The Small Business Administration’s SBA 7(a) loan program can be a great financing option for entrepreneurs looking to grow their businesses. However, the SBA loan application process can be daunting if you don’t know what to expect. Read on for answers to the most frequently asked questions business owners have when researching and starting the SBA loan application process
How do I know if I am eligible for an SBA 7(a) loan?
SBA loan eligibility is determined by your business size, model, intended project or use of the loan, and your ability to find funding elsewhere. To be eligible for the SBA 7(a) loan, you must:
• Be considered a small business by the SBA in an eligible industry. You can check your own business’ eligibility using this tool.
• Operate for profit
• Use the funds for an eligible use
• Do business in the United States or its territories
• Prove alternative financial resources are not available before pursuing an SBA loan
The SBA excludes select industries and business models from their eligible list of borrowers. For example, non-profit businesses, loan packaging businesses, businesses who engage with illegal activity, and religious institutions are not eligible for SBA 7(a) loans.
How long does the SBA 7(a) Loan Application Process take?
The SBA loan process at West Town Bank & Trust is comprised of 5 stages. You’ll start by pre-qualifying online. If your lender confirms you’re eligible, you’ll move on to the formal SBA loan application and pre-approval.
Set aside a full day or afternoon to complete the complete SBA loan application. It’s a lengthy and thorough application that dives deep into the details of your business, assets, and plans for the future of the company.
You can streamline the process by preparing your documents (listed below) before starting the formal application. The more information that you provide on the initial application regarding your business operations, the experience and qualifications of the owners/management, and your intended use of the loan and how it will benefit the business, the less time your loan application will take for the lender to review and decision the loan. Try to proactively address any questions that the lender might ask based on the application and history of the business owners.
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What is the minimum credit score for an SBA 7(a) loan?
The credit score minimum for SBA loans is determined by the bank funding your SBA loan. It’s typical for a bank to require minimum credit scores between 650-700 to qualify for an SBA loan.
At West Town Bank & Trust, the minimum credit score for an SBA loan is 665. Your debt service coverage ratio (DSCR), financial statements, and how long you’ve been in business are also considered alongside your personal credit score.
What business documents do I need to submit in my SBA 7(a) loan application?
It’s standard for lenders to ask borrowers for the following items:
- Detailed summary of the intended use of the loan (e.g., purchase equipment, working capital, or refinance debt)
- Articles of Incorporation/Organization (Assumed name/ DBA if applicable)
- Operating Agreement or Corporate by Laws
- 3 Most Recent Years of Business Tax Returns, including all forms, schedules, and statements
- Interim Business Financial Statements (Income Statement & Balance Sheet)
- Business Debt Schedule Should match liability balances from Interim Balance Sheet
- Business Collateral Schedule
- Business Plan for new businesses (<1 year of operations) and for business acquisitions
- For existing businesses, a written explanation of the business operations and qualifications of the owner’s SBA Form 1919, Borrower Information
Additionally, your lender may ask for other documents based on how you plan to use the loan proceeds. For example, if you plan to use your loan to refinance an outstanding debt the lender may ask for copies of your Security Agreements for the loans you’ll be paying off, Payment Transcripts for the life of the loan, Monthly Statements if refinancing a credit card, etc. Your lender should provide you with a complete list of documentation you’ll need to submit, but preparing the above initial documents can help streamline the process.
Do I really need a business plan for my SBA 7(a) loan application?
Most lenders will require you to submit a business plan with your SBA loan application. A well-developed business plan can help a lender understand how your business operates, how the loan proceeds would be used, and whether you’re eligible based on SBA program standards.
Get tips on writing your plan and download a free business plan template for SBA loan applications.
What personal documents do I need to submit in my SBA 7(a) loan application?
It’s standard for lenders to ask borrowers for the following items:
- 3 years of Personal Tax Returns, including all forms, schedules, and statements
- Personal financial statement (disclose all debts as this will need to match the Personal Credit report)
- A resume that includes management experience
What is an equity injection, and why do I need proof of it for an SBA 7(a) loan application?
An equity injection is an investment of your own funds into your business. The equity injection basically functions as a down payment for the loan and demonstrates that you have some “skin in the game” motivating you.
The amount of your required equity injection depends on your project’s total cost. The purchase of the commercial real estate, purchase of a business, equipment purchases/leases, working capital uses, or other costs associated with the total project cost all contribute to your equity injection. Lenders are required to verify all your equity in the project prior to funding your loan using documents like bank statements, invoices, and receipts to verify the source and the use of the funds. You can prepare for this part of the application by making sure you have collected your most recent bank statements, and the invoices and receipts for major purchases you’ve made for your business.
Why do I have to provide information on my other businesses during the SBA 7(a) loan application process?
If you are associated with multiple businesses, the SBA requires that your lender review these businesses to ensure the applicant business, and its affiliates, meet the SBA’s size standards of a “Small Business”. This paints a better overall picture of who you are as a business owner and your history as an entrepreneur. It helps the bank evaluate your SBA loan application to make sure you’re a good fit for their program.
What is a credit memo?
A credit memo is a document the lender puts together during the application process that details your business and why you need an SBA loan. This document will ultimately be used to determine whether you will be approved for your loan. The credit memo covers everything from financial projections for your business, to credit history, to relevant expertise of your team that would contribute to your company’s success. The more information you can provide in your application to detail these items, the quicker the loan underwriting process can be.
Once my application is approved, how long does it take to get funding?
Timelines may vary from lender to lender and are often based on the use of the loan funds and the structure of the transaction as some projects and structures are more complex than others. Assuming your application is properly filled out and doesn’t hit any unexpected obstacles during underwriting, you can expect to receive funding around three to four weeks after your initial application is approved. This is contingent on you providing the necessary closing documents and the timeliness of third-party reports such as Appraisals, Valuations, and Environmental due diligence, as applicable.
How do I start an SBA 7(a) Loan Application for my business?
Before you start an application for an SBA 7(a) loan, review the eligibility requirements for businesses and use of proceeds. Ask yourself if the intended use for your loan falls under the eligible uses of proceeds according to the SBA. We recommend that potential borrowers review our 4 Tips for SBA Loan Applications during this stage to check if the program could be a good fit for their business goals.
Banks will typically offer online applications as a first step in the SBA loan application process. Keep your business documents close and organized as you fill out this application. Depending on your lender, you may need to upload some of these throughout the initial SBA loan application.
Remember, SBA loan program eligibility does not guarantee that you will receive an SBA 7(a) loan. Lenders have their own internal guidelines that must be evaluated as well. It is always recommended that you consult with a seasoned SBA lender in the early stages of the SBA loan application process to ensure your intended uses for the loan falls within the program’s guidelines.
Have a question we didn’t answer about applying for an SBA loan? Ask a question using the form below to connect with one of our loan officers who can help you understand your business financing options.
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