At Able, we're fans of SBA loans (even though we don't offer an SBA product ourselves) because they're affordable, low-interest capital—the perfect loan for small businesses that don't quite qualify for a traditional bank loan. So our mantra is "If you can get an SBA loan—and time isn't an issue—you should."
But we're also realistic about their limitations. The application is notoriously painful, with months of work, mountains of paperwork, labyrinthine rules. "The best business loan you'll never get again." And with approval rates hovering around 20-25% for big banks and 40-50% for small banks and credit unions, you might be going through a whole lot of trouble only to get rejected at the end.
So the two biggest questions business owners have about the SBA are (1) "Can I get an SBA loan?" and if so (2) how to get one.
In this post, we hope to guide you through how to get an SBA loan, specifically the most versatile SBA loan, the 7(a) loan. We address whether you can get an SBA loan in brutal detail in this post.
How to Get an SBA Loan: Eligibility
So how do you get an SBA loan? Well, to start with, you need to be a small business that needs an SBA loan and is likely able to pay it back.
In order to even be eligible to apply:
- You run a for-profit small company that operates inside the United States.
- You don't have access to equivalent funding from other sources.
- You are able to pay debts from operating cash flow.
- You can prove you have the character to repay your loans.
- You have the necessary management experience in place.
- You have a feasible business plan.
There are also loan purpose restrictions, such as:
- Loans can be applied to the purchase of real estate or equipment, but not to reimbursing funds owed to one of the owners.
- Loans can refinance existing business debt, but not if the lender is in a position to sustain a loss.
- Loans can fund an acquisition or expansion, but not to affect a change in business ownership that doesn't benefit the business.
Fun fact: The maximum loan amount is $5,000,000, but the average loan amount in 2015 was $371,628.
How to Get an SBA Loan: The Application Process
Step one is knowing your funding options. You won't be able to determine a good deal until you review your alternatives. Each business generates a fully unique funding profile based on factors such as the credit scores of the owners, the historical performance of the industry, the competitive landscape and the originality of the business model.
After you verify your eligibility, there are five steps to securing your SBA loan:
1. Find a match. First you have to find a match. You can either go straight to your preferred SBA lender (usually, but not always, a bank), or you can go to sba.gov and use their tool to connect SBA borrowers with SBA lenders.
Our recommendation is to go to an online SBA originator like Biz2Credit or SmartBiz (no affiliation), which will leverage technology and process improvements to be faster than most brick-and-mortar SBA lenders.
If you want to go the traditional route, we recommend going with a smaller bank or credit union, as they have historically higher approval rates than larger banks. Just make sure that the SBA lender you're going to offers the product you need. So, e.g., if you're looking for an SBA 7(a) Small Loan, don't go to a lender that only offers SBA Express or SBA 504 loans.
2. Talk to your SBA lender. Before putting anything together, talk to your SBA lender first to make sure you're not wasting your time. There are a lot of traps for the unwary in the SBA process, so better to involve an expert sooner rather than later.
- A completed SBA application
- Personal financial statements
- Business financial statements
- Tax returns
- Ownership breakouts
Also, check with your SBA lender to make sure you're not missing anything. An incomplete application is likely to slow down the process.
4. Submit the SBA application to your SBA lender for pre-review. Next, you'll submit your SBA application to your SBA lender for initial review. The SBA lender will review it to get a general sense of whether they want to do the loan, as well as prepare the loan package for review by the SBA.
The actual approval decision focuses in on the 5 C's of credit, much like a normal bank loan (in fact, they're required to by the SBA) In particular, they'll dial in your debt service coverage ratio and credit score to determine capacity and character, as well as other metrics to assess the other 3 C's (quick ratio, current ratio, debt to asset ratio, etc.).
