• Sba Financing Guide For Entrepreneurs Business
• Sba Financing Guide For Entrepreneurs Students
• Sba Financing Guide For Entrepreneurs Association
• Sba Financing Guide For Entrepreneurship

Small Business Administration (SBA) can be a huge financial resource for entrepreneurs unable to secure financing through other means. Last year alone, the agency's two main lending programs backed nearly $29 billion in loans supporting 600,000 jobs. Too often, however, lack of awareness prevents small businesses. Sba Loan Providers Page 4 Small Business News While it might sound simple in theory to stop by your bank or credit union and fill out a small business loan application the reality is that over four in five small business owners are denied financing from banks big and small by 2020 estimates. Small business loan definition. With some of the. Small businesses account for more than 99% of all U.S. Firms and are a crucial part of the American economy. And in 2020, most small businesses were hit hard by the ongoing effects of the Covid-19. The SBA is a federal agency that helps small businesses get loans. I doesn't issue loans itself, but it works with lenders to overcome obstacles to business lending, such as guaranteeing loans.

For most owners of smaller businesses, expanding their business, buying new equipment or opening a second location is simply a pipe dream without access to capital.

Without access to enough money, it's difficult to continuously grow a business. If you've found yourself in a growth rut and are in need of capital, it might be time to apply for an SBA loan.

Before you jump feet first into the process though, it's important to know what an SBA loan is, how to qualify, and who is eligible.

Related: The 7 Different Loans You Can Get as a Business Owner

What is an SBA Loan?

An SBA Loan is a long-term, low-interest loan given to a small business through the Small Business Administration. The SBA (a part of the federal government) works with trusted lending partners to offer loans to small businesses.

The SBA doesn't lend money directly to small-business owners, but it does guarantee a portion of the loan, lowering the risk for the lending partners.

Depending on what you want to use your SBA Loan for and how much capital you need, there are a few types of SBA Loans you should know about.

Related: 4 Mistakes to Avoid When Applying for a Bank Loan

1. SBA 7(a) Loans

An SBA 7(a) loan is by far the most common SBA Loan. This type of SBA Loan can be for up to $5 million and can be used for working capital, refinancing debt, or buying another business, real estate, or equipment.

2. CDC / SBA 504 Loans

The CDC / SBA 504 Loan combines a loan from a non-profit Community Development Corporation or CDC with a loan from a bank lender to create a long-term, low-interest loan. The CDC / SBA 504 Loan can only be used to purchase fixed assets such as commercial real estate or heavy equipment.

3. SBA Microloans

SBA Microloans are small loans, usually only up to $50,000. They are typically offered for a shorter term and have a slightly higher interest rate than other SBA Loan types. Microloans are financed by the SBA through non-profit, community organizations.

Sba Financing Guide For Entrepreneurs Business

There are many more types of SBA Loans but these are the most common.

Related: 5 Main Reasons Banks Turn Down Small-Business Owners for Loans

Who can get an SBA loan?

Who is eligible for an SBA Loan varies with the type of loan you're applying for. In general, though, a business must meet the following requirements to be eligible for an SBA Loan:

• Be a registered business.
• Be located and operate in the United States.
• The business owner must have invested their time or money into the business.
• The business must have exhausted all other financing options.

Eligibility requirements vary depending on what type of loan you're looking for, but in general, the SBA is looking to assess what the business does to make money, where it operates, and the owner's character.

The SBA wants to make sure a business will be able to repay the loan, but even a business with bad credit may be eligible for startup funding.

In general, the SBA looks for two-plus years in business, a 620 or higher credit score and $100,000 or more in annual revenue.

Related: When Seeking an SBA Loan, Remember the 5 C's

How does an SBA loan work?

One of the most common misconceptions about an SBA loan is that the money comes from the SBA. Instead, the SBA works with trusted lending partners and guarantees a portion of the loan.

Because a portion of the loan is guaranteed by the federal government, it allows the lending partners to feel safe to offer low-interest, long-term loans with minimal risk.

