SBA Business Loan

Since an SBA business loan is strictly for small businesses, we first need to take a look at what the SBA considers a “small business.” The standard guide of 500 employees or less constituting a small business only applies to a percentage of identifiable businesses.

The SBA sets a guideline for each of the North American Industry Classification System (NAICS) codes. They have compiled these guidelines into a 44-page document…and here are a few samples of what the SBA considers a small business:

A convenience store is considered a small business if it has $27.0 million, or less, in annual revenue.

A software publisher…if it has $25.0 million, or less, in annual revenue.

A producer of chickens for egg production…if it has $12.5 million, or less, in annual revenue.

A producer of chickens for meat consumption…if it has $0.75 million, or less, in annual revenue.

A telecommunications reseller, is considered a small business if they have 1,500 employees, or less.

A cigarette manufacturer…if it has 1,000 employees.

A Mineral Wool manufacturer…750 employees.

A Concrete Block manufacturer…500 employees.

The Wholesale Trade (all products)…100 employees.

So, you can see from these examples that there is a broad range of SBA definitions of what they consider a small business. As a result, your first task, when seeking an SBA business loan, would be to determine whether or not your business is considered a “small" business by the SBA. To assist you in this, you can download the detailed document, SBA Table of Small Business Size Standards here. (Opens in new window.)

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Now, assuming you have determined that you do indeed have a small business, what kind of SBA business loan is available to you? Obviously, much depends on what stage your business is in, and for what purpose you need a loan. SBA loan programs are not very popular for startups, but what is available may be worth investigating.

You do need to be aware that the SBA does not loan money directly, but is simply a government guarantor of loans you obtain from a commercial lender…usually a bank. They normally guarantee approximately 80% of the loan. So, be aware that you will have to apply for your SBA business loan through your bank or other commercial lender. We’ll discuss the process as we go along.

Loan Programs
7(a) Loan Program

This is the most popular SBA business loan program, because it is very flexible and the money can be used for most business purposes. This program is helpful to some startups (depending on how early the startup), and existing businesses, or change of owners. Here is how I would suggest you go about applying for this SBA business loan.

Meet with your local banker and present your Business Plan in your most concise and convincing manner. Then discuss with your banker the various financing methods that may work for your project. Depending on the status of your project or business, and the purpose of your loan, your banker should make some recommendations. (If your banker doesn’t’ make recommendations and assist you—you have the wrong banker and you need to find someone else). Here is what your banker should discuss with you:

Whether or not the bank can make the loan directly without an SBA guarantee.

If not, they should discuss the various SBA business loan programs available through their bank (most SBA business loan programs are available through most banks—but not all).

Your banker should arrange for the SBA application and assist you with the paperwork (remember, the bank is going to loan the money at this point and the SBA will only be the guarantor).

Your banker may, or may not, put you in direct contact with a SBA representative, but they should be overseeing the process of the paperwork.

Have you sign the papers and then they will disperse the funds.

Or…if your banker does not participate in SBA business loans (some prefer not to), your banker should direct you to a bank or other commercial lender who does specialize in SBA loans, and you would then go through the process described above.
NOTE: If you cannot find a banker who will work with you, contact the local SBA District Office, and they can direct you to a commercial lender who handles SBA business loans.

There are also several restrictions on a 7(a) SBA business loan, which cannot be used for the following purposes:

To refinance debt where the viability of the business is in question, and the SBA may have to pay on the guarantee to the bank.

To finance a partial change in business ownership, such as buying out a partner.

To provide funds for the reimbursement to an owner, whether temporary (bridge loan) or long-term.

To repay delinquent state or federal withholding taxes, or any money that would be held in trust or escrow.

For any purpose the SBA deems non-sound.

Express Programs

SBA Express—This program provides an accelerated turnaround time for review of your application by the SBA, who will give you a response to your application within 36 hours. This is not the complete processing of your application; just a review to determine if you have a chance with them or not. It is best for smaller loans, so if you are near the top of their lending limit, I would suggest working through normal channels.

