The Simple Startup Guide to SBA Loans

 In Academy, Startups

In the hierarchy of business needs, capital needs rise to the top for most companies, but for the startup business it can be even more crucial to determine where your next dollar is coming from.

So if you’re an early stage startup, our latest blog series on startup capital is for you. In this startup capital series we will outline top funding opportunities to consider, what you can expect from pursuing each type of capital and much more.

In this blog, let’s take a look at small business administration loans or SBA loans.

What is an SBA Loan?

The US Small Business Administration has been helping startups and small businesses start, grow, expand and recover since 1953 and one of their core services is the SBA loan program. The SBA doesn’t actually loan entrepreneurs funds, but what they do is guarantee loans issued by participating lenders, like traditional household name banking institutions such as Wells Fargo, Chase Bank, Bank of America etc.

What is the meaning of a guaranteed loan you might ask? When a lender issues a loan to a business owner, the SBA acts as a third party in the loan process and should the lendee go into default (i.e. they can’t pay the loan back) the SBA will take on that liability and cover a portion of the debt thereby reducing the risk to the participating lender and ultimately increasing lending activity to smaller businesses. 

The SBA loan program sounds pretty great and it truly is, so let’s take a look at the SBA loan options available. In summary, there are three core programs available namely 7(a) loans, 504 loans and specialty loans.* Let’s look at these in a little more detail. 

SBA 7(a) Loans

The most common SBA loan is the 7(a) loan likely because it can be used for a variety of purposes including acquiring or starting a business, but also buying or renovating commercial real estate, acquiring assets like machinery and FF&E, expanding working capital and even refinancing debt.

A 7(a) loan can be used to receive up to $5 million and the SBA will guarantee a maximum of 85% of a loan up to $150,000 and 75% for loans greater than that.

SBA 504 Loans

In addition to 7(a) loans, the SBA has a 504 loan program offered through local certified development companies like the Colorado Lending Source or the Colorado Enterprise Fund. A 504 loan is a long term, fixed rate loan that can only be used for acquiring or renovating capital assets such as land, buildings and equipment.  

A 504 loan can be acquired for up to $350,000 and the SBA will guarantee a maximum of 85% of a loan up to $150,000 and 75% for loans greater than that. Up to 50% of a capital asset project can be financed through a lender with a 504 loan, and the SBA will guarantee up to 40% of that amount.

Specialty Loan Programs

In addition to the more common 7(a) and 504 loan programs, there a few other lending opportunities the SBA will guarantee which include:

  • SBA Microloans: SBA loans ranging up to $50,000  offered through non profit entities like Accion.
  • SBA Express Loans: This SBA loan features an accelerated turnaround time of 36 hours, but caps the loan amount at $350,000. The average loan processing time for a non express loan is 7 to 10 business days. 
  • SBA Export Loans: The SBA has a variety of export business based programming that can provide SBA guaranteed financing for loans and lines of credit up to $500,000 or working capital for businesses that generate export sales.

Sign Me Up!

If you’re thinking these SBA loans sound like a great solution to your startup capital needs then you’re not alone. According to a 2019 press release by the Small Business Administration, SBA loans are in high demand:

In FY19, SBA’s flagship 7(a) loan program made approximately 52,000 7(a) loans totaling $23.17 billion. The 504 loan program had another year of increased performance, with more than 6,000 loans made for a total dollar amount of more than $4.9 billion.

That is an astounding amount of funds being loaned to entrepreneurs across the US. So, if the SBA isn’t actually doing any lending, what banks can you work with to get an SBA loan? The best place to start is with a preferred lender, which is a lending institution that has been pre-approved (e.g. they have the authority) to approve and extend SBA loans.This also means their loan processing time is shorter than non-preferred lenders (we DO like efficiency!).

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Below you can find a handy list of the top 20 preferred SBA lenders as put together by Fundera, but you can also narrow the list of lenders by asking them questions like,”How many SBA loans do you make in a given year?” or, “What is the dollar range of the loans you make?” to ensure the lender is a good fit for your capital requirements.

