How Do SBA Loans Work?

In the market for a business loan? Heard about SBA loans but not sure how they work or how to go about applying for one?

We compiled a list of the top 5 most common questions that small business owners have about SBA loans.

1. How do SBA loans work?

While the SBA does offer numerous loan programs to help small business owners finance their businesses, it doesn’t actually lend businesses the money. Instead, a lender (bank or nonbank lender) makes the loan, which is backed by the SBA. This allows the lender to take a little more risk than they otherwise might.

So this means that if you are seeking a business loan and don’t qualify for a traditional bank loan, perhaps because you don’t have the collateral or years in business to justify the loan, the government can help – although you still need to work primarily with a bank or alternative lender.

2. Who makes the decision that an SBA loan is right for my business?

If you’ve been turned down for a traditional bank loan, or are curious about SBA loan programs, where should you start? Should you go to the bank and ask about SBA loans, or would they instinctively guide you towards one?

While your local SBA district office can help explain the available loan programs and determine your eligibility for them, you’ll need to find a local SBA lender to kick-start the application process. These banks and financial institutions can help you determine which loan program might be right for you whether it’s a traditional bank loan, non-bank lender or an SBA-backed loan. They are also your point of contact for processing your loan application.

3. How do I determine which SBA loan is right for me?

There are numerous SBA loans available to you depending on your business profile, financing needs, growth plans and so on. There are many ways to identify the right loan program for your business.

If you are in the early stages of exploring your financing options, check out the 7 SBA loan programs for small business owners.

Once you’ve done your research, consult your local SBA District Office and ask them to steer you towards a few SBA lenders in your area so that you can be sure you’re getting the right loan program for your business – and the right bank!

4. How should I prepare for my meeting with the bank?

Preparation is crucial and it’s important to understand some of the criteria that might influence your eligibility for an SBA loan. These include credit factors – such as making timely debt payments (payment on existing credit relationships, both business and personal, is considered an indicator of your ability to repay a loan), cash flow projections and your debt-to-worth ratio. Collateral and working capital are other factors that may impact eligibility.

SBA offers guidance on all the factors that lenders look at here.

You’ll also need to ensure you are in good standing with your state Treasury and the IRS (i.e., you’ve paid all taxes owed).

And don’t forget the most important document – your business plan with at least three years of financial projections; a view of what you’ll do with the proceeds of the loan; and substantial proof that you know your industry and target market. This is particularly important for start-ups that don’t have a financial history. The bank will base its decision on your industry experience and future plans.

If you don’t have a business plan, check out SBA’s Build your Business Plan Tool – a step-by-step guide to help you get started. You can save the plan as you go and download it when you’re done.

5. What do I need to complete my SBA loan application?

An incomplete loan application won’t do you any favors with the bank and could slow down the entire loan process. Familiarize yourself in advance with the key components of the loan application – from the right forms to the necessary background information. Refer to this SBA Loan Application Checklist to ensure you have all your i’s dotted and t’s crossed. SBA also offers a free online training course: How to Prepare a Loan Package.