With the Federal Reserve increasing the interest rate in response to rising inflation, small business owners may be feeling the repercussions of measures to stabilize the economy on their bottom line, especially when interacting with customers or negotiating with supply chain partners. Effects could look like price increases and/or decreases in a business's margin. Meanwhile, finding affordable funding in the current interest rate environment can be difficult too.  

Increased costs come at a time when many businesses want to invest in new employees and/or expand their business. What is one way to answer this financing concern? A loan backed by the Small Business Administration (SBA) can help a business shift into new markets, invest in new product offerings, or grow its physical presence.

Who is the Small Business Administration?

The SBA is a government agency tasked with supporting small businesses. SBA-backed loans make it easier for business owners to receive needed funding in the form of a loan, while reducing lender risk. A lending institution (like a bank) processes the loans, which have become an invaluable way for businesses to fund a real estate expansion, or refinance high-priced debt, for example. The SBA guarantees a percentage of the loan for the lender, reducing the risk.

The application process requires some key steps to ensure you’re getting the right type of funding at the best rate available. 

The SBA loan process

To be approved for an SBA loan, you need to show that you and the business have a history and capability of paying back what you borrow. Many SBA loans will require you to prove at least two years of business activity with a focus on strong revenues. This indicates that the business has a cash flow that can go toward repaying the funds. 

If you’re more than a 20% owner of the business, then your credit score is also important. Unlike other business loans, SBA loans will evaluate an owner’s personal finances. In certain situations, like when applying for a SBA 7(a) loan, the evaluation could include adding collateral in the form of personal assets. If, however, personal collateral is not available, the SBA 7(a) loan may still be approved.

Because a lending institution processes the loan, you’ll apply for the loan through whichever institution you choose, not the SBA itself. A bank will likely require some standard important documentation, such as: 

• Business license
• Business tax returns
• Personal income tax returns
• Personal financial statement 

The institution may ask for specific documentation as well, which could vary depending on the institution and which SBA loan you apply for.

How to know whether your business qualifies

Not every business will qualify for each type of SBA loan. Instead, you will have to comply with the specific type of loan you’re seeking. For instance, if you’re in a federal disaster area, you could consider applying for an SBA Disaster Loan to repair physical damage to your business property. If, instead, a falling tree landed on your business’s roof (outside of a disaster zone), then you would need to apply for a different loan, such as an SBA Express Loan.

Businesses that apply for loans must follow standard rules, no matter which type of loan you seek. A business must meet the following criteria: 

• Be a small business, as defined by the SBA
• Be for-profit and operate in the United States
• Have a need for financing, including a clear business use for the funds
• Have had the owner invest personal equity or resources into the business 
• Additionally, you’ll have to comply with the specific sector you operate in, based on current federal levels.

How to pick the right type of loan

The SBA offers various types of loans, all of which have unique stipulations or requirements depending on your business’s need for funds and the fund’s use. You’ll want to target the loan that makes sense for your specific situation. 

The SBA 7(a) loan is the most common SBA loan sought by businesses. This loan offers low interest rates and long repayments, allowing for the business to pay back the funds in a cost-efficient manner. This type of loan also has a high cap of $5 million, allowing businesses to use it for various needs, from expansion to equipment purchases to even refinancing a bridge loan. But you will need to wait a few months before securing the financing.

An SBA microloan, on the other hand, is ideal for those situations where affordable funding is required for smaller goals. The maximum cap for these loans is $50,000 — ideal for those who are self-employed or for businesses that don’t require significant capital investments to launch new lines or markets.

Another common loan is the SBA 504 loan, which you might use when investing in large equipment but have few resources for the down payment. Or you might use it to fund employee expansion, as well as purchase real estate or refinance. 

Whatever the goal, when securing financing in the current interest rate environment, it’s important to check whether there’s an SBA loan that might work for your needs. It can help you grow, even in an unsteady economic climate.

Work with the SBA lender named #1 in Illinois for 2021 and 2022.¹ Wintrust’s experienced team can help you find the SBA loan that matches the needs of your business.

1. Based on total amount of dollars lent through SBA loans for fiscal year ending 9/30/2022.