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SBA Loan Application: 6 Steps To Build Solid Financial Projections

If you are a small business in the US, chances are you might have already heard of SBA loans. These loans, which range anywhere from $500 to $5.5 million are a great funding option for small businesses.

Yet, SBA loan application criteria are stringent: even if you are eligible, you will need to provide a number of documents to support your application. One of the most important document is your set of financial projections for your business.

Get your SBA loan application approved by building rock-solid financial forecasts for your business. In this article we will cover:

What is a SBA loan?

A SBA loan is a type of loan from a financial institution (e.g. a bank) which is partially guaranteed by the government.

The SBA is an initiative by the SBA (U.S. Small Business Administration), a U.S. government agency. The agency created these loans to simplify access to capital for small businesses. Because SBA loans are guaranteed by the government, banks and other lenders are indeed less reluctant to grant loans to small businesses with higher default risk.

There are a number of SBA loans out there which you can apply for. The most popular SBA loan is the 7(a) loan: it has low-interest rates, long repayment terms, and a very flexible use of loans clause. Yet, for a full list of the different SBA loans and their eligibility criteria, refer to the SBA website here.

However, as the US government guarantees SBA loans (often up to 85%), the eligibility criteria are rather stringent, and the process notoriously thorough.

One of the most important document you will have to provide is a set of financial projections for your business.

Why are SBA loans so attractive?

There are a number of advantages for SBA loans vs. common forms of debt, among which:

Highly competitive rates

Because SBA loans are partially guaranteed by the US government, institutions (banks) are more willing to grant startups loans with lower interest rates. Indeed, in an event of default, they can recover up to 85% their investment (see more on that above).

As per federal rules, SBA lenders are offering SBA loan interest rates as the sum of the prime rate plus a markup rate known as the spread. The prime rate is set by the government and fluctuates over time. As of the date of this article (September 2021), the prime rate was 3.25%. For the current rate applicable, refer to this page here.

Low fees

For the same reasons mentioned above, SBA loan fees are often much lower vs. bank debt fees. The upfront fee is also referred to as the guarantee fee. For instance the guarantee fee is limited to 2% for loans under $150,000.

Longer repayment terms

SBA loans typically have longer maturity dates (repayment terms). The maturities depends on the type of use of funds for the loan. Currently, the maximum maturities are:

  • Working capital or inventory: 10 years
  • Equipment: 10 years
  • Real estate: 25 years

What are the different SBA loans?

There are a number of different SBA loans, each come with its own terms, eligibility criteria and conditions. We have summed up below the different types with their principal characteristics:

SBA loanSize (up to)Use of funds
SBA 7(a) loans$5 millionWorking capital, expansion and equipment purchases
SBA Express loans$1 million
($500,000 from Oct-21)
Fast funding for working capital, expansion and real estate and equipment purchases
SBA 504 loans$5.5 millionPurchase long-term, fixed assets like land, machinery and facilities
SBA microloans$50,000Working capital, inventory, supplies, equipment and machinery
SBA disaster loans$2 millionRepair physical damage due to a declared disaster and cover operating expenses
SBA Community Advantage loans$250,000Normal business purposes; cannot be used for revolving credit
SBA export working capital loans$5 millionWorking capital to support export sales
SBA export express loans$500,000Expedited funding to enhance a business’s export development
SBA international trade loans$5 millionLong-term funding to increase export sales
The different types of SBA loans (source)

What are financial projections?

enterprise SaaS financial model template
An example of a financial plan in Excel format

Financial projections (or financial forecasts), in short, are the forecast of your financial statements, often over a 3- to 5-year period.

When we refer to financial projections, we often refer to the forecast of your profit-and-loss (or “income statement”). Yet, sometimes (especially for loan applications) financial projections require the forecast of all 3 financial statements: P&L, balance sheet and cash flow statement.

If you aren’t sure how to create a financial plan, check out our articles below:
How To Build Accurate Financial Projections For Your Startup?
4 Options to Create Financial Forecasts For Your Startup

What financial projections do I need for a SBA loan?

SBA loan application criteria
SBA loan application criteria

When it comes to financial projections, SBA loan applications are relatively straightforward.

As per their exact guidelines, you will need to produce “Projected Financial Statements that include month to month cash flow projections, for at least one-year period”.

In simple terms, you will need to prepare financial forecasts of your profit-and-loss (P&L) and cash flow statement over 12 months minimum.

Whilst the forecast of the balance sheet isn’t strictly necessary, you will have to forecast things such as working capital and other cash flow movements that impact balance sheet.

Also, whilst SBA only requires 12 months forecasts, we do recommend preparing 3-year (36 months) forecasts for small businesses with limited financial performance and assets as they often have a higher default risk.

