With a range of loan options, a longer time to repay and smaller down payments, loans backed by the U.S. Small Business Administration (SBA) can be an attractive option for entrepreneurs.
Almost any operating small business that is making a product or providing a service can apply for an SBA loan, said T.J. Hughes, Head of SBA and Program Lending for SunTrust.
“There are very few limitations on what type of business would be able to leverage an SBA loan,” he said.
As does any important financial transaction, however, applying for an SBA loan requires some homework. First, it’s important to understand how an SBA loan works.
Follow The Guardrails
The SBA does not, contrary to what many people think, directly loan money to small businesses. Instead, SBA loans are provided to small businesses through approved lenders. The SBA guarantees the loans and creates guidelines, reducing risk for lenders and making it easier for entrepreneurs to get approved.
“The SBA puts the guardrails in place,” explained Hughes. “But it really depends on the lenders to have the expertise and knowledge to work with the individual borrowers.”
General eligibility requirements for an SBA loan include owning a for-profit business that operates in the U.S. or its territories and having invested equity in that business.
Small businesses can apply for SBA loans ranging from $500 up to $5.5 million. They can then use those funds for most business purposes, from real estate and equipment purchases to ownership transitions to working capital.
Accessing Unique Benefits
SBA-guaranteed loans typically have competitive fees and rates, and some include unique benefits such as counseling and education, flexible overhead requirements and no collateral.
Often, a lender will set different terms for non-SBA loans that are designated for real estate, equipment or working capital, said Hughes. In that case, business owners may need to take out multiple loans with different rates and terms to take advantage of market opportunities in their geographies or industry segments.
An SBA-guaranteed loan, however, enables a small business to borrow a single dollar amount to execute on real estate, equipment and working capital needs with one lending product, said Hughes.
“The SBA allows you to blend those financing needs together and execute on the opportunity in front of them,” he said.
Define Your Mission, Know Your Needs
While there are different types of SBA loans, the best way for a small business to decide which loan to choose is to first define its mission, said Hughes.
“What is your business strategy? What are you looking to accomplish? What are your capital needs?” he asked.
To prepare for an SBA loan application, it’s also helpful for a business owner to have at least the last two to three years of the concern’s financial statements on hand as a starting point for a productive conversation, Hughes advised.
Beyond that point, according to Hughes, it is usually best to seek advice from a banker with SBA expertise.
“Early on in the conversation there are so many different paths that you can go,” he said. “Once you chart a path, that’s going to really dictate a lot of the documentation needs.”
Be Transparent At The Front End
Finding a lender often means interviewing several bankers to find the institution and the individual able to provide the best help, said Hughes.
“As a business owner, you typically have a strong vision for where you want to go,” he said. “And you’re looking for somebody who’s going to be able to partner with you along that journey.”
Small business owners should specifically search for an SBA preferred lender to ensure that they find a financial institution with the right expertise, he advised.
It’s also important for small business owners to be open and honest with prospective lenders about any business issues that could be relevant to obtaining a loan.
Even if your business faced challenges at some point, sharing information early in the loan process will give a lender more flexibility to find a good solution, said Hughes. The alternative can be having to start over if you didn’t disclose something.
“Being very transparent in the front end will make the process far more efficient,” he said.
Build A Team
If they win approval, small business owners should also enlist teams to help them understand their loan agreements. Such a team should include the banker who provides the loan, legal counsel and an accountant, Hughes said.
“It’s important to think in terms of having a team, versus being reliant on any one individual person,” he explained.
SBA loans can provide small businesses with a range of loan options, competitive rates and terms, and guardrails for the loan process. The best way to leverage these unique benefits, said Hughes, is to find trusted partners to show you the rules of the road.