If you’re considering applying for an SBA Loan, you’re not alone; it’s one of the SBA’s most popular programs. When you don’t have access to extra operating capital, it might seem like you’re being held back, so the SBA provides assistance to small company owners (like you!) who haven’t been able to get finance elsewhere.
You don’t have to give up your ambitions just because you don’t have a strong cash flow history or a perfect credit score! If you apply and are approved, the SBA will guarantee (like co-signing) a loan from an SBA-qualified lender for up to 90% of the loan amount, which is a great bargain for startups and small businesses wanting to expand.
The SBA does not lend directly to you; instead, SBA-approved lenders, such as regular banks and microlending organizations, facilitate loans.
SBA loan applications may require two approvals, the first from the lending institution and the second from the SBA, depending on whether the institution is an SBA Preferred Lender.
“When a lender is designated as a Preferred Lender, the SBA gives the lender the ability to make final credit decisions on SBA-guaranteed loans.
SBA loans come with an SBA guarantor, which means that if you default on the loan, the SBA will compensate the lender for a portion of the debt. This guarantee lowers lender risk and improves a small business owner’s chances of receiving finance.
Working capital, inventory, and commercial equipment can all be funded using SBA loans, which range from $500 to $5.5 million. In addition, the SBA limits the amount of interest that SBA lenders can charge.
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SBA Eligibility Requirements
If you want to get help from the Small Business Administration, you must satisfy the following criteria:
- You must be legally functioning and formally registered as a for-profit company.
- You cannot be on parole as a business owner.
- Your company must have less than 500 workers and annual revenue of less than $7.5 million for the last three years.
- Your tangible net worth must be less than $15 million and your net income must be less than $5 million (after taxes and excluding carry-over losses).
- You must demonstrate that you are putting your own time and money into the company, or that you have “invested equity.”
- Your company must be physically located in the United States and do business with the United States and its territories.
- Your small business must operate in an SBA-qualified industry (speculative, illegal, or non-profit enterprises are not eligible). Learn more about the industries that are eligible and ineligible for SBA loans.
- You must demonstrate that you have exhausted all non-SBA loan options and have sought and failed to get cash from other financial lenders.
- You’ll need to show that the loan you’re applying for has a legitimate business purpose and that the SBA has authorized your intended funds use.
- You’ll need to show that you have no outstanding debts to the US government (taxes, student loans).
- A good credit score of at least 680 is preferred.
- A clean credit history that includes no recent bankruptcies, foreclosures, or tax liens.
- Having been in operation for a minimum of two years.
- For loan requests over $25,000, the capacity to offer collateral is required.
- If you want to buy a business, commercial real estate, or business-related equipment, you’ll need to be able to put down a 10% down payment.
- Cash flow sufficient to fulfill your debt commitments.
- Sufficient working capital (once you subtract liabilities from assets).
- According to the SBA, “good character” is important (partially decided based on your track record of managing your resources and day-to-day business affairs).
How To Prepare For An SBA loan
All of the items stated above must be included in your SBA loan package, but there are a few actions you should do before submitting to increase your chances of approval.
1. Confirm to see whether you’re eligible.
Make sure you’re eligible for an SBA loan as the first and most crucial step before putting up an SBA loan package.
In general, the SBA mandates that you follow the following guidelines:
- For all business owners, a FICO credit score of 680 or above is required.
- Personal or corporate collateral that covers a significant portion of the loan request’s value
- Having been in business for two or more years is a plus.
- The company is lucrative.
- There are no outstanding debts, loan defaults, or delinquencies.
If you’re seeking for an SBA 7(a) loan, you must also fulfill the following criteria:
- Consider yourself a tiny business (500 or fewer employees)
- Be in a for-profit firm in the United States and work in a qualified, non-vice industry
- Demonstrate that you require the loan.
- Demonstrate that the owner has previously committed time or money.
- Be in accordance with the SBA’s objectives.
2. Determine your distinct financial requirements.
Before you put together your SBA loan package, you need figure out how much money your company requires and how you plan to spend it.
The SBA does not provide 100 percent funding, as indicated on their website. The Small Business Administration (SBA) and intermediate lenders want to assist small companies fund new projects, but they also want to know that they will get their money back.
Lenders will be more likely and eager to support your loan if you can explain why you need an SBA loan.
3. Ask a local lender or the SBA about different loan options.
Before putting together your SBA loan package, chat to local lenders or the SBA about the many types of loans available.
There are a variety of loan alternatives available for different sorts of organizations, quantities of money, and loan types. For example, if you’re a small firm in need of $50,000 or less, the SBA microloan is ideal for you. You would, however, be ineligible for an SBA 7(a) loan, which is only available to firms that have been in existence for at least two years.
Knowing what alternatives are available can make determining which sort of loan you are eligible for and which to apply for much easier.
4. Sort and arrange your papers.
It’s time to gather and arrange your paperwork once you’ve determined the loans you’re eligible for.
To review, you’ll need the following items:
- Statement of purpose
- Business plan
- Financial statements
5. Fill complete the SBA forms that are necessary.
You’ll also need to fill out and sign certain SBA papers in addition to the materials indicated above.