When a small business applies for an SBA loan, the borrower must be approved by not only the SBA but also by the intermediary lender. Because of this double-approval process, receiving approval and funding for an SBA Loan is often a longer process with more paperwork when compared to traditional loans.

The pros of an SBA loan include low down-payments, long payment terms, and reasonable interest rates. The interest rates for SBA loans typically start as low as 6.5 percent and can be paid off over 5-25 year terms.

When it comes to growing your business affordably, an SBA loan is truly the best way to go. It's not an easy approval process, but there are ways to improve your chances.

Related: We're Bringing Unsexy Back to Entrepreneurship

How can you improve your chance of approval for an SBA loan?

As most small-business owners quickly learn, receiving an SBA Loan is no easy feat. There are a lot of eligibility requirements and paperwork to work your way through.

Before you apply, make sure you have all of the necessary documentation, build-up your credit scores, develop a strong business plan, and provide collateral.

Gather Necessary Documents

When you apply for an SBA Loan, you'll need to provide the following documents:

• Driver's license
• Voided business check
• Bank statements
• Balance sheet
• Profit &; loss statements
• Business tax returns
• Personal tax returns
• Business plan
• Business debt schedule

Build Credit

You might be surprised to learn that another important factor when applying for an SBA Loan is your personal credit score. Checking and working to improve your credit score will make it easier to receive approval for an SBA Loan.

You can improve your credit score by moderating your credit utilization, paying off credit cards, and paying bills on time.

In addition to checking your personal credit score, the SBA or secondary lender may want to check your business credit score.

Develop a Business Plan

Before you're approved for an SBA Loan, the lender will want to see your business plan. A business plan shows the lender how you plan to use the money and increase profits. Remember: the lender wants to make sure you'll be able to repay the loan.

Your business plan might also detail your product or service, management team, analysis of the industry, an operations plan, a sales and marketing strategy, and analysis of the businesses weaknesses and strengths.

Provide Collateral

Before qualifying for an SBA Loan, you may have to provide collateral to back the loan. This means that if you default on repaying the loan or your business fails, the lender can recover their money. Collateral typically includes real estate, equipment, inventory, or another asset that can be sold by the lender.

When it comes to growing a small business, there's no better loan than an SBA Loan. If your business qualifies for an SBA Loan, you're in for a low-interest, long-term boost to your small business.

SBA 504 Loan Requirements for Borrowers, Projects, Lenders, and More

While they are not as stringent as some other types of loans, you will find a wide range of eligibility requirements when it comes to the 504 loan program. These apply to you (the borrower), but also to lenders, and even the project you’re about to embark on.

What Are the Eligibility Requirements to Get an SBA 504 Loan?

When it comes to business eligibility, you’ll find that the requirements are pretty easy to meet. However, it should be noted that the program is actually designed for qualifying businesses that cannot obtain reasonable terms on financing without the help of the SBA. If you can obtain conventional financing with low interest and reasonable terms without the SBA’s help, this program may not be for you. Other requirements include the following:

• Your business must be worth $15 million or less.

• You must operate as a for-profit entity (nonprofits are not eligible).

• You must meet SBA size requirements that pertain to small businesses. Note that size requirements vary by industry, so there is no one-size-fits-all answer here. You can find the current business size requirements set forth by the SBA here.

• Your average net income for the preceding two years prior to applying for the 504 program must be $5 million or less after income taxes.

• You cannot be engaged in passive activities.

• You cannot be engaged in speculative activities.

• You must meet job creation requirements, or, alternatively, meet community development or public policy goals.

• You cannot purchase and then hold real estate. Real estate purchased with the loan must be utilized for business needs.

• You cannot be engaged in any form of lending.

• You cannot have defaulted on a federal loan previously.

• You cannot be involved in any sort of political activity or lobbying activity.

• You cannot be involved in any form of gambling, nor can you operate a casino.

• The loan must be repayable from cash flow generated by the project in question.

• You must be able to provide the SBA with personal histories for all principals in your company.

