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How to apply for an SBA loan? SBA loans are synonymous with support for small businesses in America. What type of assistance can they provide? What is it really like getting an SBA loan for your startup business?

What Is The SBA?

The US Small Business Administration was formed almost 70 years ago in 1953. The official mission of the SBA according to Wikipedia is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters”.

It will interest you to know that the SBA is more than just a source of funds for small businesses in the United States. Though if you are seeking financial help, then this can be a path that may offer what you need.

The Cons & Criticism Of The SBA And SBA Loans

The SBA may have gone seriously underutilized by many entrepreneurs and small businesses in the past. The recent PPP loan program may be changing that and is increasing awareness of the SBA, and the link may have to it. It may begin with a necessity for many, but it could prove sticky for those that have good experiences.

One of the top reasons many entrepreneurs may have foregone the help the SBA can offer in the past is simply not deeming it relevant to them.

Often without investigating it for themselves. It is an old, government agency. Often not the type of organization young disruptive startups think about associating themselves with.

In the past, during bull markets when credit has been freely available, lenders may have often found it easier to place borrowers in other types of loan programs they know better, required less paperwork, and paid them more. Often if only because they weren’t familiar with SBA loans themselves.

During the interruptions of 2020, the SBA moved to the forefront of business support again, thanks to the Paycheck Protection Program funded by government stimulus. There was some controversy and complaints about much of the funding claimed to be slated to help small businesses actually ending up going to large businesses instead.

It’s not clear exactly what those numbers are yet, or who was really influential in those situations. Yet, that shouldn’t take away from the fact that the SBA has been providing valuable and essential help to entrepreneurs and small businesses when they needed it most.

Don’t dismiss them until you’ve actually checked them out for yourself. And, you would want to make the effort to learn how to apply for an SBA loan.

What’s A Small Business: Who Do They Serve?

The SBA has several parameters on which it bases who it focuses on serving. Although this can vary between its programs, initiatives, and over time. So, before you go searching elsewhere it is worth checking for yourself first.

According to its website, generally, the SBA is looking you to:

  • Be a for-profit business of any legal structure
  • Be independently owned and operated
  • Not be nationally dominant in its field
  • Be physically located and operate in the U.S. or its territories

NAICS codes can also play a role. These codes are what you use to file with the IRS for tax purposes and define what type of business you are. There can be different rules for different NAICS codes.

You can check the IRS website for more details on these codes. Sometimes, accommodation businesses are treated differently. In other cases farm, real estate and finance companies may not qualify for certain programs.

What is considered a small business can actually vary greatly by industry. You might be surprised at how big some ‘small businesses’ really are.

Some businesses are measured by their amount of gross revenues. Others by the number of employees they have.

The SBA Has Different Criteria for Assessing Suitable Small Businesses

For example; you can be a house builder, and still be considered a small business with $39.5M in annual revenues. Whereas a mushroom production company may not be eligible for help if they make more than $1M per year.

When it comes to employees, if you are in the gold or gas business, you are allowed to have up to 1,500 employees, and still, be considered a ‘small’ business. Whereas farm produce and children’s clothing companies may no longer qualify for help after they reach 100 employees.

There is also a different set of rules for banking and credit companies, which allow them to have up to $600M in assets and still qualify for small business programs.

Check out the Electronic Code Of Federal Regulations to see which maximum size requirements apply to your specific business. And, find out about the procedures for how to apply for an SBA loan.

What Does The SBA Do?

According to a blog post by the SBA’s former deputy administrator, the work of the organization can be categorized as the ‘3 C’s’.

Before we get into the capital side and SBA loans, these other two focuses shouldn’t be ignored either.

Contracts, in particular, can be relevant for startup businesses with big aspirations. The SBA can help facilitate contracts with the government. It may be especially worth checking out the 8(a) program.

This Business Development Program is designed to help entrepreneurs who are ‘socially disadvantaged’. This is based on race and gender. That may not be politically correct, but that is the way the SBA policies are written.

Minorities and women may want to explore this program. 8a companies are supposed to be awarded 5% of the US government’s $99B in contracts each year.

The other big thing that the SBA does is provide advice through SCORE mentors. These are volunteer counselors for small business owners and entrepreneurs trying to start their own businesses.

These advisors are supposed to be forbidden from recommending their own products and services during their work, but all have their own personal preferences and opinions when it comes to recommendations for software, marketing, etc. It’s free.

Sometimes you get what you pay for. Yet, it can provide someone to keep pushing you and holding you accountable for making progress if you can’t find another advisor.

SBA Loans

The SBA has several major loan program initiatives that we cover below. Note, that the SBA is not a direct lender.

Like the VA and USDA, or even quasi-federal organizations like Fannie Mae and Freddie Mac, the SBA mostly guarantees loans made by third-party lenders. They may also provide funding to these third-party entities, which are then distributed through front-line originators and licensed lenders.

