SBA loan

Launching or growing a small business can be a pivotal time for entrepreneurs and business owners. Fortunately, when seeking to acquire growth funding, you have a powerful ally. Small Business Administration (SBA) loans are a great way for small- to medium-sized businesses in need of capital to secure financing with backing from Uncle Sam.

What is an SBA loan?

Learning the truth about SBA loans can be empowering for small businesses. Generally, an SBA loan provides the opportunity for a longer-term loan and a lower monthly payment, allowing business owners to borrow a larger amount over an extended payoff period.

This type of financing is not provided directly by the SBA. Instead, loans are funded by a bank or other lender under guidelines provided by the SBA. Working with partner institutions, the SBA helps lower the risk for lenders by guaranteeing the loan and making financing easier to attain for small businesses.

An SBA guarantee provides a secondary source of repayment to the bank, which allows banks to expand credit criteria when the applicant doesn’t qualify under conventional lending guidelines. If there’s a weakness or two in the loan application, the guarantee can help get it over the hump for approval.

For example, a business may seek out a longer term to reduce monthly payments or may need a government guarantee if its available collateral is insufficient to secure the loan. This type of loan also lowers down payment requirements, so businesses can retain more capital to support growth.

Types of SBA loans

SBA loan products can range from big to small and can be used for many business purposes, such as operating funds, business expansion, real estate purchases and an array of other uses. Based on the business need, there are two loan alternatives:

  • 7(a) SBA Loan: SBA 7(a) loans have the greatest flexibility. The proceeds may be used for everything from buying a building to providing capital to increase cash flow, boost operations or expand.
  • 504 SBA Loan: This option provides secure long-term financing to acquire equipment, other fixed assets or owner-occupied commercial real estate with the advantage of a low down payment and a fixed rate.

Almost any business entity or structure is eligible for an SBA loan. Despite conventional wisdom, it doesn’t matter if your company is a sole proprietorship, partnership, LLC or corporation.

Consider the example of a media company that had lost its lease. By financing the acquisition and renovation of a building, the company was able to create the perfect creative space to accommodate its growing business, while locking in the occupancy expense to protect against ongoing rent increases or lease terminations. Furthermore, the owners were able to benefit from appreciating real estate values.

Business owners should do homework and understand what they are applying for. While your lender can help match you with the right loan for your business needs, applicants need to know what they want in advance. They also should be prepared to designate how much of their own funds they are willing to invest.

Common misconceptions about SBA loans

Another myth that has circulated is the notion that only “small” businesses can qualify for this type of loan. The SBA does have loan qualification parameters but businesses with up to $5 million in net income after tax and up to $15 million in tangible net worth can qualify.

If the business is a manufacturer, the size standard allows companies with up to 1,000 employees to qualify. Rarely are loan requests denied due to size.

A further misconception is that SBA is the “lender of last resort.” On the contrary, these loans merit close consideration to gain the benefits of a lower down payment and longer term—both of which are key to growing companies.

Most businesses are eligible with the exception of non-profits, speculative investments and certain other industries such as lending institutions. Any business planning to expand or in need of growth capital is a candidate.

How do you qualify for an SBA loan?

While loan requests for a startup business are available, these requests can carry greater risk and can be more difficult to obtain. As a result, the SBA requires at least two years of successful operations to be considered an “established” business.

Additionally, a personal guarantee is required from every individual holding at least a 20 percent ownership stake. The personal guarantee posts owners’ finances and assets as collateral if the business can’t repay the loan. In addition, some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender before requesting a loan.

Perhaps the most important item to consider in preparing to seek funding is to secure the services of a bookkeeper or accountant for accurate financial reports well in advance of approaching lenders for a loan.

Business owners who use financial software without understanding accounting sometimes generate financial reports that don’t make sense. Banks require three years of historical financial statements, so it’s wise to plan ahead. Even if you’re not borrowing now, you may need to provide credible financial statements in the future.

Businesses also should be warned against accumulating debt before applying for an SBA loan. Taking out auto loans and opening credit card accounts prior to asking for SBA funding can affect credit scores and the debt ratios used to evaluate creditworthiness. Try to keep personal expenses down and avoid taking on unnecessary personal obligations like heavy credit card debt.

Where do you start with an SBA loan?

The SBA website offers a loan application checklist you can use to gather your documents, including tax returns and business records. Here are some of the other documents you’ll need for your application:

  • The SBA borrower information form
  • Statement of personal history
  • Personal financial statement
  • Personal income tax returns (previous three years)
  • Business tax returns (previous three years)
  • Business certificate or license
  • Business lease
  • Loan application history

Bringing it all together

There are many ways to grow your business and an SBA loan can prove to be a useful option to help you get there. Start with one of the lenders participating in the program as a Preferred SBA Lender. Under this designation, a lender must demonstrate knowledge and proficiency in SBA requirements with regard to eligibility, credit underwriting, closing and servicing. The lender also must show that it has the management, controls and financial capacity to make and service loans funded under the program.

Getting help from an experienced banker can help you navigate the process successfully. Talk to a banker who can answer your questions and provide the guidance you need.

Gloria Miller, Senior Vice President and SBA Lending Manager for California Bank & Trust

Gloria Miller has 25 years of experience in all aspects of commercial and Small Business Administration lending with an emphasis on government-guaranteed lending to small businesses. In addition to helping budding companies grow, she manages CB&T’s team of business development officers across the state and oversees the bank’s SBA loans through submission, credit approval, funding and closing. To learn more, visit

Loans subject to credit approval; SBA approval required. Terms, conditions and restrictions apply. The information contained herein may not represent the views and opinions of California Bank & Trust, a division of Zions Bancorporation, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.

Small Business Administration stock photo by Jer123/Shutterstock