What are the most common SBA Loan Products?
SBA 7(a) Loans
Loan Amounts: Up To $5,000,000.00
Use of Funds: Working capital, debt restructure, business acquisitions, franchising, equipment, startup, payroll, marketing, expansion, lease hold improvements, commercial property, and the list goes on...
Interest Rate: Prime + 2.75% (Depending on the loan size banks can charge up to 6.5%)
Terms: Up to 10 Years
SBA 504 Loans
Loan Amounts: Up To $5,000,000.00
Use of Funds: Commercial property for owner use. Must be 51% owner occupied. Not for real estate investing. Can include land, construction, furniture, fixtures, lease improvements.
Interest Rate: Prime + 2.75% (Depending on the loan size banks can charge up to 6.5%)
Terms: Up to 25 Years
SBA Express Loans
Loan Amounts: Up To $350,000.00
Use of Funds: All the same use as the SBA 7(a) loan. It is an SBA 7(a) loan but only up to $500,000 and fast tracked. Very few banks participate and they create unique programs around it. Minimum 1 to 2 years in business.
Interest Rate: Prime + 2.75% (Depending on the loan size banks can charge up to 6.5%)
Terms: Up to 10 Years
How do you get approved for an SBA Loan?
1. Credit Requirements
SBA loans are all personally guaranteed and anyone that is 21% or more owner of the business must be a guarantor. This means your personal credit must be clean without any bankruptcy, collections, or even late payments - especially in the past 3 to 4 years.
If your business is at least 1 year old, the SBA will also be looking at your business credit score, called the FICO Small Business Scoring Service (SBSS). If your personal credit is not strong enough you will need to either have business credit or build business credit to be able to qualify.
2. Debt Service Coverage Ratio
DSCR is calculated by dividing a business’s net operating income by their total debt service. Using the data from the last 3 years of your personal financial records plus up to 3 years of your business financial records for established businesses, and if business acquisition; 3 years of business financials from the seller. Based on these variables banks and lenders calculate a debt service coverage ratio. This ratio determines your ability to repay the debt. Most banks want to see between 1x to 1.25x DSCR.
3. Business Plan
One of the first things that banks and lenders will look at is your business plan. Your business plan is essentially your pitch deck and the banks and lenders are investors in your business. The more detailed your business plan and the clearer your request, the more likely you will be approved. Your Business Plan should also demonstrate 2 to 3 years real projections.
4. Projections
It's important to provide realistic and well-supported projections to the lender to demonstrate that your business has a viable plan for growth and repayment of the loan.
When applying for an SBA 7(a) loan, you'll typically be required to provide several types of projections to help the lender assess the financial viability of your business.
These projections may include: Profit and Loss, Cash Flow, Balance Sheet, and Sales Projections.
5. Collateral
Most SBA Banks want the loan to be fully collateralized with real estate equity. This is not the case every time and in every situation.
On loans above $350,000 the SBA requires the bank to take a 2nd position lien on available real estate equity, even if the bank doesn't require it. Collateral is usually discounted at 15% to 25%.
6. Cash On Hand
The amount of money you need for a down payment on an SBA 7(a) loan can vary depending on several factors, including the size of the loan and the purpose of the loan.
Typically, SBA lenders require a down payment of at least 10% of the total loan amount for most 7(a) loans. For example, if you're applying for a $100,000 SBA 7(a) loan, you'll need to provide a down payment of at least $10,000. However, some lenders may require a higher down payment, depending on their individual lending criteria.
7. Insurance Requirements
When applying for an SBA 7(a) loan, you will be required to meet certain insurance requirements to protect the lender's investment and minimize risk. The specific insurance requirements will depend on the lender's policy and the nature of your business, but some common types of insurance include: Property Insurance, Liability Insurance, Workers' Compensation Insurance, and Business Interruption Insurance.
On larger loans, the SBA lender may require that you assign the bank to a life insurance policy as well. This makes sure the bank will get paid in the event of your death.