The SBA can guarantee up to 90% of some financial programs. For lenders, this means their risk in making these loans is very small.

If borrowers default on this federally backed loan (which is something you never want to do), then the government pays them back 9 out of every 10 cents they passed on to you.

They can’t really lose. In turn, this may sometimes result in easier loan approvals or lower interest rates. Like the 1% on PPP loans. So, take the time to find out all the relevant information about how to apply for an SBA loan.

SBA 7(a) Loans

SBA 7a loans are the primary umbrella loan program for qualifying small businesses. This covers both fixed repayment loans and lines of credit.

Generally, these loans go up to $5M, with up to 85% of that guaranteed by the SBA. Approvals may be gained in less than 10 days.

These loans can even be used for international and export businesses.

While requirements may vary by lender, you can expect to have to provide:

  • SBA loan application form 1919
  • Personal history
  • Personal financial statement
  • Business financial statements and forecasts
  • P&L statements
  • Business licenses
  • 3 years of personal and business tax returns
  • Resumes of the principals of the company
  • Copies of leases

Loans may or may not require to be secured and collateralized by personal or business real estate assets.

SBA 504 Loans

The SBA’s 504 loans are designed for building or acquiring assets that will encourage business growth and jobs. This is designed to be long-term financing with fixed rates, with loan amounts for up to $5M.

To qualify you must:

  • Be a US-based for-profit company
  • Have a net income of less than $5M after taxes
  • Have a net worth of under $15M
  • Must have a feasible business plan
  • Have qualified management expertise

SBA Microloans

This isn’t your average ‘micro’ loan. The SBA’s microloan program provides loans of up to $50k. These are provided through local nonprofit community lenders.

These loans are ideal for new business startups.

They can also be used to re-open, rebuild or ‘enhance’ a business.

With the exception of buying real estate or paying off existing venture debts, these funds can be used for just about anything else. Keep these points in mind when gathering information about how to apply for an SBA loan.

EIDL

Economic Injury Disaster Loans are a very interesting form of financing that has no doubt been seriously underutilized by hurting small businesses and entrepreneurs.

These loans can provide up to $2M, at rates as low as 2.75% for up to 30 years. No business owner or entrepreneur should consider giving up or making seriously detrimental decisions of significant layoffs until they explored this avenue of financial assistance.

PPP Loans

The most recent addition to the lineup of SBA guaranteed loans is the Paycheck Protection Program.

SBA Investment Capital

One of the least known services of the SBA is its investment capital.

While the SBA says that these funds often go to more mature small businesses with cash flow, there can be plenty of flexibility and very few hard and fast rules.

The SBA partners with private investors. Together they fund intermediary SBICs. The SBA puts in $2 for every $1 of private capital.

In turn the SBICs fund businesses with this capital according to their own investment criteria and preferences. The SBA even provides a list of their licensed SBICs along with contact information and whether it is likely or not that entity is currently making investments.

These funds can be up to $10M. Those rates can be steep at up 16%.

There are three ways these funds are offered:

  • Debt, in the form of a pure loan
  • Equity funding in exchange for a share of ownership
  • A combination of both equity and debt funding

Keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

How Would You Apply for an SBA Loan

Understand the procedures for how to apply for an SBA loan before you make the decision.

Research The Qualifications

Dig into the different qualifications of programs that may meet your needs and find the best matches, with the highest likelihood of success.

Choose A Lender Or Intermediary

Find a credible and efficient lender who you believe actively wants to make this loan, and who also meets their criteria for this loan or investment.

Complete The Loan Application

Fill out the loan application in full online.

Send Follow Up Documents

Send or upload any additional documents they request promptly. For example, tax returns, financial statements, and ID.

Wait, Wait, Wait

Be ready to wait, and be at peace with not knowing what is happening or have an official timeline. You may go days or weeks without updates and then wake up to lots of dollars in your bank account and an email congratulating you on your approval.

Alternatives To The SBA

While the SBA is certainly worth exploring and learning about, don’t be discouraged if you are not a fit for their programs. There are many other sources of capital for your startup business.

For equity capital this includes:

  • Friends and family
  • Angel investors
  • Venture capital firms
  • Private equity funds
  • Strategic units of big corporations

Additionally, there are different types of business grants and competitions for early-stage startups. As well as working capital, merchant advance, factoring loans, and business lines of credit available from a wide variety of lenders.

This is in addition to industry-specific and asset-based funding, like mortgage loans and equipment financing. But, learning how to apply for an SBA loan could prove to be a huge positive for your startup.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.

In the video below I cover How To Apply For An SBA Loan in detail.

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FULL TRANSCRIPTION OF THIS VIDEO:

Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about how to apply for an SBA Loan. Before we get started, make sure that you hit that Subscribe button, and this way, you will never miss out on any of the videos that we roll out every week.