If you're a sucker for detail, check out our detailed overview of the SBA decision process here. If you'd rather just get to the point, here are the rough numbers for what is likely to get approved by an SBA lender when marking a standard term loan:
- Strong personal and business credit (680+ FICO)
- Few (if any) derogatory marks on your credit score
- No unpaid federal debt, including taxes and student loans
- 2+ Years of Historical Profitability
- A debt service coverage ratio of at least 1.25
- Debt to revenue of less than 0.2
- Plenty of equity in the business
- Positive net worth of the business
- Loan to value ratio of less than 80% (if collateralized)
- Debt to asset ratio of 1.0 (using either business or personal assets)
- No other liens
- Personal guarantee
5. Term sheet! The lender will issue a term sheet that summarizes the most important features of the loan. This term sheet isn't binding per se, because you still need to go through the full SBA approval process, but it should be a good indication that the lender thinks you'll get approved.
6. Deposit. This puts an end to the evaluation phase. The deposit will cover third-party reports such as appraisals.
7. Underwriting and approval. In the next phase, the SBA reviews the file prepared by the lender documents. In theory, the SBA is just making sure that the SBA lender did it's job correctly. But there are substantial judgmental factors at play, so there's no guarantee this will be a rubber stamp.
8. Due diligence and closing: Once you've got your approval, you still need to go through diligence. There are various third-party reports (such as appraisals, valuations, environmental impacts and so on). Then you review and sign your documents and you're funded!
How Long Does Approval Take?
According to the SBA, most loans are processed by the SBA in one to two months.
However, that's just for the SBA's approval process. The originating lender also needs to underwrite your file, as well as perform all necessary due diligence and legal paperwork.
In practice the entire process takes closer to three to four months (not counting the initial paperwork), particularly for complex or messy applications. The longest we've seen the process drag out (so far) has been 10 months.
Think: all the speed of a bank combined with all the bureaucracy of the federal government.
SBA Small Loans and SBA Express
If you're asking for $350,000 or less, you might also be eligible for the SBA Small Loan Program or the SBA Express Program.
The Small Loan Program is for well-qualified borrowers, and in theory the SBA will turn the application around more quickly.
The SBA Express Loan Program is for faster turnarounds, and not only can the lender expect a response from the SBA within 36 hours, but they also have more leeway to approve you before the SBA reviews the file. This comes with a big trade-off, though: the SBA will only guaranty 50% of an SBA loan, which means they're riskier for the lender (and more expensive for you).
You can read more about both here.
Pro Tip: Use the SCORE Program
Before you start the loan process, look into the SCORE program. This nonprofit association aids small business owners in accessing essential practical advice and mentorship. The SBA works with SCORE to make sure business owners can get the answers quickly and accurately. SCORE can also help you establish relationships with lenders before the loan becomes a necessity.
Pro Tip: Don't Ask for Too Little
Another crucial consideration is that too many small business owners don't ask for enough money up front. In the interest of keeping their obligations low, they underestimate what they really need because they think they can always come back for more. The problem with this is that getting a follow-up loan is rarely possible, so they end up getting their second loan from sources with higher capital costs.
Pro Tip: Be Careful about Trying to Refinance
SBA lenders will ding you if the loan purpose is refinancing existing debt. It's not prohibited, but it's definitely not encouraged (the lender will have to explain to the SBA why the refinance makes sense, especially if you're trying to refinancing same-lender debt). So if you're worried about your chances for approval, leave the refi off the table for now.
So you've read up on how to get an SBA loan, as well as the approval criteria, and decided that you don't want or can't qualify for an SBA loan. Or maybe your SBA lender has decided for you... after 4-6 months.
Well, there are SBA alternatives, but they're not always pretty.
In the best case, you'll usually end up trading 2 to 5 points on your APR in exchange for increased speed/ease or more flexible credit requirements (that's because SBA alternatives are not guaranteed by the SBA, and therefore are much riskier for the lender).
In the worst case, you'll end up with an APR that's 4 to 10 times higher than what you can get from an SBA lender (really). Or you'll end up with a term that's 1/5th as long, meaning 5x more expensive on a cash-flow basis.
So again, if you qualify for an SBA loan and the 2-4 month time frame isn't an issue, we recommend you go with the SBA (not us). But if you do decide to go with an SBA alternative, we recommend going with a lender with long terms and relatively low rates (like Able). You can check you ballpark terms here (without affecting your credit).