• You must have a business plan, and it must be deemed feasible.

• You must plan to occupy at least 51% of the building if it is an existing structure, and 61% of the building if it is new construction.

Note that many businesses that qualify for 7(a) financing will also qualify for 504 financing, but not all, due to the more stringent requirements.

Sba Financing Guide For Entrepreneurs Students

What Are Lender Requirements with an SBA 504 Loan?

There are few requirements when it comes to lenders involved in the 504 loan program. However, they are relatively stringent, and are as follows:

• Meet minimum lending activity level requirements (actively lend to customers)

• Have a board of directors with at least nine directors who vote

• Have full-time, professional management

• Have full-time, professional staff

• Be an SBA-approved private sector lender

• Work with CDCs

What Are the Project Requirements with an SBA 504 Loan?

We have touched on most of the project requirements previously within this guide, but we’ll cover a quick refresher below.

• The project must meet job creation requirements. If not, it must meet public policy goals or community development goals without causing the CDC to miss its overall target job creation rate.

• Meet usage requirements.

• When applicable, meet “green” requirements.

What Are the Requirements for Going Green with a 504 Loan?

Interested in going green using a 504 loan? There are a few qualifications that your business and your project will need to meet first. Note that your project may only need to meet one of these qualifications. These are as follows:

• Project goal is to design/build LEED certified buildings

• Project goal is to reduce energy consumption by 10% or more

• Project goal is to create renewable energy

• Project goal is to incorporate sustainable design element

Ongoing Covenants: Post-Closing Requirements for SBA 504 Loan Borrowers

We’ve just taken a close look at the requirements to obtain an SBA 504 loan. Complying with these is the only way to obtain the loan in the first place. However, once you have been issued a loan, there are additional requirements – restrictions and covenants – that must be upheld. Failing to do so can result in serious repercussions.

Sba Financing Guide For Entrepreneurs Association

• Ownership Changes: Any change in ownership of the business can only be made with the approval of the SBA first. This can be limiting for business owners who want to sell the company but do not have a qualifying buyer. It can also be problematic for business owners thinking about business succession if the 504 loan will not be paid off by the time the current owner wants to step down. Note that this includes “control” of the business, and does not refer only to actual ownership. The SBA’s approval must also be in written form.

• Taxes: The SBA takes the matter of taxation very seriously, as well as your obligation to uphold your tax liabilities (as the owner/borrower). Each May and October, you must provide evidence that your real estate taxes have been paid, assuming the loan is secured by real estate. If real estate is not part of the loan (equipment/machinery only), then this does not apply.

Sba Financing Guide For Entrepreneurship

• Hazard Insurance: Every year, the SBA requires that 504 loan holders provide evidence of hazard insurance on the business property. Note that this insurance must be equal to the remaining balance of the SBA loan. The bad news is that this can be expensive up front when the loan is first originated. However, it does mean that insurance costs will drop over time as the loan principal is paid down.

• Proof of Financial Responsibility: In addition to showing proof that you are paying your real estate taxes, the SBA also wants proof that you are upholding your other financial responsibilities. For instance, you will need to have your corporate tax return compiled and sent to the SBA regularly. The same is true for your annual financial statements (prepared by an actual accounting professional).

• Additional Encumbrances: Thinking about using the collateral for the 504 loan to secure additional financing? While that might be possible, you cannot do it without first checking with the SBA. You must get written permission from the Small Business Administration before incurring any additional encumbrances on any collateral securing the 504 loan.

• Protecting Your Business: Finally, you will find that the SBA wants to hedge their bets when it comes to the stability of your business. It is not uncommon for the death of a key individual within a business to cause serious financial problems. The SBA will require that all key individuals within your business have life insurance to offset this possibility.

As a note, these are just some of the more common restrictions and covenants, and they only apply to the Small Business Administration. It is entirely possible that there will be others that apply to your situation, and it is also likely that your lender will impose their own restrictions and limitations, such as covenants referring to cash flow coverage and other financial ratios.