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If you’ve done any amount of research into financing options for your small business, you probably quickly learned that applying through one of the U.S. Small Business Administration's various loan programs will be by far your best available option. But now you might be wondering how to prepare an SBA loan package.
Because SBA loans are typically long-term, low interest and partially backed by the federal government, they are consistently ranked as the most affordable and sought-after form of funding available for entrepreneurs.
Unfortunately for small business owners, these dream loans aren’t easy to get.
To give out these loans, the SBA works with trusted intermediary lenders. That means that a small business must be approved for the loan not only by the SBA but also by the intermediary lender. Both institutions will look at your personal and business financial statements, credit score and want to know what the loan will be used for and what collateral you have to offer.
Because SBA loans are partially backed by the U.S. Small Business Administration, it lowers the risk taken on by the intermediary lenders. In the chance that a small business is unable to pay back its loan, the SBA will cover it. It’s a great deal for small businesses as well as intermediary lenders.
There are many different loan options available from the SBA, but the most common is the SBA 7(a) loan. We will focus on this loan option throughout this article.
Other SBA loan options:
SBA 504 loans.
SBA Export loans.
SBA Disaster loans.
Now that you know the background of the SBA and SBA loan, let’s get onto the tips for how to prepare an SBA loan package.
How Much Do You Need?
Elements to include in an SBA loan package
An SBA loan package is the application you submit to receive a loan through the U.S. Small Business Administration.
Your SBA loan package must include three important items:
Statement of purpose.
Each of these items must be included in your SBA loan package.
Let’s walk through the SBA’s specific recommendations about how each of these items is presented and what needs to be included:
Statement of purpose
Your statement of purpose might seem like a nebulous piece of narration, but the SBA has actually laid out exactly what they want here.
The SBA wants you to include in your statement of purpose:
Information about your loan request.
Written business plan and description.
A narrative about how the loan will positively affect your business.
A statement about how you as the business owner have already invested your time and money into making the business succeed.
A key fact to remember about the SBA is that 100% financing isn’t an option. They want to make sure that you as the owner have invested your own time and money into the business before they’ll agree to fund your loan.
This is because the SBA knows that, as they say, you’re more invested when you’ve got skin in the game. They want to see your personal commitment and connection to the business in order to believe that you won’t easily give up when your business hits inevitable ups and downs.
Of the four key elements of the statement of purpose, information about the loan request is the section more often skipped over by business lenders. Yet this is a dangerous mistake since it’s the section that lenders consider most important! Keep in mind that, to a lender, the most important question you can answer is to explain how the business will repay the loan.
Be sure to include in this section the duration of the loan you’re requesting, the amount, proof of ownership, why you need the loan, how you intend to repay it and the collateral you have available. We can guarantee that’s what the lender is interested in.
Your business plan
The next thing you need to include in your SBA loan package is your business plan. This section goes back to the fact that the lender is examining your business to make sure that you’ll be able to pay their money back.
The business plan that you include with your SBA loan package doesn’t need to be your entire business plan but can simply be the necessary excerpts of your business plan.
Your business plan should include:
A description of your business.
A prediction for the future of your business.
Information about your product or services.
Outline of how the business and management team is organized.
We want to say it again: this is essential. If you think you can skip including your business plan, you need to think again. We (and the SBA) believe that this is an essential aspect of your SBA loan package.
We apologize if you’re tired of hearing it, but the most important thing to remember when preparing an SBA loan package is that the lender is most interested in how you’ll repay the loan.
Keeping that fact in mind, you want to provide the lender with financial information that shows that you’re able to and how you plan to repay the loan.
Cash flow statements—cash income and expenses.
Income statements—also known as a profit and loss statement.
Balance sheets—business value or net worth.
Personal financial statements—personal net worth, including debts.
Once you submit your SBA loan package, a lender will review it. Each lender will evaluate to make sure that you meet their unique requirements. In general, a lender looks at the three Cs:
Now that you know what you need to include in an SBA loan package, let’s talk about how to prepare it.
Steps to prepare an SBA loan package
Your SBA loan package needs to include all of the elements listed above; but before you submit, there are a few steps we recommend following to improve your chances of approval.
1. Determine if you’re eligible.
The first and most important step you can take before preparing an SBA loan package is to make sure that you’re eligible for an SBA loan.
In general, the SBA requires that you meet these rules:
680 or higher FICO credit score for all business owners.
Personal or business collateral meets a large percentage of the value of the requested loan.
Two or more years in business.
Business is profitable.
No debt obligations, loan defaults, or delinquencies.
If you’re applying for an SBA 7(a) loan, you also need to meet these requirements:
Be considered a small business (500 or fewer employees).
Engaged in an eligible, non-vice industry.
