How do I prepare a successful SBA loan application?

Small businesses turn to SBA loans to fuel growth and stay competitive. They can help with everything from launching a business to financing operating costs. SBA loans tend to have lower rates and longer repayment terms. Applying is a pain-in-the-neck and takes a lot of time and paper pushing. For a lot of shops, it’s worth the work.

A lender is going to want to know why you’re looking for money and how much you need, as well as how you’re going to use it. Be clear on that and link it to a growth plan for your business. Be realistic on projections. The more specific and clear you are, the faster the process of pre-approving and underwriting can move.

Here are some common reasons a small business might use an SBA loan. Go through and think about each. Update your business plan while you do.

• Using SBA loans can help businesses restructure debt and get more breathing room.
• Businesses can use SBA loans to buy equipment, inventory or even real estate.
• Another reason to use a SBA loan is to purchase an existing business.

There are other ways to use SBA loans to grow a small business too, such as hiring employees, marketing and opening new locations. Work them into your business plan and be ready to explain them in detail.

SBA’s Rules

The SBA has rules for businesses, guarantors and how money can be used. Check them before doing the heavy lifting. Here are the five broad categories.

• Guarantors. They need acceptable credit, and they must be a U.S. citizen or legal permanent resident. They cannot have defaulted on a government loan, and cannot owe more than $5 million in SBA loans.
• The business. It must be for profit, and located in the U.S. It can’t have after-tax income of more than $5 million a year, or have a tangible net worth of more than $15 million.
• Industries. Excluded are pyramid schemes, lenders, private clubs, religious groups, and firms with more than a third of revenue from gambling. Not a complete list.
• The loan. The amount can’t be more than $5 million and must fully amortize. It can be for up to 25 years if used to purchase real estate, and 10 years for everything else. Anyone who owns 20% or more of the business must sign for it personally.
• What can the money be used for? Working capital, buying a business, buying real estate or equipment, refinancing debt, construction.

On top of SBA’s rules, many lenders will have their own as well. Not all lenders are the same. Here are common ones.

• Time in business. A common minimum is two years.
• Credit rating. Often a minimum of 650.
• Debt service coverage. Many lenders look for a global DSCR of at least 1.25x.

If you fall short, personal cash on hand and past experience in the industry can help make up for it.

A Few Items All SBA Lenders Will Want

Now that you know why you need an SBA loan and that you qualify, gather the documents. There are a few items all SBA lenders will want. A full package is a different matter, and depends on the deal and lender. The first request will generally include the following.

• Most recent three years of personal and business tax returns.
• A schedule of all the debts on the business.
• Up-to-date interim financials for the business.
• A personal financial statement for any and all guarantors.

That’s not all. More paperwork comes later, like legal agreements and lease documentation, to close the loan.

Things to Consider When Working with a Specific Lender

You can get an SBA loan from a small community bank, a credit union or a large national bank. In FY2019 there were 1,708 lenders that made at least one 7(a) loan.

Preferred SBA lenders can make a difference in how fast a small business is pre-approved for an SBA loan. Non-delegated lenders submit the entire application to the SBA, which reviews it and decides. Here are a few more things to consider.

• Types of Lenders. Small-business loans can be provided by banks, credit unions, Community Development Financial Institutions (CDFIs) and online lenders. Each may specialize in a certain type of loan.
• Delegated Authority. Lenders with experience working with the SBA can apply to get it. It speeds up the process.

Online loan marketplaces do not lend money directly to small business. They use technology to match you with lenders that have experience working with the SBA.

You can get free or low-cost advice at your local SBA District Office or Small Business Development Centers (SBDCs).

The work you do here will pay off. Lenders will dig deep into your business to decide if you’re creditworthy or not. Be organized, play to strengths and have fast turnaround on requests. The more prepared you are, the faster the money can come.