If you’re in need of that extra bit of funding, you have a few options. You can crowd-fund the money (via friends or websites such as KickStarter or Patreon), bring in investors, or apply for loans. Of these options, applying for loans is the most popular and successful means of getting that leg up you’re looking for.
Your best bet will usually be applying for a Small Business Administration (SBA) loan. The SBA is a government-backed institution that makes it easier for small business owners to receive loans through banks, credit unions, and other affiliated lenders. Essentially, the government insures the loans and promises to cover around 75% of the loan value in the event of a borrower defaulting. Thus, the lenders take on significantly reduced risk and are willing to lend larger amounts to more borrowers than they would otherwise.
What Kinds of Loans Does the SBA Offer?
There are a few different kinds of loans offered by the SBA. There are differing benefits and requirements of each. Right now, the SBA offers four different kinds of loans:
- 7(a) loans. This is the main lending program offered, as well as the most popular. It covers your basic expenditures, such as equipment and working expenses, as well as the purchase, furnishing, and renovation of real estate. The maximum amount they’ll loan you for this is $5 million, with no set minimum. You negotiate the interest rates between yourself and the lender; however, they must follow the SBA’s requirements. For more information about the fees, amounts, and guarantees, you can visit the official SBA site.
- These are another common and effective loan to apply for. Like the name suggests, these are small loans of up to $50,000 offered for mostly the same uses as 7(a) loans, but with more restrictions. For example, you can’t use them to buy real estate or pay for debts. You can apply for microloans through specialized non-profits designated by the SBA, but more on that in a bit. This is a very popular loan for small businesses (even home based businesses) and the average loan amount is about $15,000 (far less than the maximum loan amount of $50,000). If you’re going to use a micro loan it’s a really good idea to set aside a considerable portion of what you borrow to market your business. When working with limited funds it’s critical that you earn revenue quickly so you can grow your business based on profits you generate.
- CDC/504 loans. These loans are for long-term, “big” purchases such as the purchasing, renting, or constructing buildings, buying machinery, or refinancing debt incurred from business growth. Usually, the SBA will insure 40% of the loan value, the lender will risk 50%, and you’ll provide 10% collateral. This program loans up to $5 million, and comes with a 10-year or 20-year maturity term.
- Disaster loans. These are loans supported by the SBA to help repair inventory, real estate, and other assets that have damaged during a disaster. These loans cap at $2 million.
The process for getting each loan is a bit different, so we’ve prepared a quick guide for each.
How to Get 7(a) Loans
- Make Sure You’re Eligible
Before you apply, you should make sure that you can get the loan. In order for you to be considered, you should:
- Have a reasonable down payment and personal finances prepared. This is not always required; however, having 10% to 20% of the loan value as cash or collateral will boost your chances of getting the loan.
- Meet the SBA’s definition of a small business.
- Ensure you’re not in debt to other parts of the government (tax liens or backed taxes likely will prevent you from qualifying).
- Be able to show the need for the loans, as well as a solid plan to use them. Meaning, have a written business plan showing how you’ll use the funds (office equipment, marketing, hiring employees, etc.).
Some other things to keep in mind to make your application more likely to be accepted:
- It’s easier to get loans if you’ve got an established business that is 2+ years old. However, businesses less than 2 years old can qualify for micro loans.
- Good credit is very helpful; if your FICO score is less than 660, you should consider trying to increase your credit score
- The more collateral you can offer, the better your chances. Cash in the bank, equity in a property or certificates of deposit can be good sources of collateral.
- Find A Bank
Since banks are the intermediaries that give loans, finding a good bank is an important step. Usually, your best bet will be banks that have the most experience with giving SBA loans, as they’ll have the fastest and most effective application process. Don’t be afraid to visit multiple banks, and be sure to ask each one all of your questions—good communication and clarity is important! This first discussion will generally establish whether you’d be a good fit for each other.
If you’re looking for a loan less than $350,000, there are options available online to you, such as SmartBiz, that can pre-approve you and get funding in a week. For loans larger than $350,000, the SBA website has a handy tool that will search for lenders to meet with.
I’d advise you create a list of four lenders in your area that you’ve identified as high volume SBA lenders. Then go to the one lender you are least interested in first. Talk to them and ask all your questions.
The reason you go to your least desirable lender first is that you might sound silly or uninformed due to some of the questions you ask. And that could make you less likely to get a loan from that lender. But once you’ve heard their answers to your questions and received additional information about their requirements you’ll be more prepared when you go apply with the other, more desirable, lenders.
- Prepare Your Paperwork
If you pass the initial step, your bank will offer you a proposal. If you accept it, you’ll need to get to work exchanging your information. The SBA provides a checklist of what you should have prepared, including links to all the necessary documents and applications.