Be engaged in for-profit business in the United States.
Demonstrate a need for the loan.
Show that owner has invested time or money already.
Be in line with SBA goals.
2. Identify your specific financial needs.
Before you put together your SBA loan package, it’s important to know how much financing your business needs and exactly how you’re going to use that money.
As stated on their website, the SBA doesn’t offer 100% financing. The SBA and intermediary lenders are interested in helping to fund new ventures for small businesses, but they also want to make sure that they will get their money back.
By identifying why you need an SBA loan, the lenders will be more willing and interested to fund your loan.
3. Ask a local lender or the SBA about different loan options.
Before putting together your SBA loan package, you should consider talking to local lenders or the SBA about the different types of loan options.
There are various loan options available that apply to specific types of businesses, amounts of money and types of loans. For example, if you’re a startup that’s in need of $50,000 or less, then the SBA microloan is perfect for your business. On the other hand, you wouldn’t be eligible for an SBA 7(a) loan, which is only for businesses that have been in operation for at least two years.
Knowing what options are available will make it easier for you to know which type of loan you’re eligible for and which to apply for.
4. Gather and organize your documents.
Once you know which loans you’re eligible for, it’s time to gather and organize your documents.
To review, you need:
Statement of purpose.
5. Fill out the required SBA forms.
In addition to the documents listed above, you also need to fill out and sign some SBA forms.
SBA Form 1919.
SBA Form 912.
SBA Form 159.
Once you’ve collected all of the SBA forms and other supporting documents, it’s time to have your SBA loan package reviewed by a lender or business mentor.
6. Prepare a draft SBA loan package for review by a lender or mentor.
The documents and SBA forms listed above go together to create your drafted SBA loan package.
Make sure you have everything organized, clearly documented and neatly put together before bringing them to the bank, SBA, or business mentor for review.
That’s it! Once you’ve had your draft reviewed by a lender or mentor, you’re ready to submit. Have confidence that you’ve done everything you can to improve your chances of approval.
Tips to create the best SBA loan package
Receiving approval for an SBA loan is no easy feat. Now that you know what an SBA loan package entails and the process for putting it together, we have some tips on improving your chances of approval.
We want to make sure that you put together the best possible SBA loan package and receive approval for your SBA loan on the first try.
1. Research potential lenders.
When you’re applying for an SBA loan, the intermediary lender is just as important as the SBA. You must receive approval from both lenders to receive a loan.
We recommend that you research potential lenders to find ones that have worked with the SBA before and to know their specific eligibility requirements. The more you can tailor your SBA loan package to a specific lender, the more likely it is to be approved.
2. Make it easy to read.
Lenders are in the business of lending money, not reading essays. Make sure that your SBA loan package is easy to read, brief and stays on topic. Don’t tell the SBA and their intermediary lender your life’s story, but do give them the necessary information.
When you’re writing your business plan and letter about why you’re requesting a loan, give it the time it deserves. Try not to write in a haste but to take time to sleep on your ideas. Write them down, put it away for a few days and then come back to edit it.
By sleeping on it for a few days, you’ll find that your ideas are clearer and can be presented more succinctly.
3. Point out: this is how you’ll get your money back.
The SBA and the intermediary lender want to make sure they’ll get their money back. They’re taking a risk by loaning you money and they want to make sure that it’s a good risk to take.
Make their job simple by telling them exactly how you plan to use the loaned money and how you’ll pay them back. This isn’t quite as simple as saying, “I’ll pay you back,” so make sure that you outline a detailed, comprehensible and reasonable plan.
4. Present attractive projections.
Let’s be clear here, we are not recommending that you lie to the SBA. What we are recommending is that you present positive financial projections.
There are reasonable projections for business growth. You don’t have to show the SBA the most conservative of those.
5. Emphasize management strength.
The management team of a business plays a major role in that business’s success. The SBA and their intermediary lenders are interested in knowing how you’ll use the loan money to make your business more successful.
One aspect of that: your management team. So in your business plan, be sure to note the strengths of your management team and the role they will play in helping to make your business even more successful than it already is.
6. Learn from your mistakes.
If you have submitted an application for an SBA loan before, be sure to learn from your mistakes.
7. Proofread and edit.
Small business owners are great at running businesses, but they’re not always the best writers. That’s okay! But it means that you need to reread, edit and proofread your documents before submitting them.
This includes your financial documents! You want to make sure that there are no mistakes in your financial documents.
It’s possible to edit your own SBA loan package, but we highly recommend getting a friend or colleague to also look it over. When you read your own writing, you’re likely to skip over and not see mistakes. Having someone else review your material, even if they aren’t an editor, can mean those errors get corrected before submission.
This article originally appeared on Fundera, a subsidiary of NerdWallet.