Getting an SBA Loan for Your Small Business: Part II

Earlier this week I posted an overview of the SBA loan process, and presented a few steps to get started. Now it’s time to get into the nitty gritty — the numbers. The bank is going to look at a few things:

  • How much money you’re asking for.
  • The maximum amount of risk the SBA will guarantee. If your loan is for more than $150,000, the SBA will only guarantee payment of 75% — so for example, if you borrow $1,000,000 and default on the loan, the SBA is only going to reimburse your bank for $750,000 and the bank has to absorb the remaining $250,000.
  • What sort of assets you and your business have. Generally, if you can show personal and business assets that total at least 75% of the loan amount you’re requesting, your bank is going to approve your loan application. The wider the gap between your assets and this amount, the more the bank is going to look at your business plan, your financials and your resume to decide if they want to accept this risk.

Loans for the Lean: A Note on Assets

The last factor — assets — is likely the biggest hurdle facing oDesk-based businesses; as a virtual business, chances are you don’t have many assets. Instead of hundreds of thousands of dollars of equipment, you have contractors and a laptop.

However, remember that the small things add up when it comes to assets, so it’s important to think of any and every asset you can when putting together your application. And going forward, when you buy anything for your business, you should check with your accountant to determine if it can be considered a business asset.

You should expect that because you don’t have as many assets as most businesses, your bank is going to need convincing that you are worth taking a risk on. As a result, it’s so important to work with a bank that you have some sort of relationship with. If the person evaluating your loan application knows you well, they will know about your successes working on oDesk, and you’ll have a much better chance of them approving your loan application. So my advice — even if you aren’t considering a business loan at this time — is to find a local bank, do all of your business and personal banking there, and get to know the employees in your local branch of the bank. Bankers don’t often encounter people who have built virtual businesses or who work online, so it’s going to take some time to educate them about what you do and your part in the future of work. But consider that an investment into the growth of your business.

The Final Stage: More Paperwork

When you get the good news that your bank has decided to approve your application, you get to celebrate accordingly — with the next round of paperwork. If you felt like you had to do a lot of paperwork to get to this point, hold on tight.

Many banks will hand you off to a ‘packager’ at this point, which is a consultant or business that does nothing but take all of the paperwork you’ve provided thus far, plus all of the bank’s paperwork and your answers to a number of questions, and convert it into the 500+ pages of documentation that are required to be prepared before a loan can be submitted to the SBA. The ‘packager’ is generally going to charge you anywhere from $1,500 to $2,500 for their services; it’s wise to build this into the amount of your loan request. Once the packager has completed their paperwork, they will set up a time for you to sign this massive collection of papers and documents. Once it’s signed, it’s submitted to the SBA for approval.

If your bank is an SBA Preferred Lender (which is an important thing to look for when selecting a local bank to work with, if you are planning for or considering an SBA loan in the future), then the submission to the SBA is basically a formality and you should have a final approval of the loan at this point. If your bank isn’t an SBA Preferred Lender, then the SBA will review all of your documentation and make a determination concerning the approval of your loan.

Once you get to this final stage, your bank will set up a time for you to sign one last set of paperwork that outlines your responsibilities and duties under the loan. Once that paperwork has been signed, you may begin drawing from the proceeds of the loan to make the purchases you outlined in your business plan.

If you do not already have a business address for your company (and a corresponding lease), your bank is most likely going to require that you obtain a lease before you draw any money from the loan. It can be helpful to build this expense into the amount you’re requesting for your loan, and then find an office building or office park with executive offices nearby that you can use.

The process of obtaining an SBA-backed loan is a long, complicated process, and if you are operating an oDesk-based business, it can be even more complicated. But if you find a good local bank, are patient and write an excellent business plan, you will be on your way to funding in no time.

I’d love to hear from you if you’ve had success obtaining an SBA-backed loan for your oDesk-based business, or if you’re thinking about trying the SBA loan process. Let me know in the comments section below!