For big-ticket items, SBA 504 loans let you borrow up to $5 million from approved lenders. Terms run 10, 20 or 25 years, and interest rates are around 3%. You’ll likely need a down payment of 10% to 30%.

Not everyone qualifies for a 504 loan, though. To qualify for a 504, the purchase has to create jobs or help the business grow. The company has to operate for profit in the U.S., with a net worth of less than $15 million and a net income that averages $5 million or less over two years.

Approved Lenders

The SBA only guarantees part of each loan, and lenders themselves actually issue them to the businesses that make it through their credit and application checks. To find a lender, the SBA’s Lender Match tool helps locate local, approved lenders.

Approved lenders may or may not provide all of the agency’s programs. Comparison shopping can help you choose among SBA loan programs, so check:

• Lenders who participate in the specific SBA program you want
• How much it can lend you
• Details about the interest rate and other costs
• How long you’ll have to pay it back
• What happens if you pay early
• What your credit score has to be
• What application requirements and fees are
• When you’ll get the cash
• Whether it has SBA Preferred Lender status

Call the lender and ask about the process first. And get your documentation together early. Doing that in advance makes it go much faster. Be prepared because most lenders will ask for a business plan. Needs vary but most lenders ask for a similar set of paperwork.

• Business licenses and certification
• A description of your business history and any owners
• Tax returns for two years for the business and owners
• Current financial information for the business, plus one to three years of financial projections
• Income statement and balance sheet
• Record of other loan applications

After you’re finished, you’ll give the application to the lender, who will send it to the SBA for review. From there, the qualification process usually takes 30 to 90 days. Applications for the SBA Express program are reviewed by the agency within 24 to 36 hours of receiving them. If the application is approved, the lender then closes the loan and deposits the funds in the borrower’s account.

Brand-new companies can qualify for an SBA loan, but your options are limited. New companies don’t have a financial history and that can be a problem when obtaining any type of financing.

If you’re a new business owner, bring along documents that prove you’ll succeed. Write up a business plan showing how you’ll repay the loan on time. Attach information that shows any management and industry experience you have and how that can help the company grow.

A 7(a) borrower can be based in the U.S. or one of its territories.

Remember: there are other rules for some SBA loans. Sometimes there are industry restrictions or rules on minimum time in business. Some types of business - illegal ones, speculative ones and some others - can’t get SBA loans at all.

Some types of SBA loans suit startups better than others, such as microloans. Be sure you apply for the right type of loan, one you’re likely to qualify for.