How to Obtain a SBA Loan

by: Teeny Ingberg

The SBA or Small Business Administration loan is a significant source of financing for small businesses. Typically, SBA loans are used to finance plant construction or expansion, to purchase equipment, and to provide working capital. Under the SBA Guaranty Loan Program, loans to entrepreneurs from private lenders, usually banks, are guaranteed for 80% of loans up to $100,000 and 75% for loans over $100,000.

Working capital loans generally have maturities of five to seven years. Longer maturities are used to finance fixed assets, such as land and buildings. Lenders apply directly for SBA loans for their customers. Essentially, you are a customer of the bank, and the bank is a customer of the SBA. You will not deal directly with the SBA but will work through your lending officer.

If the bank feels that you are a creditworthy customer and is willing to apply for the SBA loan, which greatly minimizes its risk, it will prepare a loan package to submit to the SBA. This loan package will contain the bank's credit analysis of your venture and the loan request.

The SBA will perform an independent review of the loan package. It will determine whether the business is eligible under its guidelines and whether the entrepreneur meets its credit requirements. The agency closely evaluates whether your sales and financial projections are realistic. In addition, it scrutinizes your repayment ability.

Many banks have signed participation agreements with the SBA. However, only 50% of these banks are active lenders and send in applications for SBA loans. Further, only about 25% of these lenders aggressively pursue SBA loans. Therefore, it is important to determine whether a potential lender regularly participates in the SBA loan programs.

The interest rate the bank charges you will vary. A bank can charge up to 2.25% above the New York prime rate for loans with maturity dates of less than seven years. On maturities over seven years, the bank may charge up to 2.75%. An interest rate can be fixed or variable, depending on your negotiation and relationship with the lender.

The SBA does offer a direct loan program, but currently the funds are available only to Vietnam era veterans and other disabled veterans who have a 30% or more compensable disability. To obtain additional information about the SBA business loan programs, call its business development division. You can also ask for the brochure of Business Loans from the SBA.

You could also contact a local small-business investment company or SBIC, a privately owned company, licensed by the SBA, to provide equity capital and long term loans to the entrepreneurs. Your local SBA office can provide you with a list of SBICs.

Smart Tips for Obtaining an SBA Backed loan

1 - Develop a business plan that contains proper financial projections, including cash flow, profit and loss statements, and balance sheets. Make your projections month by month for the first year of operation and then annually for the next three to four years.
2 - Prepare a current personal financial statement for any principals involved in the venture.
3 - List the collateral to be offered as security, including an estimate of the present market value of each item.
4 - State the amount of the loan request and the purpose for which the funds will be used.
5 - Establish a business relationship with a full service bank that participates in government lending programs.
6 - Make an appointment with your loan officer and ask him or her to finance your loan.
7 - If the loan is turned down, ask about the possibility of using the SBA Guaranty Loan Program.

If you follow these few tips for applying SBA loan, you should be able to successfully have the approval for the loan. You can also do the research on the web for more information about the loan application process.