For small businesses, getting a loan can be a real challenge. Banks and conventional lending institutions have strict lending standards when it comes to issuing loans, believing that a small business is a bigger risk than its larger counterpart. Small businesses face higher interest rates and an unfair shot at qualifying for a loan, and when you're independent business depends on securing capital quickly, you've got to know what avenues to pursue to succeed.
Ultimately, small business owners are looking at acquiring an SBA (Small Business Association) loan anywhere between 60-90 days from the time of the initial application to when the funds are released. Some factors can alter the tentative timeline like the loan's size, the term length, what the loan will be used for, and the lender's due diligence.
What a Small Business Loan is All About
The most time-consuming aspect of getting a small business loan falls on the borrower, from gathering the correct documentation to the actual application process. But don't let the timeline stress you out if you're in a hurry for the capital. There are things you can do to speed the process along.
SBA loans' purpose is to encourage small businesses because it's true that they face a difficult time acquiring loans from conventional financial institutions like banks and credit unions. The government wants to see these small businesses flourish. The SBA guarantees up to 85% of its loans and dramatically lowers the risk that these lenders fear when taking on these small businesses' loans.
There are three types of SBA loans you can apply for:
- SBA 7(a) loans: a general-purpose loan that can reach up to $5.5 million. The 10-year repayment term is the most common repayment length.
- CDC/504 loans: a loan designed to aid a small business in purchasing real estate and equipment, with longer repayment terms extending to 25 years.
- SBA microloans: smaller loans up to $50,000 with a shorter term length—a six-year maximum repayment period.
Whatever loan suits you, you'll have to provide your lender with a full scope of information about yourself and your company. SBA loans take the most qualified candidates, businesses with comprehensive profit and loss statements, a clear business plan, and an impressive personal credit score to prove their creditworthiness.
The Timeline of a Small Business Loan
Now that you know what to expect and what types of loans there are available to you, here's a detailed rundown of what the actual process looks like and the time it takes to move through each step.
- Gather documentation and necessary information for your loan and apply. This can take one day up to 30 days, depending on how long it takes you to fill out your application, which yes, it can be a meticulous process that can very well take up to a month.
- Your lender proceeds with the underwriting process. Depending on the lender, this amount of time can vary. Typically this part of the process doesn't take long if you've selected a lender that promotes a quick turn-around time—about 10-14 days.
- You will receive your commitment letter after your lender has approved your small business loan. This can take an additional 10-21 days.
- The lender closes the loan—about 7-14 days, and again, this varies from lender to lender.
If you add up the number of days it could potentially take from the start of gathering your information, applying for the loan, to the moment your lender officially closes the loan, you're looking at about 60-90 days. Again, it depends on how the lender operates, your loan's size, and what you're using it for. Your lender will thoroughly go through your application and credentials before issuing you the loan, so be prepared for the qualifying part to be the longest stretch, especially if you've applied for a large amount with a long term length.
If you use a lender in the SBA's Preferred Lender Program, you'll find lenders who have full authority in their underwriting and credit check process without SBA review. For you, that means this part of the loan process is streamlined. Lenders who aren't in the Preferred Lender Program could have less experience, and the SBA becomes more involved in their underwriting process, extending it.
SBA Express Loan
The SBA loan is the ideal solution for a small business, but what if the process is just too long for you? Fortunately, the SBA recognizes that small business owners may be in a hurry to acquire some much-needed capital so their business can flourish, so they created the SBA Express Loan.
This loan is similar to the SBA 7(a) loan, only the application process is faster, and it's only backed by a 50% guarantee by the SBA instead of the traditional SBA loan's 85% guarantee. For you, that means less documentation, less paperwork, and a quicker application. You could be cutting off two or three weeks from your SBA loan timeline with the Express loan.
A few things to know about the SBA Express loan—the maximum amount you can acquire is $350,000, and the loan can be issued to you in either a term loan or a line of credit. The SBA Express loan is more expensive than its standard SBA loan counterpart because of that smaller 50% guarantee, which increases your risk to the lender, so they'll offer you terms that match your risk.
SBA loans generally have the best terms for small businesses, but there are other options out there.
Equipment financing can be a faster process, depending on the lender. You work with your lender to acquire a specific piece of equipment for your business, and the process can be quicker and require less paperwork. It could take a day to get your application ready to submit, one to two days for the loan approval, and five to ten business days to receive the funds. Equipment financing is faster because the lender uses the piece of equipment as collateral if you default on the loan.
Many businesses turn to online lenders because the qualification process can be less stringent, and the approval underwriting is often much faster than traditional lenders, like banks. Some online lenders promise same-day business loans, which can help if you're looking for a lump sum in the form of a standard term loan. You may not get the best interest rate, like the kind the SBA loan can offer, but you'll get your funding faster.
And again, online lenders are the way to go for a line of credit you want to have access to quickly. You can apply for an SBA line of credit, too, but an online lender can get you approved and get you financing in a business day, or sometimes instantly. If you don't have the most impressive credit score, this could be the best option for your business - online lenders offering lines of credit have the low qualifications for approval.
Getting your hands on funding right away can seem like the best idea at the moment, but think long-term. You'll be stuck with this loan for a while, and you'll want to make a smart decision for your business. That could be waiting for an SBA loan, going through an online lender, or pursuing a business line of credit.