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Updated: Apr 2, 2019
If you’re a small business owner who’s run into a bit of a cash crunch, you’ve probably already started your search to find a small business financing solution. There’s nothing to be ashamed about here; cash flow problems impact businesses of all sizes and can rear their ugly head at any time.
When researching the many options available for funding, if you have some time to wait, you may find that loans guaranteed by the Small Business Administration (SBA) are the perfect financial vehicle for your small business.
SBA loans provide small business owners with up to $5.5 million in government-backed financing. Since the government guarantees up to 85% of each loan, lenders are more likely to fund these small businesses. In the event of a default, the government covers a big portion of the loan so there’s less risk to lenders. That said, SBA lenders still typically prefer to finance companies that have been in business for a few years and have high credit scores.
From the borrower’s perspective, SBA loans tend to offer favorable interest rates and flexible terms. One of the agency’s responsibilities, after all, is supporting entrepreneurial efforts. What’s more, SBA loans tend to be versatile; business owners can invest these funds in a number of different ways.
The SBA offers several kinds of loans, including 7(a) loans, 504 loans, microloans, and more. Check out this in-depth guide to learn about the differences between some of the SBA’s most popular offerings and figure out which one might work best for your business.
If you’re thinking of applying for an SBA loan, get ready to wait.
While it’s not impossible to get an SBA loan approved in a relatively short period of time (SBA Express loans can get you a decision within 36 hours, though you’ll still need to go through the underwriting process with individual lenders, which can take a few weeks), more often than not the entire process will take at least two or three months.
Since many small business owners turn to loans when they need cash immediately, they usually don’t have the luxury of waiting 90 days or more for a loan to potentially come in. Remember: SBA loans can be quite difficult to qualify for, so you could end up waiting for months, only to be declined.
Still, your business’ unique situation might be ideally suited for an SBA loan. If you’ve decided to apply for an SBA loan, here’s what you’ll need to do.
First things first: You need to gather all relevant documentation to begin the loan application process.
Lenders will usually ask you to submit personal information, business licenses, proof of business ownership, a business plan, and other similar documentation. Of course, you’ll also need to know how much capital you’re trying to secure, and you should also be prepared to describe how you’re planning to use your loan.
Lenders will also want to look at your business finances — as well as your personal finances.
Gather documentation relating to your business financials, including financial projections, profit and loss statements, two years of business tax returns, and two years of personal tax returns. You may also want to check your business and personal credit to make sure you qualify on that front.
Lenders typically will want you to prove that you understand your business’ financials and that you have a specific plan for the funds, as well as the means to pay them back.
Most lenders won’t just hand over a sum like $1 million without any strings attached.
Instead, they’ll ask you to offer collateral — an asset like a house, a car, or other property — to secure financing. That way, in the event you default on the loan, your lender can recoup their losses by selling your collateral. There are ways to get funding without collateral, but many SBA loans will require it.
Think long and hard about what collateral you’re comfortable with putting at risk. In the worst case scenario, could you really afford to lose your home because the economy collapsed and you defaulted on a business loan?
Different lenders have different strengths. When considering lenders, you need to look at loan rates and amounts, the reputation of the financial firm, what kind of support resources and customer service they offer, where they’re physically located, and more.
This process isn’t necessarily as time-consuming as it might sound. The SBA has an online tool that enables you to shop a network of over 800 SBA-approved lenders in just a few clicks. If there’s a match, you’ll hear back from interested lenders within two business days.
Once you’ve narrowed down your search to a few vendors, it’s time to get everything together and make your pitch.
According to the SBA, lenders are more likely to approve applicants who can demonstrate industry expertise. This makes sense: Who wouldn’t prefer lending to someone who knows the ins and outs of the industry they’re operating in?
Remember, this entire process can take up to 90 days and — in some instances — even longer. Before you decide to go down this route, make sure that your business can afford to wait that long for funding that may never end up coming in.
Even in the most ideal scenario, the SBA loan process can be a long and arduous one. But as we’ve recently seen, other unforeseen roadblocks can emerge at any time to slow the process down even more.
The recent government shutdown, for example, included the SBA.
On an average day, the SBA processes hundreds of loans. During the shutdown, the agency was processing a much smaller volume, including certain disaster loans. Business owners who were already in the middle of the SBA loan process had to wait even longer to hear about the status of their application.
As of the publication date of this article, the U.S. government has reopened, but the SBA still has a significant backlog of loan applications to review — meaning entrepreneurs who applied for loans months ago are likely still waiting on a verdict.
When the SBA works smoothly, it can still take a long time to hear back on funding requests. But, as the shutdown illustrates, other unforeseen variables can emerge at any time to slow the process down even more.
Before you apply for an SBA loan, it’s critical to do your due diligence and determine whether you can really afford to wait three months or more to get the financing you need to grow your business.
If you have the luxury of time on your side, you may find out an SBA loan is perfect for your needs. If not, you might want to look elsewhere for business financing.
Justin is a business writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.