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Small Business Loans 101

US Small Business Administration

A Quick Lesson on SBA Lending

Small business is a big deal.

Small businesses account for 99.9 percent of all companies in the United States, according to the Small Business Administration (SBA), and represent more than 47 percent of private sector employees in the U.S. In 2018, small businesses created almost 70 percent of new jobs in the country, too.

But for small businesses to succeed, entrepreneurs need capital. Without funding, it’s difficult for companies to plant their feet and become successful.

There are a number of options for startups to choose from when it comes to financing their new business. Some reach out to venture capitalists, others apply for micro loans, and some tap into personal savings to fund the cash necessary to start their own company.

SBA loans are an option, too, and one that can be beneficial to borrowers and banks alike. If you’re wondering what SBA loans are, and how to apply for one, look no further – here’s a quick lesson on SBA financing and the mechanisms that support it.

What Are SBA Loans?

The SBA is a federal agency that helps propel entrepreneurs, small business and the U.S. economy. Through SBA loans, the agency guarantees lending institutions – banks – that it will pay back a certain percentage of the loan if it defaults.

It should be noted that the SBA is not giving the loan to the borrower. It’s the bank, rather, that acts as the lender, and is lending the money according to the SBA’s requirements. Because of this guarantee from the SBA, banks are more willing to provide loans to small businesses that may not otherwise fit into their lending guidelines.

“Using the SBA loan program, the bank can extend credit to borrowers that otherwise don’t meet the bank’s credit policy. Examples could be loans with collateral shortfalls – loans that need longer repayment terms – or loans to a startup business that relies on projections rather than historical financials,” said Sunrise Banks Senior Vice President and SBA Loans Manager Chris Albrecht.

“The biggest advantage of using the SBA loan program is access to capital that may otherwise not be available conventionally.”

Are There Different Types of SBA Loans?

The SBA offers a handful of different loan options.

One is the 7(a) loan, which helps small businesses with startup costs and other financial needs. The SBA offers these loans for up to $5 million, and provides a maximum guarantee of up to 85 percent.

Another option is the 7(a) Express Loan program, which can provide up to $350,000 to borrowers.

SBA loan products also include export, international trade, and disaster recovery loans.

How Do I Apply for an SBA Loan?

What about actually applying for and getting an SBA loan?

For starters, it’s a good idea to visit the SBA’s website to see what’s required for the specific loan you’d like to apply for. The SBA spells out some general eligibility requirements online, including that the business applying must “operate for profit” and do business in the U.S.

Lending banks will be more willing to approve funds for a business if it is equitable and has a proven track record of success.

“Often times, a great SBA borrower would be someone who is looking for funding to grow or expand,” said Albrecht. “They could be purchasing an existing business, purchasing equipment, or maybe starting up a business. It could be a business that needs to improve its cash flow.”

Like any commercial loan, you’ll need to provide financial information for underwriting. The SBA loan program has a few extra qualifying documents to ensure the project and individuals are eligible for SBA financing.

Albrecht also notes that borrowers should work with a bank that has SBA loan experience.

“Look for a good lender to work with,” said Albrecht. “Look for someone who understands your business, the loan products and can get the deals done.”

The Minnesota District Office for SBA is a great resource if you’re looking for a lender.

Beneficial to Both Parties

SBA lending is an effective and viable option for many new or existing businesses. It can help companies expand their purchasing power or provide the initial funding necessary to start a new business.

The SBA’s guarantee to lenders also makes loan approval more likely. And, as Albrecht points out, it’s not just the borrowers who benefit from the SBA’s lending process.

“SBA loans are often made to new customers of the bank. This lets us broaden our customer base and build loyalty, which in turn allows us to grow our portfolio,” she said.

Learn more about SBA lending here. Or, for more small business resources, check out the Small Business Learning Center.

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