What Are SBA Loans?
The Small Business Administration (SBA) supports American small business by providing increased access to affordable funding. The SBA encourages traditional lenders like banks and credit unions to provide loans with favorable rates and repayment terms through SBA lending programs.
With some emergency exceptions, the SBA doesn’t loan directly to small business owners. They support lenders by guaranteeing a portion of loan, which removes some of the risk to the lender. The SBA’s loan programs are meant to encourage people of all backgrounds to embark on the American Dream.
An SBA Loan is traditional debt-based financing with advantages for small business owners. These loans provide up to $5 million in small business funding, which can be used for starting a new business or franchise, purchasing an existing business, expanding operations, buying equipment, purchasing commercial real estate, or acting as working capital. Though these loans are approved and funded through individual banks, the SBA guarantees 50 to 90 percent of the loan if it goes into default, which is why lenders are willing to offer favorable terms and conditions to small business owners.
There are a number of SBA loan programs, but Guidant specializes in three types.
SBA Loan interest rates are based on the daily prime rate (set by the Federal Reserve) plus the lender’s spread. SBA Loans normally have a variable rate, which means the interest rate can fluctuate over time. Some lenders might opt for a fixed rate, which means your interest rate won’t change over the lifetime of the loan. Some lenders may even do a fixed rate for a portion of the loan term – for example, a 10-year loan could have a fixed rate for three and a variable rate for seven years.
All SBA loan programs require you to make a down payment. Though the requirements range from about 10 to 30 percent of the principal, the inability to make a large enough down payment can disqualify you from being approved. Fortunately, you can use other forms of funding to cover some or all your SBA loan down payment – including 401(k) Business Financing, also known as Rollovers for Business Startups (ROBS).
A repayment schedule, also known as an amortization schedule, is included in your SBA loan terms. It’s possible to save money on interest payments if you can pay the loan back over a shorter period. However, your monthly payments could be more manageable over a longer time period. Most SBA Loans are amortized over 10 years, with no prepayment penalty for terms under 15 years.
Most SBA lenders require business owners to sign a personal guarantee to be approved for a loan – which is common with debt-based financing. This guarantee is an agreement to use personal assets to cover the loan if the business can’t pay it back. That means if your business fails while the loan is still being repaid, you and other owner become personally responsible for the remaining loan amount. Personal guarantees are binding regardless of your entity type.
Closing costs and fees for SBA Loans vary depending on the type of SBA Loan you use. With 7(a) loans, Guidant usually estimates about five percent of the project total as the closing cost. However, your costs could be higher or lower depending on your lender and the type of project.
The 5 C’s of SBA Loan Eligibility
There are five primary elements that lenders consider in SBA Loan applications. These “five C’s” can help you understand if you’re a qualified candidate for an SBA Loan.
It’s key to be able to cover the down payment of an SBA Loan. Lenders don’t over 100 percent of your project cost, so they feel reassured knowing that you have a personal stake in the success of your business. The amount of down payment you’ll need depends on your business and the type of SBA Loan you’re applying for.
But if you can’t cover a down payment out-of-pocket, you aren’t out of luck. SBA Loans can be combined with other forms of funding, like 401(k) Business Financing or unsecured loans.
Your credit score and credit history play a role in your approval for SBA lending. Most lenders look at your personal and business FICO score. A 700+ personal score and 160 business score are typically the minimum requirements for SBA Loan approval. Credit events, like a recent bankruptcy, can have a negative impact on your application.
Capacity means how your business can generate income (or cash flow) to repay your SBA Loan. You and your spouse’s income, and the current/anticipated income from your business all play into the lender’s confidence about you making your monthly payments. If you’re funding a new business, lenders put more weight on your outside income sources. If you’re purchasing an existing business, they’ll look at the business’s tax returns and recent financials.
Lenders look at your personal and business character when evaluating your strength as a borrower. Your business experience is a factor for lenders – while you don’t need experience in the industry of the business you’re funding, it helps. You’ll provide information about events in your personal history, like child support payments, criminal convictions, and recent arrests.
Your personal property may be used as collateral to secure your loan. For example, the bank may take a lien against your home to use as security if the loan goes into default. Unlike the other eligibility requirements, it’s possible you might not be denied a loan if you don’t have enough collateral to secure it — it can depend on how you met the other requirements.
You don’t have to rank perfectly for each of the five C’s to get approved for a loan. All five elements are indicators of your attractiveness to lenders. They’re not considered individually in a vacuum – all five C’s play together when lenders are looking at you as a prospective borrower.
How Do SBA Loans Work?
There’s more than one type of SBA Loan, but the application process is similar for the three loan types that Guidant supports: SBA 7(a) Loans, SBA Working Capital Loans, and SBA Express Loans. Our expertise helps you through the SBA Loan application process – which means faster loan approval, more lender options, and less back-and-forth.
Pick Your Business or Franchise
Before beginning the SBA loan application process, you’ll need to identify your small business project. Whether you’re launching a startup, opening a franchise, buying an existing business, or expanding your current business, having a clear picture of your goal helps guide you along the rest of the application process. From knowing the amount of funding you need to writing your business plan, all the crucial elements of your application package will be focused around your project. You won’t be approved for SBA funding without providing specific details about your business.
Determine Your Financing Needs
After you know the type of business you’re looking to fund, determine how much small business financing you need. By creating detailed financial projections that include startup costs, you can understand how much funding you need and even areas where you can potentially save money.
Find a Lender
You’ll need to find a lender to fund your SBA loan. That’s where Guidant comes in. We make finding a lender easier on you, thanks to our team of industry experts who will help you fill out a single SBA loan application and make sure your application is attractive to lenders. By only needing to fill out one application, you’ll save significant time and effort.
We’ll take your application out to our extensive lender network. We’ve built industry relationships that make sure you SBA loan application finds the lenders with the best matches for you. Plus, you gain a competitive advantage by having more lender options.
Apply for Your SBA Loan
After you’ve received the offer you like the best, we’ll help you put together your full loan application package. By working with Guidant, you’ll have an experienced hand helping you through this complex process. Our streamlined process makes it much easier to apply, improves your funding chances, and most of the time – doesn’t cost you anything.
In most cases, Guidant doesn’t charge you for our SBA loan services (also known as loan packaging services). We ask for a small deposit at the start of the loan application process, so we know you’re serious about getting your SBA loan. If your loan is over $200,000 or you also use 401(k) Business Financing, we return your deposit as soon as your loan closes – or in the rare situation where we can’t find a lender for you.
Underwrite Your SBA Loan
You’ll work with your lender to underwrite your SBA loan. During underwriting, the lender reviews the information in your application, pulls your credit, and determines your strength as a borrower by analyzing the likely risks and benefits of lending you money.
If you’re working with an SBA Preferred Lending Partner (PLP), the lender will internally review and potentially approve the loan. If you’re working with a lender that doesn’t have PLP status, after your application is passed through internal underwriting, your info will be sent to the SBA for additional review. During all of this, Guidant works as your liaison with the lender – we keep your underwriting process moving forward as quickly as possible.
Finally, once your SBA Loan has been approved in the underwriting process, it’s time to close! You’ll receive a closing checklist. You’re the primary driver of the closing checklist – so you can move as quickly as you want. As soon as you provide everything on the checklist, your loan can fund.