How to Apply for an SBA Loan: A Step-by-Step Guide
Save time and energy when by reading this helpful how-to guide on applying for SBA loans.
Getting approved for a loan that is backed the Small Business Administration (SBA) can serve as a critical lifeline for your business, but the application process can be challenging to complete. Learn about the different types of loan programs offered by the SBA and how to navigate each step of the process with our helpful how-to guide.
This article does not offer legal or financial advice and may not be appropriate for your small business. Always consult with a qualified professional about your specific circumstances.
What is an SBA loan?
An SBA loan is a government-backed loan that is specifically designed for small businesses. These loans are not issued by the SBA. Instead, the SBA creates guidelines for its partnering lenders. The SBA helps lenders reduce their risk by guaranteeing the loans that they issue.
What are the advantages of getting an SBA loan?
While applying for an SBA loan can be a time-consuming process, it’s often worth the stress since these loans typically offer lower rates and fees compared to non-government loans. Certain SBA loan programs also come with valuable benefits like free counseling and continuous support, lower down payments or even no collateral upfront.
Additionally, qualifying businesses may have access to other government loan programs and contracts which helps them stay competitive with larger corporations. For example, the Historically Underutilized Business Zones (HUBZone) program provides access to government contracts for qualified small businesses in urban and rural communities. Qualifying small businesses can also be awarded exclusive government grants. Some grants and training programs may be industry-specific or reserved for certain groups, such as women or military veterans. You can find a list of available grants on LendingTree.
Another advantage of SBA are the tax incentives. For example, small business owners can save up to 50% of employee health care costs through the Small Business Health Options Program (SHOP). This program is a part of the Small Business Health Care Tax Credit, which is only available to small businesses with fewer than 25 full-time employees. Some cities have also created programs that offer tax credits to incentivize entrepreneurs to relocate or create a business in their city and help grow their local economy. Be sure to check your local government website to learn about their specific programs and how to apply.
Types of SBA loans
7(a) Loans
The standard 7(a) loan is the most popular loan that small business owners apply for. It offers financing of up to $5 million and the capital can be used for a wide range of purposes, from working capital to seasonal expenses, fixed assets and renovation projects.
504 Loans
The 504 loan program provides financing for fixed assets, including buildings and machinery. It also covers construction and renovation projects to modernize existing facilities.
There are three main components of a 504 loan:
- Up to 40% from an approved lender
- 50% from a certified development company (CDC)
- A 10% to 20% down payment from the borrower.
The SBA will guarantee up to $5.5 million but the project could be worth as much as $20 million or more. Note that 504 loans cannot be used for working capital.
Microloans
The SBA microloan program provides up to $50,000 in financing. Microloans can be used for working capital, inventory or supplies, and fixed assets like furniture and machinery. Microloans cannot be used to purchase real estate property.
EIDLs & CAPLines
CAPLines are fixed or revolving lines of credit to help small businesses fulfill cyclical or short-term working capital needs. The four types of CAPLines are:
- Contract loans
- Builders lines
- Seasonal lines of credit
- Working capital lines of credit
Most business owners are familiar with the seasonal CAPLine which helps cover seasonal expenses related to inventory, labor, or accounts receivable.
General Loan Requirements
Given that the SBA offers several different loan options, requirements can vary depending on the loan program and the lender. These are some standard eligibility requirements for all SBA loan applications:
- The business must be a registered for-profit business such as a sole proprietorship, partnership, or corporation.
- The business must be registered and operating in the U.S. or within one of its territories.
- The business must be independently owned and operated and is not dominant in its field on a national basis.
- The business must not have obtained funding from another lender.
- The business must meet the SBA’s definition of a small business.
The SBA’s definition of a small business.
The SBA’s definition of small business is based either on revenue or the number of employees and varies based on the industry. Generally, a small business is an independently owned for-profit enterprise that employs 500 or fewer persons. These standards can change depending on the industry. For example, some businesses may have up to 1,500 employees and a maximum of $41.5 million in average annual receipts. This definition is different from the one used by the IRS, which defines a small business as an enterprise with assets under $10 million.
A small business must also account for average annual receipts or number of employees of its affiliate(s) when determining its small business status. Affiliate businesses are economically dependent in some way. For example, a family-owned business with several different companies ran by different family members at separate locations. If these businesses share common ownership or interests, the SBA will look at that total number of employees when calculating an individual company’s small business status.
Steps for applying
1. Identify your industry and confirm whether you meet the SBA’s definition of a small business.
- Use the SBA size standards table, to find your 6-digit NAICS code and which small business classification you must meet: average annual receipts or number of employees.
Average annual receipts are the business’s total or gross income plus the cost of goods sold. To calculate average annual receipts, take the average of your total income over the last three or five complete fiscal years, including affiliate businesses. Younger businesses should calculate their average annual receipts by multiplying the average weekly revenue by 52.
Number of employees is the average number of full-time, part-time, and temporary people employed during each pay period over the past 12 most recent months, including employees of any affiliate businesses. Younger businesses may use the average of each pay period they have been in business.
- Calculate your company’s three-year average annual receipts or the average number of employees for your business, whichever applies and enter the number into the SBA’s size standards tool. Then click “See Results.” The tool will confirm whether you meet the small business size standard.
2. Find a qualified SBA lending partner and submit your application.
- Select the type of loan that you would like to apply for and check with your preferred bank or credit union to see if they offer SBA loans. If you do not have a preferred lender, you can use the SBA’s free online Lender Match tool to find an approved institution. Another option is to contact your local SBA District Office and ask for referrals.
- Lender requirements for different application packages can vary depending on the program. Gathering the required documents can easily take a few weeks to compile. Start this process as soon as possible. If you’re applying for the 7(a) loan, you will need the following documents:
- Your SBA loan application form (Form 1919).
- A personal financial statement and statement of personal history.
- Business financial statements, such as income statements, balance sheet, current profit and loss statements (the last 90 days or more) and a one-year financial projection statement.
- A list of any other business that you own along with business affiliations.
- Your business certificate or license from when you registered the business.
- Your loan application history, if you have one.
- Personal and business tax returns for the past three years.
- Personal resumes for each principal of the business.
- An overview and history of your business.
- A copy of your business lease, if you have one.
After you submit your application to the lender, they may follow up with questions or requests for additional documents. The lender will typically review your application and decide whether to proceed within one to two weeks.
If you meet the requirements, you will receive a document called a “loan proposal” or “letter of intent.” This document outlines your request and the terms of service including a minimum down payment, fees, and closing details. Sign the loan proposal if you agree to the terms and wish to move forward with the underwriting process.
Once the SBA and lender approve your application, you will receive a “commitment letter.” You must sign and accept if you want to proceed. Next, you will receive the closing documents. The closing process can take two to four weeks. The money will be disbursed to your account once these final loan documents are signed.
The entire process can take as long as two to three months or longer to complete.
