Before starting the loan process, it’s crucial to understand how SBA loans work. First, you should note that the Small Business Administration doesn’t directly provide small business loans. Instead, the SBA guarantees a certain portion of the loan. For SBA Express Loans, the SBA will guarantee 50 percent of the loan, but percentages vary for their other loan programming. By guaranteeing the business loan, the SBA lowers the risks for lenders, which encourages them to lend. Lower risk also results in more affordable interest rates for business owners. For instance, SBA Express Loan interest rates are set at a maximum rate between 4.5 to 6.5 percent above prime. The business must operate in the U.S. and be a for-profit enterprise to qualify for the type of loan. In addition, there are other SBA loan qualifications that small business owners must meet, which we’ll detail in this blog post.
How to Apply for an SBA Express Loan:
1. Show that You’ve Invested Time and Money Into Your BusinessThe SBA strives to support entrepreneurs who have invested in their own business ventures. Ultimately, by having skin in the game, you reduce the risk for the lenders as the likelihood of default will be lower. Thus, it would help if you documented every dollar spent and every hour worked. Specifically, we suggest documenting the following information before pursuing an SBA Express Loan:
- The amount of money you invested into your business and its products or services.
- The amount of money invested in your business by other people (business partners, donors, investors, or other outside funding sources)
- How long your company has been operational.
- The number of hours per week that you work at your business
- Equity structures and stakeholders
2. Prove That You’ve Exhausted Other Lending OpportunitiesThe SBA considers itself a last resort option, as they guarantee express loans for businesses that can’t qualify for other financing options. Due to this, you’ll need to provide thorough documentation to the SBA that proves that you’ve been unable to secure a loan through traditional lenders. Therefore, before applying for an SBA Express Loan, apply for traditional options, and detail all declines. Although this will be time-consuming, it will help you increase your chances of qualifying for an SBA loan.
3. Know Your Business Lending C’sWhen evaluating express loan applicants, the SBA uses the “three C’s” of business lending: credit, cash flow, and collateral. This simplified model refers to the most common factors lenders consider when assessing loan applications. To improve your chances of getting approved, review the “three C’s” as they relate to your business. Credit – This refers to your history of taking out loans and paying your debts. Lenders want to see that you make your weekly or monthly payments on time. Check your credit score before applying for an SBA loan to find out if you meet the credit score requirements. Cash flow – You’ll need to calculate your monthly income minus monthly expenses when determining your cash flow. This is a snapshot of your business’s financial health. Again, assess your monthly cash flow before submitting your application. Collateral – Your collateral assets could be used to back your small business loan amount. If you have significant collateral, this can help you get approved if other areas of your business aren’t strong, such as your credit history.
4. Connect with A Partnering SBA LenderTo obtain an SBA loan, you’ll work with an approved partner lender. First, you’ll be required to fill out the business financing lender’s loan application. Usually, the application process and documentation will vary from lender to lender. However, the SBA does offer an online Lender Match tool to help you get started.
How to Find an SBA Approved Lender
- Fill out the required loan forms: You’ll have to provide contact information and briefly describe your business’s industry, operations, and overall strategies.
- Share planned use of funds: Detail how you plan to use the business financing and confirm that it is an approved SBA use of funds. For example, if you’re seeking an Export Express Loan, you must operate in the export market and use the financing for those expenses.
- I have written a business plan
- I have financial projections
- I’m generating revenue
- I have fixed assets to put forth as collateral
- I am a Veteran