6 steps to build solid SBA loan financial projections

We have listed out below a list of 6 steps you should follow to build rock-solid financial forecasts for your SBA loan application.

Step 1. Start from your actuals

Before you start creating financial forecasts for your business, you should first look at your actuals. From there, we will identify and extrapolate a number of drivers which will allow us to project your revenues and expenses later on.

You don’t necessarily need now to start from your entire profit-and-loss or cash flow statement you would have exported from Xero for instance. Instead, identify what drives the most of your business’ performance: is this the number of customers you have? Is this the commission rate you are charging your customers?

The key drivers will help us estimate your financial forecasts later on. As such, they need to be clearly identified. A few examples of drivers for 3 illustrative businesses are:

  • Retail: number of customers, average order value
  • Ecommerce: number of visitors, conversion rate, average order value
  • SaaS: number of users, churn, average revenue per user

Once you have identified your key drivers, include them as a start to your model. For instance, if you are generating $10,000 sales from 3,000 orders in a given month, your key drivers in that month can be:

  • Orders per month: 2,000
  • Average order value: $5.0

Step 2. Build your revenue model

Before we estimate revenue based on the drivers discussed earlier (step 1), we need to clearly identify what is your revenue model. Surprisingly enough, one business can have multiple revenue models. For a refresher, read our article on the 8 most popular revenue models.

For example, if you sell subscriptions to customers (e.g. gym membership) yet you also sell one-time services (e.g. dedicated sessions with trainers), these should be listed as two separate revenue models as they work differently. The subscription is a function of the number of users you have, multiplied by a recurring monthly fee for instance. In comparison, sessions are a function of a portion of your users, multiplied by another one-time fee.

Once we have identified your revenue model(s), we need to build out revenue for each of them. Using our gym membership above, subscription revenue will be a function of the number you have over time times the recurring fee. For sessions instead, use a percentage of users who pay for a session each month (based on your historical if any) – for instance 5% of total users – and multiply it by the total number of users and the one-time session price.

The gym membership example above help us understand why we need the key drivers we brought up earlier. Revenue projections should never be a plug – a guessed number from you. Instead, revenue is the function of multiple drivers. There are always at least 2 drivers for each revenue model: volume and price.

Step 3. Forecast your variable costs

Variable costs are expenses that increase or decrease based on the level of sales and/or another factor (e.g. customers for instance). As such, they can’t just be flat over time, instead their amount will vary based on other parameters of your financial plan.

Common variable costs are:

  • Raw materials
  • Advertising spend (e.g. paid ads)
  • Packaging and shipping costs (ecommerce)
  • Transportation
  • Corporate taxes

If you have historical performance, use your actuals to forecast variable costs. For example, if you pay $10 in shipping costs in average per order, use the same value for your projections.

Instead, new businesses will have to find information either with industry benchmarks, public sources (cost-per-click for paid ads spending can be found for any keyword on Google Planner for instance) or quotes from potential suppliers.

Step 4. Estimate all your fixed costs

Fixed costs in comparison, are easier to estimate as they remain fixed over the projected period. Common examples are:

  • Salaries and benefits (for each employee)
  • Website hosting
  • Bank fees
  • Rent and utilities

Salaries and other payroll expenses often constitute the bulk of fixed costs. In order to accurately forecast salaries you need to estimate the right amount of people you will need over time, and their salaries. Average salaries for specific jobs and geographies can easily be found in industry benchmarks. The number of people your business will need depends on their function: some teams will increase or decrease based on certain metrics such as revenue (sales and customer success teams often grow in line with revenue) whilst others will remain stable (administrative functions e.g. finance).

Read our article on how to build a flexible hiring plan in Excel for your business for more information on how to efficiently forecast salaries expenses as your business grows.

Step 5. Putting it all together

Once you have projected revenue and expenses based on your key drivers, you can now consolidate it all under your profit-and-loss. Subtract all expenses (fixed and variable) as well as startup costs from revenue to get to net profit.

To calculate your cash flow statement, no need to do anything complicated at this stage: simply use your net profit, and subtract any other cash items (i.e. capital expenditures), for instance the startup asset purchases discussed above (step 2).

Step 6. Review and adjust

After having built your projected profit-and-loss and (simplified) cash flow statement, take time to review your estimates. Do they make sense to you? Is there anything surprising in your projections?

The review of your financial forecast should help you determine 2 things:

  • Are your projections error-free? It’s easy to get lost in spreadsheet and make mistakes in your calculations.
  • Are your projections realistic? Now that you take a step back to look at the big picture (revenue, growth, margins, cash flow), it’s easier to assess whether your projections are unrealistic or not.
In order to build realistic projections for your startup and know how to compare them vs. industry averages, read our articles below:
How To Use Industry Benchmarks For Your Startup Financial Plan