Top 20 Preferred Lending Institutions

  1. Live Oak Banking Company
  2. Newtek Small Business Finance
  3. Wells Fargo
  4. Byline Bank
  5. Huntington National Bank
  6. Celtic Bank Corporation
  7. JPMorgan Chase
  8. U.S. Bank
  9. KeyBank
  10. Readycap Lending
  11. Justine Petersen Housing and Reinvestment Corporation
  12. Business Center for New Americans
  13. Economic and Community Development Institute
  14. Accion
  15. Finanta
  16. Oregon Association of Minority Entrepreneurs, Credit Corp
  17. Community Ventures Corporation
  18. Renaissance Economic Development Corporation
  19. Rural Enterprise Assistance Project/Center for Rural Affairs
  20. Flagship Enterprise Center

What Do I Need to Get an SBA Loan?

With step one, find a lender, crossed off your list, let’s tackle step two, what to bring to the meeting. Assuming you meet the qualification criteria for an SBA loan – a) you’re a small business based on employee count and b) you have good credit – then you’re ready to get started by gathering information about your small business and financial history.

We suggest using the SBA’s loan application checklist to keep yourself organized because you will need to have a number of documents prepared including:

  • SBA’s borrower information form
  • Statement of your career experience especially as it relates to your business
  • Personal financial statements like a credit report and bank statements
  • Personal income tax returns for the past 3 years
  • Business tax returns for the past 3 years
  • Business certificate or license
  • Business lease
  • Previous loan application history

What Should I Know About an SBA Loan?

One item we’d like to bring to your attention in regards to SBA loans and really all loans, in general, is the potential for a personal guarantee. In an ideal world, we would never sign a personal guarantee on a loan, BUT sometimes beggars can’t be choosers and it is simply necessary to get the financing you need to make things happen. So this brings up two questions:

1) What Is a Personal Guarantee?

Essentially, when you sign a personal guarantee should you default on your loan (i.e. your business can’t pay it back) the bank is now authorized to seize your personal assets to pay for the loan. In other words, you as the business owner, become a co-signer on your business loan. 

2) Do SBA Loans Require a Personal Guarantee?

In so many words, yes, but this is a little tricky to answer, since lending partners, like banks (and not the SBA itself), are actually issuing the SBA loans. So, yes, the SBA does require at least one personal guarantee on their loans. However, the lending partners themselves may require additional guarantees (or not) depending on their particular lending policies. 

Signing a Personal Guarantee on an SBA Loan

All the Models

In addition to the documentation required to apply for an SBA loan, your lender will likely have some questions for you about your business model and how the funds will be used. Since we’re big fans of preparation (can you ever be too prepared?) you might like to refer to an article we wrote about the importance of financial modeling for startups. Because building, analyzing, and continuously updating a financial model will help you answer many of the big questions on your lender’s mind like:

  • How will loan funds be used?
  • What other sources of capital does your business rely on?
  • What are your short and long-term capital requirements and what funding is available to you if your projections fall short?

Making the Best of Your Funding

Getting through the application process for an SBA loan, can feel a little bit like jumping through hoops in a circus ring, so making the best of those funds is crucial to your strategy moving forward. But first you should do a little happy dance for a job well done! Receiving those SBA funds is huge and you should celebrate that win.

Second, remember all the business plans and financial models you prepared and shared with your lender about how you plan to use your funds? Now, you just have to stick to them! This is simpler said than done right?

If you just want someone else to do this for you, our experts in finance and accounting have your back.

If you’re looking for a fabulously cost-effective way to do this, we’d like to recommend two tools we’ve developed just for you – our cash manager and cash model.

These tools will help you manage your business’s funds on an ongoing basis by helping you build a 90-day forecast or a 2-year cash projection. AND we teach you how to use the financial models AND keep them up to date. 

Sign Up to Learn How to Manage Your Business’s Cash Simply >>


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*Last Updated August 2020: The SBA has been known to change their policies and the terms of their SBA loans, so please keep that in mind. We will work to keep this space up to date, but you can always go directly to the source.

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