The Small Business Administration or SBA established in the 50s to assist aspiring entrepreneurs in starting and operating their businesses. The Small Business Administration is an independent body that can work with all kinds of organizations to provide much-needed loans.
Before you apply for sba loans, it is essential to understand that the SBA does not offer loans to its customers. The loan arranged through a traditional lender. The SBA only structures the investment and provides guarantees to the lender.
Loans Offered by Small Business Administration
There are four main types of loans offered by the Small Business Administration:
- General Business Loans
- Equipment and Real Estate loans
- Disaster Loans
the terms and conditions for each of the loans mentioned above. A prospective borrower needs to fill different applications if he is applying for more than one category. The borrower may seek out any of the programs offered by SBA, including venture capital, bonds, or government grants. Business entities cannot have the latter; however, non-profit organizations (NPO), as well as educational bodies, may apply for government grants.
If you can show the SBA that you will be able to repay the entire loan and accrued interest with your business cash flow, there are more than enough chances that you will qualify. However, the SBA also seeks out the credit history of the prospective borrower, his experience in running the business, the collateral he is ready to put up, and if he has invested his own money into the company in the form of equity. If the borrower has invested around twenty percent of the total business equity, then he is required to guarantee the loan obtained through SBA personally.
Qualifying for an SBA loan
If you are an entrepreneur or a business owner, and you have decided to obtain financing through the SBA, you should keep in mind that it is a difficult task. Below we will discuss what you need to do to increase your chances with the SBA.
Ensure that your business falls into the right size
The Small Business Administration has very stringent rules when it comes to defining a small business. They have their standards for determining the size of your business. It depends on the annual revenue generated by your business or the number of people it is hiring. However, this also depends on the industry in which you are operating.
Taking help from these defined factors, you can quickly determine whether you fall into the small business category and, thus, qualify for applying for an SBA loan.
General requirements for SBA loans include the location of your business, its profitability, and the industry of operations. You are not able to get financing for your business if the industry is not included in the SBA approved list.
Improve the Credit Score
The SBA website says that bad credit scores may not hinder your chances of qualifying for a loan. However, an excellent credit score will increase your chances of the manifold. Another reason why the credit score is important is that the SBA does not offer loans by itself. It only arranges these loans on your behalf. The lending institution may add the credit score as a qualification for the loan. In that case, your chances will become very dim.
First of all, get your hands on your recent credit report through any one of the credit reporting agencies. Fortunately, the credit report also provides you with the reasons for your bad score. There could be any reason or several reasons why your score may become unsuitable. You may be a habitual late payer of bills, or you may already have obtained more credit than you could repay.
Fortunately, you can take care of most of these reasons by:
- Making it a habit to pay your bills on time.
- You may be retiring some loans by making early payments to the lenders.
- You are ensuring that there are no errors reported on your credit report.
- Discussing various agreeable options for payment with lenders and requesting them not to report your loan.
If there are items on the credit report that you think cannot be fixed right away, take note of them and discuss them with the SBA officials.
Decide how the SBA loan will utilize.
Do you need the SBA loan as working capital? Or do you want to expand your operations by purchasing a piece of equipment for increasing your production?
Whatever the reason for seeking an SBA loan, you will need to let the officials know about them, and also show them a viable plan for using the borrowed amount.
The plan should be a detailed one and be able to convince the SBA that you need that amount and will be able to add value to the business once you get your hands on it. It is crucial because the SBA is guaranteeing the loan on your behalf. If you are unable to convince them that your future business cash flows will cover the repayments plus accrued interest, they will never guarantee the loan on your behalf.
Investing in Business Equity
It is essential to show the SBA that you are serious about running the business, and see it succeed. It will be evident to the SBA when they know that you have a lot of your own money invested in the form of equity. A reasonable amount goes equity allows the SBA to determine that you have risked your own money into the business. If it fails, it will be a personal loss. On the other hand, if there is little owner’s equity in the company, the SBA will think why should it bother to guarantee a loan for a business whose owner does not want to invest his money in. That will weaken your prospects immediately.
Preparing Financial Statements
The SBA will be more than willing to review your financial statements. So you should have those prepared and handy at all times. What they are interested in are your income statement and your cash flow. You can also show your projected income at least for the next three years. The projections should be based on credible assumptions, and be able to show them that your future income will be enough for repayment.
The Final Word
Many small businesses have obtained more than one SBA loan over a few years. Getting a loan is never easy. The process is a complex one and becomes frustrating at times. However, SBA loans can also prove to be instrumental in assisting business growth. The terms offered by these loans are comparatively reasonable. Of course, it takes some time to get your loan approved, but in the end, it is always worth it.