It’s time to get your SBA loan package examined by a lender or business mentor once you’ve gathered all of the SBA paperwork and other supporting papers.
6. Prepare a draft SBA loan package for a lender or mentor to evaluate.
Your prepared SBA loan package is made up of the papers and SBA forms indicated above.
Before taking them to the bank, SBA, or a business mentor for evaluation, make sure they’re all structured, well-documented, and properly put together.
7. Submit your work.
That concludes our discussion. You’re ready to submit your draft once it’s been evaluated by a lender or mentor. Have faith that you’ve done all possible to increase your chances of being approved.
>> More: Recourse vs. Non-Recourse Loans
How to Create the Best SBA Loan Package
Getting an SBA loan approved is a difficult task. We have some suggestions for boosting your chances of acceptance now that you understand what an SBA loan package is and how to put one together.
We want to make sure you put together the greatest SBA loan package possible and have your SBA loan approved on the first try.
« Research possible lenders.
The intermediate lender is equally as crucial as the SBA when applying for an SBA loan. To get a loan, you must get clearance from both lenders.
We recommend conducting research on possible lenders to identify those who have already dealt with the SBA and to learn about their unique qualifying requirements. The more your SBA loan proposal can be tailored to a specific lender, the more likely it will be accepted.
« Make it as simple to read as possible.
Lenders aren’t in the business of reading essays; they’re in the business of lending money. Make sure your SBA loan package is simple to read, concise, and on point. Give the SBA and its intermediary lender the facts they need, but don’t tell them your life story.
Give your company plan and letter explaining why you’re seeking a loan the attention it needs. Try not to write in haste and instead give yourself time to think about your thoughts. Write them down, then leave it aside for a few days before returning to revise it.
You’ll discover that your thoughts are clearer and can be conveyed more simply after sleeping on it for a few days.
« Make a point of mentioning how you’ll get your money back.
The SBA and the intermediary lender both want to know that their money will be returned. By lending you money, they’re taking a risk, and they want to make sure it’s a good one.
Make their work easier by informing them exactly how you want to utilize the borrowed funds and how you intend to repay them. It’s not as simple as stating, “I’ll pay you back,” so be sure you have a thorough, understandable, and fair strategy in place.
« Make eye-catching projects.
Let us be clear: we are not advising you to lie to the SBA. What we suggest is that you provide optimistic financial forecasts.
There are legitimate company growth predictions. You are not required to present the SBA the most conservative option.
« Make a point of highlighting the management team’s abilities.
The success of a company is largely determined by its management team. The Small Firm Administration (SBA) and its intermediary lenders are interested in learning how you plan to use the loan funds to grow your business.
One example is your management team. So, in your business plan, make a note of your management team’s skills and the part they’ll play in making your company even more successful than it now is.
« Be willing to learn from your mistakes.
If you’ve previously applied for an SBA loan, make sure you learn from your mistakes.
« Proofread and modify your work.
Small company entrepreneurs are excellent managers, but they aren’t necessarily the best writers. That’s fine! However, before submitting your papers, you must reread, revise, and proofread them.
This includes all of your financial records! You want to be certain that your financial papers are error-free.
You can update your own SBA loan package, but we recommend having a friend or colleague review it over as well. You’re more inclined to pass over and miss faults while reading your own work. Even if they aren’t an editor, having someone else examine your work might help you catch problems before submitting it.
Advantages of SBA loans
- Interest rates are low.
- Repayment arrangements that are favorable.
- Low down payments are available.
- There are several applications for this product.
- There isn’t much, if any, collateral required.
Dis-advantages of SBA loans
- Some loans have smaller loan amounts.
- Approval time is longer than with certain lenders.
- Creditworthiness is frequently necessary.
- The variety of services available might be perplexing.
- Frequently, a personal guarantee is necessary.
Alternatives to SBA Loans
If the conditions of an SBA small business loan don’t meet your needs, explore the following other financing options:
Nonbank and internet lenders have risen in popularity, providing financing alternatives to traditional banks and government agencies, particularly for individuals in need of quick cash. Alternative lenders provide a variety of financing options, including as credit lines and merchant cash advances. Alternative loan solutions, on the other hand, may have high interest rates and fewer flexible payback arrangements.
Credit Cards For Business.
Business credit cards are great for entrepreneurs with little or no experience in the field. If you’ve been turned down for a loan due to poor credit, a business credit card might help you improve your credit score. Furthermore, corporate credit cards typically provide a variety of benefits, such as travel, dining, and petrol rewards.
To raise cash from a wide number of individuals, small company owners may launch crowdfunding campaigns. Because you’ll almost certainly need to advertise your campaign in order to gather cash, people with marketing abilities and an internet following are more likely to succeed with crowdfunding.
Starting a crowdfunding campaign generally has no minimum time in company or credit score requirements, depending on which platform you choose. While most crowdfunding services do not compel you to refund the cash you raise, others may charge a fee based on a percentage of the total funds raised.
Putting together an SBA loan package is a difficult task. We hope that our straightforward tutorial has made life easier for you. We are certain that if you follow all of the procedures given here, apply the suggestions, and gather all of the appropriate paperwork, you will be accepted for your SBA loan.