Many people want to create a business but need money to do so. Luckily, SBA loans are available. But what are SBA loans, and how do you write a business plan to get an SBA loan?
SBA loans are loans that are given to small businesses to help them begin production and help them grow. The guidelines of these loans are created by the Small Business Administration and banks give them to the businesses. Business plans for the SBA loans are in a traditional or lean startup format.
Now that you know a little bit about what SBA loans are and how business plans that people use to apply for them are written you may be wondering how to write a business plan to apply for an SBA loan.
What are SBA Loans?
SBA loans are loans that are given to small businesses. The guidelines for these loans are written by the Small Business Administration, but they don’t give out the loans. Instead, banks and credit unions are the ones that lend the money to small business owners.
SBA loans make it easy for lenders to access capital and the loan guidelines make it less risky for the lenders to give money to small businesses. (Source)
SBA loans typically have lower fees and rates than loans that are similar, so it is better to get an SBA loan rather than a non-SBA loan. Some of the SBA loans give you support that helps you run your business so you don’t have to do it by yourself because you have help from people who have business experience. SBA loans also tend to have lower down payments than other business loans, have flexible overhead requirements, and don’t need you to give the bank or credit union collateral for some of the loans.
What Types of SBA Loans are Available?
There are 3 types of SBA loans: 7 (a) loans, 504 loans, and microloans.
7 (a) Loans
7 (a) loans have limited fees and the interest rates are capped so they can’t increase too much over time. The 7 (a) loan is the most common type of SBA loan and you can take out up to $5 million. (Source)
This loan type is mainly used to purchase real estate for a business, but it can also be used to pay for:
- Short-term and long-term working capital
- Refinance business debt
- Purchase furniture, fixtures, and supplies
There are many qualifications to be eligible for a 7 (a) loan. To be eligible for a 7 (a) loan, your business needs to:
- Operate for profit
- Be considered a small business by the SBA
- Be doing business in the United States
- Have reasonable invested equity
- Use other financial resources before applying to the loan
- Demonstrate need for the loan
- Use the funds for business purposes
- Don’t miss payments for other debts
To get a 7 (a) loan you need to submit or complete:
- SBA form 1919
- SBA forms 912 and 413
- Profit and loss statement
- Projected financial statements
- List of the subsidiaries and affiliate names and addresses.
- Business license/certificate
- Loan application history
- Income tax returns
- Personal resumes
- Business history and overview
- Business lease
- 3 years of Federal income tax returns
- Proposed bill of sale
- Proof of equity injection
The 504 loan is meant to be used to expand a business. It has a fixed financing rate and you can take out up to $5 million. (Source)
504 loans can be used to construct or purchase:
- New facilities
The 504 loan can also be used to improve:
- Parking lots
- Existing facilities
However, the 504 loan can’t be used to pay for:
- Working capital
- Repaying/refinancing debt
- Investment in rental real estate
Microloans are loans that can be used for nearly anything that improves or expands a business. This is one of the only SBA loans that can be used by non-profit childcare centers. Typically a microloan gives $13,000 to small businesses, but it can give them up to $50,000. (Source)
A microloan can be used to pay for:
- Working capital
However, microloans can’t be used to purchase real estate or pay off existing debts. It is meant to be used to re-open, repair or rebuild your small business in a way that will improve it and make customers want to purchase things from your small business.
How Should I Write a Business Plan for an SBA Loan?
Business plans are important when you are first starting a business, but it is also important to have a clear and concise business plan when you are applying for an SBA loan. If you do not get the SBA loan that you apply for, then you won’t be able to start your business and you likely won’t have a way to support yourself or your family. And if your business plan does not get an SBA loan approved, then you likely won’t be able to get investors to invest in your company.
There are two main business plan formats; traditional and lean startup. (Source)
Traditional business plans have a standardized structure and are very detailed in all of the included sections. However, they take a lot of work to compile and take a long time to make and read, so they take a little bit longer to approve when you use a traditional business plan to apply for an SBA loan. However, lenders and investors like seeing traditional business plans because they are very thorough.
Lean startup business plans are shorter, but they are also less common and less detailed. They also have a standard structure, but they tend to only include the most important parts of your business plan rather than the entirety of your business plan. They don’t take a long time to finish making and are typically only one page long. If you give potential investors or lenders a lean startup business plan, they may ask for you to tell them more about your business.