Export Express—This SBA business loan was set up to help small businesses develop or expand their export markets. Most banks in the U.S. do not lend on export orders, receivables, or Letters of Credit. This is where the SBA steps in and can provide lenders with an up to 90 percent guaranty on export loans. The purpose is to encourage banks to make loans that will help small businesses with their export market.

Lenders still use their own credit decision-making process and loan paperwork, and the SBA provides an expedited eligibility review and subsequent response in less than 24 hours. This allows small businesses to get access to their funds for exports faster.

Eligibility is the same as for all 7(a) SBA loans, but applicants must have been in business for at least 12 months, though not necessarily involved in exporting during that time. In addition to standby Letters of Credit, the money can be used for the same purposes as all 7(a) loans.

In this loan program, the SBA also provides export training and assistance to small businesses, including marketing, planning, and management assistance.

Again, application for this SBA business loan is made directly to the lender, although the lender must be a participant in the SBA Express Program. For more detailed information contact your local U.S. Export Assistance Center through your SBA District Office.

Patriot Express—If your business is 51 percent or more owned by veterans or members of the military, you can apply to this program for expedited service. It is not a special program for veterans, only special handling of the loan application.

Community Express—This program allows SBA approved bankers to provide a combination of financial and technical assistance to borrowers located in certain “underserved” communities, known as “Historically Underutilized Business Zones” (HUBZones). This also includes communities identified as distressed through the “Community Reinvestment Act” (CRA). If you think your business may fall into one of these categories, contact your local SBA District Office for more information before going to your banker.

CDC/504 Loan Program

This is a specialized SBA business loan that can be used only for the purchase of assets or to pay for physical improvements. This too, is a government guarantee program, not a direct loan from the SBA. The money cannot be used for working capital, investing, repaying debt, or refinancing. If you are planning to acquire any major assets, or build some physical expansions, this loan guarantee may be just the ticket for you. You approach this SBA business loan exactly the same way as detailed for the 7(a) loan program. Only the purpose of the loan is different.

Micro-loans

This program provides short-term loans to small businesses and not-for-profit child-care centers. The maximum loan is $35,000, and the average loan is approximately $13,000. The SBA designates only certain intermediary lenders for this program and you must work through one of these lenders when applying for this special loan. The money can be used for any business purpose except paying existing debt, or buying real estate.

These specialized lenders are also required to provide business training and technical assistance to the borrowers, who may also be required to complete training and/or planning requirements before the loan is considered. Unfortunately, this program has not been very popular due to the excessive amount of paperwork and government bureaucracy involved. This is really too bad, because a program like this could really benefit many smaller businesses.

Other Programs

There are a few other programs available through the SBA, including one for disaster relief, and a current temporary program for financial relief. There are no special financing programs for veterans, but the SBA does offer special business counseling and express processing to assist veterans.

As you can see, the purpose of the loan must be convincing in the eyes of both the banker and the SBA; and you, the owner, must be creditworthy. As you can probably guess, the process for obtaining an SBA business loan is a long drawn out affair that requires a great deal of patience.

At the same time, there are many instances where an SBA business loan is an excellent alternative to mainstream funding for your business. In some cases, it may be the best alternative you have.

You also need to know that the final decision is up to the lender, and if they say "no" anytime during the loan process—there is nothing the SBA can do about that. You will have to start over with another lender.

A couple of reminders:

In most cases, you need to start your search for a SBA business loan with your local bank. Then they will do one of several things:
- Make the loan directly to you without an SBA guarantee, or…
- Work with you to apply for the appropriate SBA guaranteed loan for your business, or…
- Recommend another bank or commercial lender that specializes in SBA guaranteed loans, or…
- Suggest other forms of funding that may be better suited to your needs.
Be prepared. Every time you meet with a bank or talk to a representative of the SBA, you need to be on top of your game and have as many answers ready for their questions as you possibly can.

This report is a brief summary of most of the SBA business loan programs available to small business. For more detailed information, contact your local SBA District Office.

If you don't think an SBA business loan will work for your business venture, I suggest you take a look at financing through Angel Investors.

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