What Your Lender Wants You to Know about Applying for an SBA Guaranteed Loan

Small business owners and entrepreneurs looking to start or grow their business often turn to the SBA to help them in obtaining needed capital. The SBA through its loan guaranty program is one method for a small business to obtain capital. Other avenues are the small business owner’s savings, traditional business loans, and funds from family, friends and other investors. (Financing a business through credit card use is discouraged because of the high interest rates.) When traditional business loans under reasonable terms are not available, the SBA can help eligible small businesses obtain loans from participating SBA lenders.  The SBA loan guaranty represents the portion of the loan that the SBA will repay to the lender if you default on your loan payments.

SBA loan programs are generally intended to encourage longer term small business financing with maturities available up to 25 years.  The term of the loan will vary depending on the purpose of the loan, the useful life of assets financed and the borrower’s ability to repay the loan.  SBA also guarantees short term loans to help small businesses in meeting their short term working capital needs.  Most SBA loans are repaid with monthly payments of principal and interest.  The SBA establishes a maximum interest rate that can be charged on an SBA guaranteed loan but the specific interest rate and whether the rate is fixed or floating is negotiated between the lender and the small business owner.  Balloon payments are not allowed on any SBA 7(a) loan and lenders may not charge a prepayment penalty but SBA will charge a prepayment fee if a loan with a maturity of 15 years or more is prepaid within the first three years.

SBA does expect every loan to be fully secured but the SBA will not decline to guaranty a loan if the only unfavorable factor is insufficient collateral, provided that all available collateral in offered.  Personal guaranties are required from all of the principal owners of the business and liens on personal assets of the principals may be required.

There are several things that you can do to increase your chances of obtaining a loan from your local lending institution whether or not your loan is guaranteed by the SBA. You will need to have a business plan which describes your business along with your skills and experience. Include how you will market your business and detailed financial information showing how you will repay the loan.  Having a comprehensive business plan is necessary for your lender to analyze and make a decision about your loan application.  If you need help writing your business plan, SBA has a nationwide network of resource partners that can help you at every stage of starting, growing and helping your business succeed and most of these consulting services are provided to you at no cost.  SBA resource partners in Eastern Missouri include St. Louis SCORE and Mid-Missouri SCORE, Missouri Small Business & Technology Development Centers, Grace Hill Women’s Business Center, and the Veterans Business Resource Center. Contact information can be found on the St. Louis District Office homepage.

A business plan will help you answer your lending institution’s questions about your business.  Some of the questions that you should be prepared to answer include:
     • Why are you applying for this loan?
     • Who will be managing the business and what is their experience?
     • What advantage does your business have over your competitors?
     • How will the loan proceeds be used?
     • What are your other sources of capital and what are those repayments terms?
     • How much money do you need to withdraw from the business for personal living expenses?
     • What contingency plans do you have and what funding is available to you if projections fall short?

Before you meet with your lending institution, you will need to gather some basic information to help your lender consider your loan application.  The items that you should be prepared to share with your lender include:
     • Personal Background: Either as part of the loan application or as a separate document, you will probably be asked to provide some personal    background information, including previous addresses, names used, criminal record, educational background, etc.
     • Resumes: Some lenders require evidence of management or business experience, particularly for loans that are intended to be used to start a new business.
     • Business Plan: All loan programs require a sound business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow and a balance sheet.
     • Personal Credit Report: Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. It’s critical you try to clear these up before beginning the application process.
     • Business Credit Report: If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.
     • Income Tax Returns: Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.
     • Financial Statements: Many loan programs require owners with more than a 20 percent stake in your business to submit signed personal financial statements. You may also be required to provide projected financial statements either as part of, or separate from, your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individually.
     • Bank Statements: Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.
     • Collateral: Collateral requirements vary greatly. Some loan programs do not require collateral. Loans involving higher risk factors for default require    substantial collateral. Strong business plans and financial statements can help you avoid putting up collateral. In any case, it is a good idea to prepare a collateral document that describes value of personal or business property that will be used to secure a loan.
     • Legal Documents: Depending on a loan’s specific requirements, your lender may require you to submit one or more legal documents. Make sure you have the following items in order, if applicable:
          o Business licenses and registrations required for you to conduct business
          o Articles of Incorporation
          o Copies of contracts you have with any third parties
          o Franchise agreements
          o Commercial leases

SBA 7(a) loans are the most basic and the most used within SBA's business loan programs. 7(a) loans can be used for a variety of purposes including acquiring or starting a business; buying, expanding, constructing or renovating commercial buildings; acquiring machinery, equipment, furniture, fixtures or leasehold improvements; financing receivables; augmenting working capital; and under certain conditions refinancing existing debt. Borrowers must apply through a participating lender institution. 

The SBA also offers 504 loans through local certified development companies.  These loans provide long term, fixed rate loans for acquiring or renovating capital assets such as land, buildings and equipment.  Under the 504 loan program, SBA lends up to 40% of the project costs secured by a lien which is in a subordinate position to the lender who finances approximately 50% of the project costs.  The small business owner will be required to make an equity injection of at least 10% of the project costs.  If the business is less than two years old, a further injection of 5% is required and an additional 5% must be injected if the project is a single purpose building (such as a hotel, gas station or bowling alley). 

The SBA also sponsors a microloan program under which a network of not-for-profit intermediaries make small loans ranging from under $500 to $50,000. The program provides business training and technical assistance to help micro-borrowers successfully start and grow their own business.

There are other, more specialized, loan programs which the SBA offers, including loans for Veterans, Export Working Capital Program loans, and others.  A list of Eastern Missouri participating SBA lenders can be found on the SBA St. Louis District Office website.

Some small business owners can find it a little intimidating going through the process of obtaining a loan.  Let the SBA and our network of resource partners help make the loan application process easier to navigate. You should also feel free to visit with more than one lender in order to find someone with whom you are comfortable, who can be a long term advisor and advocate, and who will support your small business and increase your chances for success.