How to Apply for an SBA Loan

Thousands of small businesses receive funding for real estate, equipment, working capital and business acquisitions through loans guaranteed by the Small Business Administration (SBA). SBA loan terms are very reasonable. Down payments range from 10%-35% depending on various factors. Interest rates are generally 2-3% above the prime lending rate. This low cost of capital has helped many to achieve the dream of business ownership.

SBA offers two loan types: guaranteed and direct. Guaranteed loans involve the applicant, a lending institution, and the SBA, and are the most frequently used. The guarantee means that if the applicant defaults on the loan, the SBA will be responsible to the lender for 75% to 90% of the loan amount or up to a predetermined maximum amount. Direct loans involve only the SBA and the applicant. The funds available for direct loans are limited. They are available only in special circumstances—for example, if the applicant is handicapped.

If you decide to apply for SBA financing, you will want to follow these steps:

  1. Identify Your Needs. When purchasing real estate, determine what you must spend to get the type of building your firm needs. If you anticipate buying a facility that requires renovation, add these costs to the project and, if approved, the SBA will finance 90% of the total amount. If you need financing for equipment purchases or for tenant improvements, obtain a close assessment of the costs from the vendor or contractor.
  2. Structure Your Loan Proposal. A project occasionally fits the criteria of more than one SBA loan program. When this happens, loan packagers or lenders compare different loan structures including rates and fees so that you can evaluate which program best suits your business.
  3. Apply for SBA Financing. Set a timetable for document deadlines from the start of the application process through the close of escrow funds. If you are purchasing real estate, make arrangements through your lender for a current property appraisal.
  4. Open an Escrow Account. For real estate loans, and often with equipment and working capital loans, you will need to open an escrow account at a title company to complete the transition of property titles, insurance, loan documents, and funds.
  5. Other Considerations. SBA loan offices are generally inundated with applications for financing and have limited time to consider each application. If you choose to apply for financing, decide whether you want to prepare the application yourself, hire a loan packager who specializes in SBA loans, or work with the SBA loan division of your lending institution.

Preparing an SBA loan application is more time consuming than other forms of financing; however, it often turns out to be the best financing solution available for small businesses, and should not be dismissed as too onerous. Following these steps should make SBA financing easier to obtain.