Small businesses can find it difficult to obtain loans. Commercial banks have strict lending criteria which can easily disqualify a small business. Thankfully the Small Business Administration offers help for enterprising small business owners. The agency has helped countless businesses obtain loans by providing a loan guarantee. However, SBA loans can take a long time to come to fruition. How long does it take to get an SBA loan? Read this article to find out.
The SBA itself does not fund loans to businesses. Instead, the SBA provides a guarantee to the lender. In other words, you will still get a loan from a bank but the loan will be guaranteed by the SBA. If you do not repay the loan, the bank can fall back on the SBA guarantee to recover its funds. The guaranteed element can be as high as 85% of the value of the loan.
An SBA-guaranteed loan can often qualify you for very attractive business interest rates because the SBA applies strict rules to its loans. At the end of 2017 that meant the most your business could be charged in interest would be 6.75% p.a. Loan terms can be up to 7 years for operational capital, 10 years for purchasing equipment or up to 25 years if your business is borrowing to buy real estate.
SBA loans offer excellent terms, including low interest rates, as we just mentioned. But qualifying for an SBA loan can be difficult. As always, attractive borrowing terms go hand in hand with strict approval criteria. Approval rates for SBA loans are not high, but approval rates are improving with 2017 seeing a record amount of lending via SBA loans.
It is not easy to judge what the day-to-day approval rates for SBA loans are, the SBA does not publish approval rates for SBA loan applicants. Your chances of approval depend not only on the loan eligibility of your business but also on the type of lender you are attempting to borrow from.
Through 2016, small banks approved 48.8% of small business loans whereas large banks approved 23.7% of small business loans. However, these approval rates do not take into account the stricter scoring criteria that SBA guarantees demand.
Note that there are different types of SBA loans. The type of SBA loan you apply for – SBA 7(a), SBA 504 or an SBA microloan – will determine the exact loan requirements. But there are some basic requirements valid across all SBA loan types. These include:
- Your business must be registered and operating in the United States
- It must not exceed the specified size, including the total number of employees and the total business net worth
- Your business must have exhausted all other financing options
- Only businesses with strong credit are likely to qualify
Some businesses are barred from SBA loans. You cannot get an SBA loan if your business is engaged in lending money for profit or if your business is engaged in gambling activities. Businesses that function in a lobbying or political role are also barred from SBA loans.
First, you need to find out which SBA loan is most appropriate for your business. For example, do you need an SBA (7a) loan or an SBA 504 loan? Once you’ve decided which SBA loan you want to apply for you need to prepare the following documents:
- Build a business plan that explains how you intend on using your SBA loan funds
- Gather a business profile describing your management team, your business history and its goals
- Obtain full current and past financial statements, including tax returns
Next, you need to find a lender that deals with SBA loans. As we explained before, the SBA does not issue loans – it merely guarantees the funds, so you still need to talk to a lender to get your loan. When you’ve found a suitable lender, complete the SBA loan application forms – including an SBA Form 1919 if you are applying for an SBA 7(a) loan.
Each business owner or co-signer also needs to fill out a personal financial statement, while your business also needs to complete an SBA Form 159 on fee disclosures. Once you’ve submitted all the documents your lender will reply with a letter of intent (LOI). This signals that underwriters are in the process of reviewing your loan.
If the loan underwriter gives your business the green light you will get a commitment letter outlining your loan terms. Closing the loan usually involves signing this letter, but for some loans, closure would include additional steps. Real estate loans, for example, may require a third party review to proceed. Once all the steps are complete you can expect to receive your loan funds.
By now you must be wondering how long does it take to get an SBA loan. The answer is: it depends. You will have noticed that obtaining an SBA loan is tough and intensive, with many hurdles. Essentially, it can take up to six months to obtain an SBA loan. Yet for straight-forward applications the process can be as little as a few weeks – it really depends on the exact circumstances of your business.