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					           How to get an SBA loan for your small business

Thank you for inquiring about the process of getting a small business loan
through the SBA. Through its flagship 7(a) Loan Guaranty Program, the SBA
guarantees commercial bank loans made to qualified borrowers.

If you are just starting out in business or if yours is a young company with little or
no prior credit history seeking to expand, commercial banks in general will not
favorably consider your loan application. However, getting the SBA’s backing in
the form of a guaranty facilitates the loan for you and provides excellent backing
to your lender as well, given that this guaranty represents the full faith and credit
of the United States government.

The guaranty of the SBA means that in the event you as the borrower default on
the loan, SBA will make payment on your behalf. This would not, however,
release you from liability or your obligations under the loan and security

Startups and young firms can benefit from SBA financing, but even more
established firms can take advantage of an SBA guaranty: Banks can make
longer loan terms to small businesses by virtue of having an SBA guaranty.

The three-step process of applying for an SBA loan is really very simple:

   You apply for an SBA-guaranteed loan with one of our banking partners.

 If the bank approves your loan, you and the bank submit a joint application to
the SBA for our guaranty.

 If the SBA approves the guaranty, we notify the bank, who puts together the
loan documents for your signature and subsequently disburses the loan


Most banks operating in the state and specifically in the western North Carolina
area are SBA participating lenders. Consult your local telephone directory
business pages for the address and phone number of your nearest branch.

What if I’m just starting a new business?

You will need to prepare a business plan if you’re just starting up or if your
business is less than two years old.
What does a business plan contain?

Typically, a business plan contains the following elements:

 description of the business (marketing, competition, operating procedures,
 financial data (loan request and financial projections for at least three years);
 supporting documents (tax returns and personal financial statements of
principal owners, business license, articles of incorporation or partnership
agreement, a copy of the franchise agreement, a copy of the proposed lease or
purchase agreement for building space, resumes of the principal owners, letters
of intent from suppliers, etc.).

Who can help with my business plan?

 The SBA-affiliated Small Business & Technology Development Centers
provide business plan assistance free of charge, and many other services;
please consult for assistance and for the nearest center.
 The SBA-affiliated Service Corps of Retired Executives (SCORE) also
provides one-on-one counseling and business plan assistance. Consult
 The SBA-affiliated Women’s Business Center at the Mountain Microenterprise
Fund is also available for business planning and counseling assistance at
 The SBA maintains a comprehensive Web site on business plans, at
 The Small Business Center (SBC) network, while not SBA-funded, is also
nonetheless an excellent resource for technical assistance. Located at
community colleges, they are reachable through your local community college

What if I own an existing business?

In general, your banker and the SBA will require the last three years’ business
financial statements (tax returns are acceptable); interim financial statements
dated no earlier than 90 days as of SBA guaranty application date; personal
financial statement forms; and associated documents depending on the nature of
the loan request. The SBA loan forms depend on the most appropriate SBA loan
program which your banker would consider.

How long does it take to process my application at the bank?
The loan approval time may vary from bank to bank, from a matter of days to
several weeks – including time for the applicant to respond to questions the bank
may have or collect missing pieces of documentation to complete the application.

The latter tends to delay the process considerably, so most of the loan approval
process really depends on how quickly you, the applicant, can respond to bank

What happens if my loan application to the bank is declined?

Do not be discouraged by one rejection; try another bank. Since SBA does not
provide loan funds directly, your recourse is to keep trying with other SBA lending
partners. It is not unusual for borrowers to be declined by one or more banks
before obtaining a loan approval.

What happens when my loan application is approved?

Usually the bank will issue you a commitment or loan approval letter spelling out
the terms and conditions under which the bank would be prepared to lend you
the money. Among those terms and conditions would be the guaranty of the

If you sign the commitment letter, you and the bank then work together to
complete our loan guaranty forms and submit them to our office for
consideration. Your banker is the coordination point for this process.


Under regular guaranty programs, the SBA can guaranty business loans to the
following extent: 85 percent if the loan is $150,000 or below; and 75 percent for
amounts above $150,000, not to exceed a total guaranteed amount of
$1,500,000. The maximum loan which the SBA may guaranty is $2,000,000.

The SBA also has an expedited guaranty program called SBAExpress in which
lenders can authorize on-the-spot SBA approval, in consideration of which a 50
percent guaranty applies.

What about the forms? And which guaranty program do I go through?

The bank provides SBA forms to applicants, sometimes upon issuance of the
commitment letter, sometimes prior. Some banks offer the service of completing
the forms on your behalf, too, for a nominal fee. The SBA has two main guaranty
programs with separate forms:

 LowDoc: for loans of up to $150,000 where borrowers must have good credit
and the loan use must be straightforward and not require intensive credit or legal
review. The application is one sheet, with one side completed by the bank and
other completed by the applicant.

   Regular 7(a) guaranty program: all other loan guaranty requests.

How long does it take for the SBA to process an application?

Under LowDoc, a 36-hour turnaround is typically assured; under the regular 7(a)
program, an SBA officer will complete an initial review within five business days
and advise the lender of any additional information requirements or of a likely
approval timeframe at that time.

