Getting an SBA Loan for Your Small Business: Part I

I wrote this two-part article series for the oDesk blog, where it originally appeared. Growing a small business, even with the amazing tools available to the modern business owner, can be a challenge. One of the biggest challenges is often finding the time and money to power that growth. There are many time management gurus out there that know quite a bit more about the subject than I do, so I’ll leave that subject to them (for what it’s worth, I’ve learned that finding good employees, in person or online, is key to making your time go a long way).

But I do know a bit about the latter — finding the money to power the growth of your small business, and specifically your oDesk-based business. As the owner of an oDesk-based business and someone who recently completed the process of applying for (and receiving) a Small Business Adminsistration (SBA)-backed loan, I’d like to share some of what I’ve learned.

Step 1: Take an Honest Look at Your Business

Before I explain how to obtain an SBA-backed loan for your oDesk-based business, I want to first warn you — this type of loan should not be used to solve a fundamental flaw in your business. Specifically, if you’re not generating positive cash flow, and if you don’t have a clear plan for how to do so, an SBA-backed loan is not the right option for you. Here’s why.

The SBA and your bank are going to require you and any other person who owns at least 20% of your business to sign a personal guarantee. This means that if your business fails, or if your business is unable to make the payments on the loan, the SBA and your bank are going to require you, personally, to pay back the loan. Even if your business is set up as a corporation, because of the personal guarantee your obligation to repay this loan will survive the failure, bankruptcy or dissolution of your business. So, understand that an SBA-backed loan can be a powerful tool to grow your business, but it comes with significant personal risk that you should be aware of.

Step 2: Understand Your Options

A Small Business Administration-backed loan (often called an ‘SBA Loan,’ although it’s your bank, not the SBA, making the loan) is a bank loan made for business purposes where a majority of the debt your business takes on is guaranteed by the Small Business Administration, an agency of the U.S. government.

The most common loan program the SBA has — and the one I’ll be focusing on — is called the 7(a) loan program. These loans may be used for a number of purposes; those most likely to be applicable to an oDesk-based business are:

  1. The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
  2. Long-term working capital, including the payment of accounts payable
  3. Short-term working capital needs

These loans are typically structured on a 7-year term with an interest rate that varies and is usually 2.75% over the prime rate — so currently, most of these loans have an interest rate of 6%, which is significantly better than the rate you would get by financing your business using credit cards or other financing options. The average 7(a) loan is approximately $370,000, but loans as small as $25,000 and as large as $5 million are possible.

These loans do carry packaging and guaranty fees, and require significantly more paperwork than a typical business loan. You should certainly do your homework to evaluate all your financing options, but if your business is young or does not have significant assets, chances are an SBA-backed loan will be one of the best financing options that your bank will make available to you.

Step 3: Planning is Half the Battle

The SBA loan process is not a quick one; it’s a safe bet to plan on it taking several months. To kick things, off, you should first:

  • Write a business plan, if you don’t already have one.
  • Ensure that you have accurate financial records for the past three years (or as many years as you’ve been in business, if it’s been less than three years) for both your business and your personal finances.
  • Prepare financial projections. While it varies from lender to lender, most will want to see two sets of projections — a ‘worst case’ and a ‘best case’ projection. While at their heart projections are merely guesses, make sure to research your projections and base them on the past history of your business and what you reasonably feel your growth will be moving forward.

N.B.: If you need help getting your financials up to date, writing your business plan or developing these projections, look to online workers! I have hired accountants, researchers and writers via oDesk in the past, all of which were instrumental in helping me assemble the information I needed to provide as part of the loan application process.

In your business plan, you should include an overview of why you’re asking for a loan in the specific amount you’ve asked for, and how, exactly, you plan to use that money. This will form the basis of the loan application, and these numbers, once submitted to the SBA, can’t be changed. So be careful when putting this request together — you may tend to focus on the total amount you’re requesting, but how you allocate that amount into individual expenses or categories is just as important. If you say you want $10,000 to purchase equipment and $15,000 to hire a new employee, if your loan is approved, your bank is going to make sure that you spend $10,000 to purchase equipment and $15,000 to hire a new employee.

In addition to these records and plans, expect to be asked for a copy of your resume. If you have any specialized training, a degree, etc., that relates to what you do for your business, include that. Banks are looking at more than just your financials — they want to see if you can reasonably be expected to succeed in the implementation of your business plan. This isn’t a time to skimp or put forth less than your best efforts. For example, when we obtained our first SBA-backed loan at Creatuity, our loan officer was very blunt and stated that the time and attention I put into the business plan and other documentation is what finally convinced the bank to approve the loan and submit it to the SBA for consideration.

Once you meet the minimums with your paperwork — you have a good business plan, a resume and financial records, and projections that show you can reasonably afford to repay the loan — it all comes down to numbers. In the part II of this article, we’ll look at the numbers the bank will use to guide their decision to approve or deny your loan application.

Do you have any questions about the loan application process? Have you received a loan to operate your oDesk-based business? I’d love to discuss it with you in the comments!

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Jamie Larson