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U.S. Small Business Association (SBA) loans can be a great opportunity for entrepreneurs to finance small businesses. However, these loans may prove more difficult to get than many applicants think. Borrowers planning to apply for SBA loans should plan in advance for the potential hurdles that lie in store.

SBA loans are not distributed directly by the SBA; they are provided by commercial lenders. The SBA guarantees a portion of the amount to the lender in case of borrower default. This encourages lenders to provide financial assistance to small business owners whom they might not normally fund. The SBA offers three different loan programs for small businesses. The first is a basic 7(a) loan program, which is the option most applicants will likely seek and which can be used for “most sound business purposes,” according to the SBA website. They also offer a certified development company 504 loan program, which provides financing for real estate and equipment to allow small businesses to expand and modernize. The third option is a microloan which provides short-term financing for amounts below $35,000.

Interest rates on SBA loans are tied to the prime rate. The SBA sets a maximum rate, but the final rate is decided upon during negotiations between the lender and the borrower. Lenders can be located via a searchable database on the SBA’s website or by contacting a local district office. It’s also worth noting that “a requirement for getting an SBA loan [through a specific bank] is you have to commit to doing all of your banking for your business at that bank. So if that matters to you, then choose wisely,” Katherine Swanberg, a mortgage consultant with First National Home Mortgage and owner of a Sport Clips franchise in the Seattle area, said.

Those interested in pursuing SBA funding should realize that the process can sometimes be long and difficult.

The application process can be lengthy and often frustrating
The application process can require several months to complete
The turnaround time for SBA loans is generally between one and five business days, according to Peggy FaJohn, an SBA public information officer. However, “a common misconception on the part of loan applicants is that SBA’s turnaround time is the total time it takes to get a loan, when in fact it includes the time the applicant will work with the lender in discussing their loan proposal and providing documentation the lender needs to make his or her decision,” FaJohn said.

Swanberg and her business partner found the application process to be extensive, taking approximately four to five months from the time of application until the funds were released to them. Swanberg said she had believed that a typical loan should take between 60 and 90 days to process. The long turnaround time could be partially because her loan request was for a new business venture rather than an existing business.

“I was told by the SBA lender...that with purchases for brand new start-ups it is a lot harder to go through the process of getting a loan than it is for somebody that already owns a business that might be upgrading, or expanding or purchasing a new location,” Swanberg said.

However, the hold-ups in Swanberg’s loan process were largely because of issues with paperwork. “[The SBA is] extremely detail-oriented. Very picky,” she said. “Almost all the documentation I gave them was inappropriate for one reason or another. My tax returns were not signed, or my tax returns were signed but not in blue ink, or my tax returns were signed on all but one page. It was pretty laborious, trying to get them everything that they asked for.” In order to avoid these sorts of delays, FaJohn said that borrowers should come to a lender as prepared as possible, armed with a well thought out business plan or loan proposal complete with financial statements for any other existing businesses.

A well-written business plan is key. “Know exactly how much you need to borrow, what the funds will be used for, how you will repay the loan and what collateral you are offering to secure the loan,” FaJohn said. If borrowers find themselves at a loss when it comes time to compose a business plan or loan proposal, help is available through local Small Business Development Centers (SBDCs) and SCORE: Counselors to America’s Small Business Chapter. Both of these resources provide free one-on-one counseling for entrepreneurs and small business owners, according to FaJohn.

Entrepreneurs should also be sure to check their credit reports beforehand to make sure that all information is accurate and to prepare themselves to explain any blemishes on their financial record. Anyone can receive a free credit report once every twelve months; reports are available through multiple online resources.

“Make sure your financial health is in the best order that it can be in,” Swanberg said. “If your financial health is a little bit in disarray, it’s not going to be a pleasurable experience for you.” All tax returns need to be filed on time and according to all regulations, and documentation for existing businesses must be in order. Books need to be kept consistently and accurately. Expect that the lender will want to review them from time to time.

Borrowers should also be aware of potential programs offered by the SBA designed to help certain types of business owners. Swanberg said she recommended that women and minorities in particular look into state-sponsored programs in order to receive the best rates possible.

Although SBA loans are designed to make funding more available to small business owners and entrepreneurs, that doesn’t mean that they are always easy to get. Borrowers need to do everything they can to present themselves as responsible business owners in order to help the process go as smoothly as possible.

“Even with an SBA guarantee, the lender retains some risk in each SBA loan,” FaJohn said. “It is the applicant’s job to convince the lender that he or she is a good risk and will be able to repay the loan from the earnings of the business. One way for small business owners to lay the groundwork for their future financing needs is to establish a relationship with a local banker. Better access to credit is one of many benefits garnered by those with good banker relations.”