As with any business venture, you’re also going to need a business plan, which should include the following:
- A one or two page executive summary
- A description of your business and its goals
- A 2 to 5 year revenue / expense projection
- Your target market (including research on your primary competition)
- What it is you’re selling
- Financial information
To learn more about the specifics, view the SBA’s website.
If you’re in a hurry, you can choose an option called SBAExpress that will get your application reviewed and responded to within 36 hours. Note that the cap for SBAExpress loans sits at $350,000. For more information on the differences, you can visit its relevant page.
How to Get Microloans
- Make Sure You’re Eligible
When applying for microloans, make sure to keep in mind:
- Like with 7(a) loans, good credit is important but not required. However, the credit requirements for microloans are, compared to 7(a) loans, somewhat less demanding.
- Make sure you’re not delinquent on any other debts
- Make sure you haven’t been recently bankrupt
- Avoid other pitfalls such as large tax liens
- You should be the business owner or co-owner
- Have a clear plan of what the loans will be used for
- Financial statements
Some other things to keep in mind to help your chances:
- A consistent positive cash flow and a history of paying your debts is a plus
- Prepare your documentation to show you’re responsible
- Collateral a plus
- References are a plus (this may be required and you can get some from sources like your accountant, attorney, previous employers or your SCORE.org mentor)
- Find Your Intermediary and Prepare Your Business Plan
The intermediaries that you apply to for these microloans are non-profits specially designated by the SBA. There are a couple hundred in the U.S., and it’s best to apply to one that’s closer to the location where you want to start your business.
Like with your 7(a) application (above), you’ll want to come in prepared with a business plan.
How to Get CDC/504 Loans
In order to be qualified for a 504 loan, you should make sure that:
- Your business should meet the SBA’s definition of a small business
- Usually be seeking to purchase, build, or furnish real estate
- Plan to use 51%+ of the property you plan on buying for the business itself within a year of ownership
- Business cannot have a net worth higher than $15 million
- You must have the majority ownership of the company
- The business’s average net income can’t be higher than $5 million after taxes for the preceding 2 years
- Have all the requirements listed for microloans and 7(a) loans
- Approach A CDC Lender with Your Business Plan
Like when applying for microloans, when you apply for a CDC/504 loan, you’ll be approaching an SBA-certified non-profit. Like with 7(a) loans and microloans, you should come prepared with all of the listed financial records and requirements, as well as a knockout business plan. And also like with microloans, you’re best off applying from CDCs closest to your area of business.
Which SBA Loan Is Best for Me?
That depends! If you’re looking to get a business started, as we noted before, it can be difficult to find lenders for large loans. Your best bet in that case is to start off with a micro loan of $35,000 or less. As time goes on, you’ll prove yourself and your business it will become easier to apply for larger and larger loans. Additionally, microlenders will often help new business owners out along the way with advice and know-how.
If, however, you’re an existing or experienced business owner looking for a larger loan, then a 7(a) loan is a fine choice.
As always, make sure what you’re asking for fits what you’ll need.
How Should I Use My Loans?
As any entrepreneur can tell you, there’s no shortage of things to spend money on when running a business. However, it’s important to only spend money when necessary—identify the parts of your business that require investment, and try not to spend more than that. A common mistake for recipients of business loans is spending it all too quickly or frivolously. Focus on priorities first (and make sure those priorities align with whatever will directly help your business generate profits).
Generally, there are a few things that will really help your business out, so spending your loans on them will be beneficial:
- After all, if you’re selling merchandise, you’ll need to first purchase the merchandise itself. If you find yourself low on stock, then this is a good investment for your SBA loan.
- If you’ve got the relevant loan plan, this is another core part of your business. Do your best to optimize where your business is, whether that means moving or optimizing it in other ways.
- If you find yourself needing extra help, or special talent, a loan is a good way to bring extra hands on deck where you need them.
- A loan is a good time to inject some extra life into your business by getting your name out there, which it goes without saying is required if you want to attract new customers to your business. High ROI marketing is your best bet. What that means will vary from one business industry to another but generally it’s a good idea to invest in search engine optimization (SEO) and content marketing (blog, email marketing, social media engagement). If you need help with these services then here’s a great marketing agency.
- Buying and maintaining all the equipment that you need in order to keep your business running is definitely a priority. If you think a piece of new equipment would help your business, or an old piece of equipment needs a touch-up, a loan is a great way to help with that.
- A new website. Every business should have a website—it’s a way you can advertise and present yourself, and gives customers a way to look you up at a “home base” where they can get information about you. A professional website can go a long way to building a better brand. Using your loan money to hire a web design team to help you out by building or improving your website can be a great investment.