You’ve got your brilliant idea, a rock-solid business plan, and you’re ready to launch—or perhaps you’re ready to invest in or improve an existing business—and you’re going to need a loan. The U.S. Small Business Association (SBA) is dedicated to helping entrepreneurs with advice, tools, and money.
For SBA and commercial loans, you’ll need to meet a list of qualifications, including a little “skin in the game”—collateral you’ve already got (generally about 25 percent) that comes from personal savings and assets, investors, crowd-funding, or other sources.
The SBA loan actually comes from a bank, but the SBA guarantees a percentage of the loan, which reduces the risk to its lending partners and making it easier for business owners to get the financing they need. The SBA loan be right for you if your business meets certain criteria:
- It’s a for-profit enterprise
- It must be a small business as defined by the SBA. This varies by industry but it’s generally fewer than 500 employees for most manufacturing and mining industries, and take in $7.5 million or less in average annual receipts for many non-manufacturing industries.
- You are engaged in, or propose to do business in, the United States or its possessions.
- You have reasonable invested equity.
- You have used alternative financial resources, including personal assets, before seeking financial assistance.
The Difference Between a Commercial Loan and an SBA Loan
An SBA loan and a commercial loan generally fulfill the same mission—to help fund the gap in your startup or established business costs—and require similar qualifications. There are some borrowers who would not qualify for an SBA loan, while they might for a commercial loan depending on the lender criteria, said David J. Hall, a spokesman for the SBA. “The main difference is that SBA tries to make the loan more affordable by generally providing longer repayment terms and, in some cases, no fees to both borrowers and lenders,” he said. “Also, while collateral is important, SBA would not decline a loan based only on lack of reasonable collateral.”
What SBA Loan is Right For You?
The SBA offers several different kinds of loans, which fund different business activities and investments. Interest rates are generally low, and are determined by the type of loan, amount, and repayment period. They include:
- General 7(a) loans, which max out at $5 million, with no minimum. The average loan amount in 2012 was $337,730. Guaranty fees range from nothing for loans under $150,000 to 3.5 percent on loans of more than $700,000. Interest rates vary.
- Disaster loans to repair or replace items such as real estate, personal property, machinery and equipment, and inventory and business assets that have been damaged or destroyed in a declared disaster or drought.
- Microloans up to $50,000 to fund working capital, inventory or supplies, furniture or fixtures, and machinery or equipment. The average loan amount is $13,000 at a general interest rate between 8 and 13 percent.
- Real estate and equipment loans to buy land and buildings and to make improvements. Loan amounts are determined by how many jobs are created—generally, the business must create one job for every $65,000 created by the SBA.
How to Apply for an SBA Loan
The best place to start your application is on the SBA website. You’ll need to have:
- SBA loan application
- Personal background and financial statements. There are two forms to fill out: the Statement of Personal History and the Personal Financial Statement
- Business financial statements: These will show your ability to repay the loan. The stronger these are, the better your application will be. They include a profit and loss statement (P&L), projected financial statements, ownership and affiliations, business certificate/license, loan application history, business and personal income tax returns, résumés for all the principals involved, business overview, business lease, and information on an existing business if you’re applying for funds to purchase one.
To learn more and to get started on your application, visit the SBA website and start connecting with an approved lender.