Starting a business is a big step.
If you’re an immigrant with a dream to open your own small business, finding the money to do it can be hard. Small business loans can be a good way to get the money you need. But, it’s not always easy to get these loans, especially when the economy is tough and interest rates are high.
This is where Small Business Administration (SBA) loans can help. SBA loans are designed to help people like you start or grow your business. But what are they, why are they useful, and how do you get one?
In this article, we will talk about these questions. We will explain what SBA loans are, why they might be a good choice for you, and how you can apply for one. Our goal is to help you understand SBA loans better, so you can decide if they are the right choice for your business.
Note: This is the third article in our new “Small Business Financing” series. In part one, we reviewed the pros and cons of merchant cash advances (MCAs), which you can find here. In part two, we reviewed the benefits of a business line of credit, which you can read about here.
Current State of SMB Lending
The statistics are undeniable:
At major banks, the small business loan approval rate is just 14.5%. Small banks and credit unions are only marginally better, with an approval rate of just over 21%.
And while alternative lenders have the most promising percentage, their loan approval rate is a rather discouraging 27.6%.
That’s why SBA loans are more important than ever.
With a nearly 50% approval rate at small banks, SBA loans can help immigrant business owners get the capital they need to succeed.
What Are SBA Loans?
SBA loans are just like a traditional small business loan—with one key difference:
they are partially guaranteed by the U.S. Small Business Administration.
As a result, SBA loans offer flexible terms and low interest rates to small businesses.
Thanks to their government backing, SBA loans incentivize banks and other financial institutions to lend to companies that may not otherwise qualify for conventional loans.
How Do SBA Loans Work?
As we mentioned above, an SBA loan is partially guaranteed by the government.
That means you, the borrower, and the Small Business Administration share responsibility for the loan.
For example, let’s say the SBA guarantees 80% of a given loan.
In that case, you and your small business ownership team would be responsible for covering the remaining 20%.
If you were to default on that loan, the government would pay for 80% of the amount.
However, if you failed to make payments on your 20%, the SBA would be legally entitled to seize and sell those assets.
Types of SBA Loans
There are many types of SBA loans to consider—each with specific advantages and repayment terms.
In this article, we will focus on the three most common SBA loans: 7(a), 504, and Microloans.
SBA 7(a)
As the SBA’s most common loan program, the 7(a) is optimal for businesses looking to make significant purchases, like new real estate.
The SBA 7(a) can also be used for:
- Providing short and long-term working capital.
- Refinancing current business debt.
- Assisting in business expansion or acquisition.
- Purchasing machinery, furniture, and other supplies.
A standard 7(a) loan can deliver up to $5 million to your small business.
7(a) loans have both fixed and variable interest rates, with terms that extend to 25 years.
If you borrow over $150,000, the government will guarantee up to 75% of your loan.
If you borrow less than $150,000, the government will guarantee up to 85% of your loan.
While the standard 7(a) loan can disburse funds in 5 to 10 business days, there are faster alternatives available.
For example, the 7(a) “Express” loan has an application turnaround of 36 hours or less, though its maximum loan amounts are reduced to $500,000.
To view the complete list of SBA 7(a) loans, click here.
SBA 504
SBA 504 loans are ideal for businesses looking to purchase land, commercial real estate, or long-term equipment.
504 loans involve two different loans: one from a bank or credit union, which provides 50% of the funding, and another from a Certified Development Company (CDC)—a not-for-profit—that contributes roughly 40% of the total money.
The CDC portion is fully guaranteed by the Small Business Administration.
The borrower then provides the remaining 10%, which functions as the project’s down payment.
Though 504 loans are capped at $5.5 million, some businesses may qualify for up to three projects and receive a total of $16.5 million.
With a 504 loan, borrowers can select from 10, 20, or 25-year repayment terms.
According to the SBA, interest rates are fixed for the entire loan term and are pegged to the current 10-year U.S. Treasury notes.
In other words, interest rates are typically 3% of the debt and can be financed with the loan.
Note: Unlike a 7(a) loan, an SBA 504 cannot be used for working capital, refinancing current business debt, or investing in rental real estate.
To learn more about 504 loan eligibility, click here.
Microloans
As the name implies, an SBA microloan allows business owners to borrow a small sum of money.
While the maximum microloan is $50,000, many small business owners apply for much less.
In fact, the average SBA microloan is about $13,000.
Though they are specifically designed to help companies start-up and expand, microloans have a broad range of additional uses that include:
- Working capital
- Inventory costs
- Supplies, furniture, and fixtures
- Machinery and equipment
- And more
There are only two ways in which an SBA microloan cannot be used: purchasing real estate and paying for existing business debts.
An SBA microloan has a maximum repayment term of 6 years. While interest rates will depend on the lender, microloans typically hover between 8 to 13%.
To learn more about microloans — and participating microlenders — click here.
Can Immigrant Business Owners Qualify for SBA Loans?
Absolutely! Many immigrant business owners can qualify for SBA loans.
As well they should, considering 44% of Fortune 500 companies are founded by immigrants or their children.
Generally speaking, there are two categories that make SBA qualification possible for immigrants:
- If a business is owned by a lawful permanent resident (LPR)—i.e., a green card holder who is lawfully authorized to live in the U.S.
