What are SBA loans and how do you apply for one?

Capital. For a small business owner, it may feel like one of the most precious commodities. Most budding business owners require it to get their enterprise off the ground - and to grow and develop it in the future. Growth capital can take your business to a new level, from helping you hire additional staff and open new locations to acquiring new equipment and upgrading technology to better serve your customers.

Some rely on a cash reserve, but it’s notoriously difficult to get a bank loan for a growing business. Banks must confirm your down payment, that your profits meet their minimum requirement and that you’ll have the ability to repay the loan. They can’t just make the numbers up; these standards are set by regulators. It’s frustrating to have those hurdles in your way when a big job, seasonal rush or piece of new equipment could give your business the push it needs to move to another level.

Loan Programs

The U.S. Small Business Administration backs loan programs specifically for owners who can’t get conventional bank loans. However, the agency doesn’t lend directly to business owners. You’re still getting the money from the bank, but it’s taking the risk because the SBA is promising to pay back most of the loan if your business can’t. That gives banks room to approve loans they wouldn’t otherwise take the risk on.

The SBA’s 7(a) loan program is the agency’s core program. The government will guarantee a loan to approved lenders up to $5 million, with no minimum. 7(a) loans can be used for any business-related reason, including operating costs, property, equipment or inventory.

The SBA’s CDC 504 program targets startups, new businesses and growing small firms.

The SBA also runs a microloan program, with loans of as much as $50,000 to help small businesses and some nonprofit childcare centers start and grow. The average microloan is about $13,000.

There’s also a special 7(a) program called CAPLines. This version is generally used by construction firms, seasonal services businesses and manufacturers. It’s for financing seasonal inventory and materials, or for assignable contracts that can be used as collateral; the credit can also revolve (renew). Another special program is the Export Loan Program that helps businesses to grow their exports.

In addition, the SBA offers financial help to veterans and members of the military community who are starting or growing a small business.

How Do You Get One of These Loans

Remember, the SBA doesn’t lend money directly, it only guarantees loans made by lending institutions. Start with your own bank. If it doesn’t offer SBA loans, go to another bank. You can find SBA lenders on your state district office page on the SBA website.

You complete the loan application based on SBA guidelines, so the loan qualifies for an SBA guarantee if approved. The guarantee is the part of the loan the SBA will repay to the lender if you default.

The SBA website offers a Loan Application Checklist to help you put together your package for the bank. There are several documents that will go with the application:

• Your last three years of tax returns for your business, and for you.
• Your business financial statements for the last three years.
• A summary and history of your business.
• Financial projections.
• Your personal financial statement and background.
• If it’s a loan for a line of credit, the relevant contracts or project details.

The SBA is far from your only option, though. There are state and local economic-development agencies and some nonprofits that make low-interest loans to businesses that may not qualify for a bank loan.

Be sure to take advantage of every opportunity to fund your growth, but don’t spend money that’s borrowed without making it work for your business. It only gets harder to pay back if you’re borrowing for something that doesn’t improve your bottom line.