The SBA is obviously synonymous with support for small businesses. In today’s video, we’re definitely going to be covering how to do the application, how to make it happen, and how to secure those funds that would help your business grow. So without further ado, let’s get into it.

What is the SBA? The U.S. Small Business Administration started almost 70 years ago, back in 1953, in order to help small businesses either on starting out or on helping them during times of crisis. And we saw that, for example, how the SBA Loans kicked in when we had the pandemic, the Coronavirus. Again, it’s the entity that the government is using in order to foster innovation, in order to foster the new jobs that are being created, and a great source for small businesses to obtain access to financing.

In terms of the cons and criticisms on the SBA, up until recently, there weren’t a lot of entrepreneurs taking advantage of these programs because of the nature of them. Typically, there was a lot of red tape. It was very difficult to gain access to that money. The applications were a bit of a burden, and entrepreneurs actually preferred going to the more traditional sources and investors that wouldn’t put those hurdles that come with taking money from the government. 

That was up until recently when the Coronavirus hit when you saw the Paycheck Protection Program, the PPP Loans that really helped entrepreneurs and also the owners of small businesses in order to maintain their business during those difficult times. This has opened the mindset and also the way that people are now perceiving the SBA Loans as a potential good method in order to get those companies up and running.

So, what’s a small business anyway? And who are those small businesses that qualify in order to get the SBA involved? According to the SBA, in order to qualify, the small business needs to be the following:

  • Be a full profit business of any legal structure.
  • Be independently owned and operated.
  • Not be nationally dominant in its field.
  • Be physically located and operate in the U.S. or its territories.

Obviously, what is considered a small business could vary per industry. One thing that is critical that the SBA is going to require is that your business is in a position or has a corporate structure that is paying those taxes to the IRS. Some of those things are going to be critical, and without that, it’s going to be impossible for you to apply to those programs that they have for loans.

What does the SBA do? According to certain blog posts that the organization has published by some of the leadership, the SBA has three main things:

  • Capital
  • Contracts
  • Counseling

There’s also mentorship, especially when we’re talking about those contracts that the SBA is going to connect you with, and that is with the score program where there are mentors that are helping some of those small business owners in order to understand what is the best path forward and how they should be executing in order to build their business.

When it comes to the actual loans, the first one is the SBA 7(a) loan. With this loan, what you want to go for is up to $5 million, and some of the requirements are going to be the following:

  • SBA Loan Application Form 1919
  • Personal history
  • Personal financial statement
  • Business financial statement and forecast
  • P and L Statements
  • Business licenses
  • Three years of personal and business tax returns
  • Resumes of the principles of the company
  • Copies of leases

Then you have the SBA 504 Loans. Those are essentially for acquiring assets, and they can also go up to $5 million. Some of the requirements are going to be the following:

  • Be a U.S.-based for-profit company.
  • Have a net income of less than $5 million after taxes.
  • Have a net worth of under $50 million.
  • Must have a feasible business plan.
  • Have qualified management expertise.

Then you have the SBA Microloans. Those are the typical ones that are fantastic for startup companies. They’re much easier to actually apply for and much easier to get. So if you’re starting your business, maybe a hyper-growth company, a company from scratch, and you don’t know how to start or perhaps some money that you need to start the operation, to pay for the website, the servers, or even the graphic design, or perhaps even the incorporation of certain parts of the business or documentation with your lawyers. This is a great program that you could use.

Then you have the Economic Disaster Loans. Those are some of the ones that you saw during the pandemic, during the Coronavirus, and they can go up to $2 million.

Then you have the SBA Investment Capital. Now, this is less known. This is where they partner up with some institutions that are deploying the capital, and some of the ways in which you have to keep in mind that this money is deployed are the following:

  • Debt in the form of a Pureloan
  • Equity funding in exchange for a share of ownership
  • A combination of both equity and debt funding

So how would you start the application? Where do you go? How does this work? Some of the step-by-step that you need to take into consideration to make it happen from Point A to Point C are the following:

  • Research the qualifications
  • Choose a lender or intermediary
  • Complete the loan application
  • Send follow-up documents
  • Wait until you get a response

There are also alternatives to the SBA and to the loans and some of those financing structures that we have been discussing. Some of the most common are the following:

  • Friends and family
  • Angel investors
  • Venture capital firms
  • Private equity funds
  • Strategic units of big corporations

Additionally, you also have business grants, competitions from universities, accelerators, and incubator programs that can help. That could be a great alternative if you’re starting up. 

So, hit a Like on this video. Leave a comment. Let me know what you’re up to, and then also Subscribe to the channel so that you don’t miss out on all the videos that we’re rolling out every week. And if you’re raising money, send me an email at alejandro@pantheraadvisors.com. I would love to help you out with your capital-raising efforts. Thank you so much for watching.

 

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