As the SBA clearly states, funding is available for businesses that are “at least 51% owned by individuals who have LPR status.”
Note: This category includes immigrants who have sought asylum or refugee status and have received lawful permanent resident status. - Secondly, SBA qualification is also possible if a business is owned by temporary U.S. residents who hold the appropriate work visa(s)—like an H-1B or E-2.
While non-citizens can apply for SBA loans, qualification is fully dependent on the lender.
Regardless of your individual status, the SBA will carefully inspect your documentation—including your business records, your personal finances, and your immigration paperwork.
We will discuss this essential part of the process below.
The Application Process: Part One
While each SBA loan has its own demands, there are several foundational requirements to consider.
To be eligible for an SBA loan, you must first:
- Have a personal credit score above 620
- Be considered a small business, as defined by the SBA
- Have operated at least two years as a registered, for-profit business
- Not owe any existing debts to the U.S. government
- Have personal (or business) assets to secure your part of the loan
You also must be able to demonstrate that you tried and failed to find financing elsewhere.
After all, the lender—and the SBA—will need to know why your loan application requires a government guarantee to be approved.
You will also need to ensure that your business qualifies for an SBA loan.
Because the Small Business Administration is a government agency, some business types are automatically excluded from eligibility, including:
- Non-profits
- Gambling organizations (like casinos)
- Religious institutions
- Discriminatory business (i.e., anyone that caters exclusively to one race, religion or sex)
- Lending businesses
If you satisfy all of these requirements, it’s time to gather your documents and submit an application.
Note: If you want to qualify for a 504 loan, you must have a net worth below $15 million and an average net income of less than $5 million (after federal income taxes).
The Application Process: Part Two
Because 7(a) loans are the most common, we will focus on that particular application process.
However, if you are interested in applying for a 504 loan, you can do so through a Certified Development Company (CDC).
Click here to find a qualified CDC in your area.
Or, if you want to apply for a microloan, you can do so through a non-profit or community-based organization.
Click here to find an SBA-approved intermediary in your local area.
What You’ll Need for an SBA 7(a) Loan
When you apply for an SBA 7(a) loan, you will compile what’s known as a “loan application package.”
This package simply contains information like your loan application form, your personal financial records, your business records, and more.
Your local lender will have a specific process and guide you through it step-by-step.
Nevertheless, this comprehensive checklist contains everything the lender may request:
- Complete SBA Form 1919, the Borrower Information Form.
- Complete SBA Form 413, the Personal Financial Statement. Each business owner and/or co-signer will need to complete this form.
- Profit and Loss (P&L) Statement current within 180 days of application.
- Supplementary P&L Schedules for each of the past three calendar years.
- Projected financial statements for the upcoming year, with a detailed explanation.
- All business certificates and licenses.
- All records of past business loan applications.
- Three years of your business tax returns.
- Three years of your personal tax returns.
- Complete resumes for each business owner and/or co-signer.
- Business leases for all real estate your business owns or rents.
If you intend to buy an existing business, you may also need to provide the following information:
- Current balance sheet and profit and loss statement.
- Federal income tax returns for the previous three years.
- Proposed bill of sale including the terms of sale.
- Asking price with schedule of inventory, machinery and equipment, and furniture and fixtures.
- Franchise, jobber, or licensing agreements.
- Proof of equity injection.
To view the SBA’s 7(a) application details, click here.
Tips for Improving Chances of Approval
If you’ve made it this far, chances are you’d like to get an SBA loan.
Here are three tips to strengthen your chances of approval:
1. Strengthen Your Personal Credit
The higher your credit score, the higher your odds of SBA loan approval. It’s that simple.
While a FICO score of 620 could technically qualify for an SBA microloan, you will need at least 640 to get an SBA 7(a) loan.
If at all possible, aim to reach 700 or higher.
While it takes time to build credit, the rewards are well worth the effort. Plus, you can start today by paying off outstanding debts, reducing your credit utilization ratio, and more.
For more tips about boosting your credit, click here.
2. Apply Through Your Local Bank
Want to increase your chances of getting an SBA loan?
Apply through your local bank or credit union, rather than a major financial institution.
Here’s why: many local banks have a designated representative who deals directly with the SBA, so they can help you jumpstart the process right away.
Plus, if you already have a relationship with your local bank, they may be able to put in a good word for you.
Don’t have a local bank or credit union you trust? No problem.
Be sure to visit a Small Business Development Center and get advice about finding the ideal lender.
Click here to get started.
3. Develop a Compelling Business Plan
It’s very important that you can articulate your business plan to the lender, especially if your credit is less-than-perfect.
After all, lenders want to know two things:
- How you’ll use the money
- How you’ll repay the loan
By building a powerful (and specific) business plan, you can impress lenders and give them greater confidence in lending you money.
Never underestimate the power of persuasion, especially when it comes to lending.
Moving Forward
Small businesses are the backbone of the American economy, and SBA loans help make it even stronger.
And yet, while SBA loans are powerful, they’re not the only funding option available to you and your business.
You can also access a merchant cash advance (MCA) or business line of credit, depending on your short and long-term needs.
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