What about SBA Preferred Lenders?

SBA Preferred Lenders ( have been delegated the
authority to approve SBA loans by the SBA. In those instances, the paperwork
and processing time are both substantially reduced; additionally, the lender
prepares the SBA loan closing documents, further streamlining the processing of
such loans.


What happens next?

For non-Preferred Lender loans, the SBA issues an Authorization and Loan
Agreement to the bank. This signifies the approval of our guaranty for the
business loan.

Generally, the terms and conditions of the Authorization tend to mirror those in
the bank’s loan agreement with the borrower. Assuming all the conditions prior
to a disbursement of loan proceeds have been satisfied, the bank would
disburse, or pay out, proceeds of the loan, and you would make regular
payments to the bank.

Throughout the life of the loan, the SBA stands by to make payments on your
behalf in the event you default (i.e., you are unable to make payment on the


What about the rates?

In commercial lending, interest is generally indexed against the Prime rate of
interest, which is sometimes defined as the base rate on commercial loans
charged by large money center banks. As an example, assume that the Prime
rate is 4 percent.
For an SBA-guaranteed, five-year loan of $100,000, the maximum rate of interest
a lender can charge is prime plus 2.25 percentage points, or 6.25 percent.

And what about bank or SBA fees?

Out-of-pocket expenses such as attorney’s fees, title insurance, miscellaneous
security recordation fees, etc., are always borne by the borrower. The SBA
prohibits its lenders from charging “points”, or commitment fees; however, some
institutions may charge a nominal fee for putting together the SBA guaranty
package on your behalf.

The SBA assesses a guaranty fee, which is a percentage of the guaranteed
portion depending on the loan amount and term. In the above loan example, the
applicable SBA guaranty fee would be $100,000 x 85 percent (SBA guaranty) x 1
percent = $850 fee. The fee is actually charged to the bank, and the bank
generally passes this fee on to the borrower upon loan closing or disbursement.

I need a bigger loan to buy a building (or a large piece of machinery). Is there
any other program besides the 7(a) Program?

There sure is – for real estate acquisition or the purchase of larger pieces of
machinery, ask your banker about the SBA’s 504 Program, which provides long-
term fixed-asset financing at favorable rates and terms.


So what does a lender look for when reviewing your business loan application?
They’re called the Five Cs of Credit. Think about them as you prepare your
business plan and complete the loan application forms.

Character. Your character is essential in any credit decision. Lenders can judge
your creditworthiness with a credit report; in addition, your answers to questions
in loan applications regarding any past criminal convictions, bankruptcy, and/or
compromises are also used to evaluate character as it relates to your ability to
repay a loan.

Capital. This is your equity in the proposed venture or existing business. When
applying for an auto or home loan, the lender will typically require a 20 percent
down-payment from the borrower. Similarly, the lender will look for the amount of
the borrower’s equity in any business loan application – whether it’s for the
acquisition of new machinery for an existing business, or the total startup costs in
a new business venture. The 20 percent rule is a good rule of thumb for
business loans as well, but be aware that for new ventures (particularly higher-
risk ones such as restaurants), the lender will often require a larger capital
contribution (“down-payment”) from the borrower. The more highly capitalized
your business is, the greater the chance your bank or the SBA will approve your
application. How much capital you have at stake is an indication of the likelihood
you would walk away from your investment.

Collateral. The lower the amount of borrower’s equity or capital, the more the
lender will place emphasis on items such as collateral. It goes without saying
that the lender will take a lien, mortgage, or security interest in whatever assets
are being financed. But particularly in the case of new ventures – where
financing also involves working capital – the lender’s collateral position is not
secure at the outset; i.e., the loan amount exceeds the value of assets being
financed. Thus, the lender will look to the personal assets of guarantors or
principal owners of the business for additional security. SBA’s collateral policy
requires the bank to secure the loan fully to the extent possible; however, if you
as the borrower are unable to pledge any additional collateral, that in itself does
not disqualify you from approval.

Capacity. Often referred to as cashflow, capacity is exactly what lenders refer to
in assessing your ability to repay a loan – the primary source of repayment.
Lenders are interested in the business’s repayment capacity and hence look to
past or projected income streams in determining repayment ability. Want to
know if you have the ability to repay a business loan? Take the “rule-of-thumb”
cashflow: Start with your company’s (past or projected) annual net profit after
taxes; add depreciation expense (since this is a non-cash item); then add interest
expense. Next, divide this by twelve to arrive at monthly cashflow for debt
service. Then, deduct your monthly principal and interest installments. The
resulting (hopefully positive!) margin is what your lenders look for in determining
the repayment cushion for your business.

Conditions. Businesses don’t operate in a vacuum. Ask yourself, under what
conditions does my business operate? Who are my competitors, and how does
my pricing strategy compare with theirs? What exactly are my competitive
advantages? What about the internal conditions of my business? What is my
staffing like? Is management succession in place?

So which of the five Cs is the most important? All of them are interdependent –
commercial lending is an art, rather than a science. But it’s important to note that
any weakness in one of the five Cs should be compensated for by additional
strengths in the other four.


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