What do You Need in a Traditional Business Plan for an SBA Loan?
- Executive Summary
- Company Description
- Market Analysis
- Organization and Management
- Service or Product Line
- Marketing and Sales
- Funding Request
- Financial Projections
In the executive summary of your traditional business plan, you will need to talk about what your company does and why it will be a successful company. You should put your mission statement in this section, as well as the financial information for your company.
In the company description, you will need to put the advantages that your company has, including whether or not you have any experts in the field working for you. You will also need to include the location of your business, if you have found it already, and who your company will serve with its products or services. In this section, boast about the company’s strengths, as many strengths as you can.
In the market analysis section of your business plan, talk about what the current industry your business is a part of looks like at the moment, and talk about what other companies in the industry are doing. Talk about the trends and themes in the market and why other companies in the same industry are successful in the industry they are in.
In the organization and management section of your business plan, talk about how your company will be structured. Is it a C or an S corporation? This is a great place to put a chart that includes all of the management and who is in charge of what departments in the company, and who will answer to who when it comes to the difficult questions and issues that will come up during the business day. If you already have a lot of the managers chosen, put their resumes in this section and talk about how their experiences will help your company.
In the service or product line section, describe in detail what you are selling or what service your company will be providing. Talk about what the product will look like, how long it will last, and any copyrights or patents that you have filed already or will file in the future. You should also talk about the research and development for your product or service that is currently happening or will happen in the future.
In the marketing and sales section talk about your marketing strategy and how it may evolve. Also, talk about how you will attract customers to your business and how you will keep them loyal to your company and products. Talk about all of your marketing and sales strategies, even if you don’t think that they will work very well.
In a traditional business plan, include a funding request. In this section, talk about what funding your company requires and clearly explain what you will use it for and how long that money will last the company. Talk about salaries, materials, equipment, and bills that you will pay with the funding that you are asking for. After you talk about what you will use the money you receive from a loan for, talk about how you plan on repaying the loan and how much you plan on paying monthly, and how your company will get that money.
In a traditional business plan, include a financial projections section. In this section, talk about what your company will make every month for a few years and try to convince the reader or loan provider that your business will be financially stable long-term. If you are asking for funds to support an already established business that you own, show what your company has made in the last few months and convince them that your company is stable and that it is a good idea to give your business the money that you are asking for.
In the appendix section of your traditional business plan, add any of the supporting documents that you did not include in the other sections. Include credit histories, resumes, pictures of products, reference letters, legal documents, and patents if you have them available to you.
If you have a small business that you want to start quickly or is very simple, then you will likely want to create a Lean Startup business plan when you apply for an SBA loan. Lean startup business plans are smaller and easier to write than traditional business plans.
What Do You Need in a Lean Startup Business Plan for an SBA Loan?
- Key Partnerships
- Key Activities
- Key Resources
- Value Proposition
- Customer Relationships
- Customer Segments
- Cost Structure
- Revenue Streams
When you talk about the key partnerships, talk about what other businesses will work or currently work with your business including suppliers, manufacturers, subcontractors, and strategic partners. If you can list the other companies that you will work with already, then do so in this section.
In the key activities section, talk about what your company will do to get ahead of the competition. Talk about how you will use technology to connect to the customers and talk about whether or not you will sell directly to your customers.
For the key resources section of your business plan, talk about the assets that you have including your staff and your intellectual property. Talk about how you will be valuable to your customers and how you will make your products or services seem necessary to them.
In the value proposition section of your business plan, talk about how your products or services are unique and bring value to the current market.
And In the customer relations section of your business plan, talk about the customers that you already have and how future customers will interact with your business. Talk about what technology you will use to connect with them and whether or not you will have both a physical store or just an online store.
In the customer segments section of your business plan, talk about the target audience for your products or services.
The cost structure section of your business plan is to talk about how you will reduce the cost of production and how you will maximize the value of your product or services. Talk about what significant costs your business will have and then talk about the strategy you have to keep your costs down.
In the revenue streams section of your business plan, talk about how your company will make money. Talk about membership fees, ad space, and direct sales that your company will make money from. If there will be multiple sources of revenue, talk about all of them.
Writing a business plan to get an SBA loan may take more work depending on the format you choose to submit your business plan in. It may take more work to do a traditional business plan than a lean startup plan, but you might end up being more successful in receiving your loan.