Small Business Administration loans can be confusing. Here are details to help the process
It’s hard enough qualifying for a business loan, it’s the golden ticket to growing your business. That’s where the Small Business Administration comes in. An SBA loan is made by a lender but guaranteed by the government—which lowers the lender’s risk. In other words, the SBA makes it easier for small business owners to get big, inexpensive loans when they’d normally be turned away.
An SBA loan is made by a lender but guaranteed by the government, which lowers the lender’s risk. In other words, the SBA makes it easier for small business owners to get big, inexpensive loans when they’d normally be turned away.
SBA lenders ask for certain documents or information in order to answer one of these 4 questions. Let’s break them down.
1. What’s the deal with your business?
You’re more likely to lend money to a friend than a stranger, right? SBA lenders work the same way. They want to understand you and your business thoroughly before they fork over thousands (or millions) in financing. The more comfortable they are with you, how competent they find you and how convincing your business plan is, the more likely you are to qualify for a good loan.
And because you’re a small business owner, the SBA is especially interested in your personal history. Here’s some of what they’ll ask for:
- Previous names and addresses
- Your resume
- Your educational background
- Your criminal record
Plus, they’ll be looking for some insight into your business and how you run it. A good business plan will provide them with:
- Financial projections
- Core differentiators (What sets your business apart?)
- Market analysis
- Strategies for sales, marketing, etc.
- Organizational structure and management team bios
And that’s not all. You’ll also be asked to give copies of your legal documentation, including:
- Licenses, permits, and registrations
- Articles of Incorporation
- Real estate or equipment leases
- Franchise contracts
- Supplier contracts
Finally, your SBA lender will want to know how big your company is and how long you’ve been around for.
While your time in business is just a background fact to you, to the lender it can help predict your business’s success: 50 percent of small businesses fail in their first 5 years, so the younger your business is, the riskier the investment.
2. Why do you need financing?
To reference the first analogy, if a friend asks for money, you’ll probably ask them why. Your SBA lender will do the same thing. They’ll want to know exactly what you intend to use all their money for, because it will help them decide if you’ll be able to pay them back down the line.
Be sure to have a good reason for taking out a loan, make sure that reason matches up with your business plan, financial projections, market research, and competitor analysis. In other words, verify that your loan use is a smart one.
The SBA will also be comparing your intended uses with their loan program requirements to see if they match up. They have a few different types of loans—including the 7(a) SBA loan, with flexible usage requirements, and the CDC/504 loan, which focuses on large fixed asset purchases. Double-check this before you even start an application.
3. Can you afford the loan?
Will your business be able to make those monthly loan repayments? It’s a simple question, but all-important for lenders. Before they loan you cash, they want to be sure they’ll get it back—plus interest.
To figure that out, your SBA lender will ask you for these financials:
- Balance sheets
- Profit & loss statements
- Cash flow statement
- Bank statements
- Business tax returns
- Business debt schedule
The more cautiously and successfully you’ve managed your business finances, the higher your chances are of getting an SBA loan.
That said, the SBA does guarantee loans for startups with little or no business history, too. If that’s the case with your business, then you’ll want to focus more on the next section.
4. Should they trust you to repay?
The final question: are you trustworthy? Your reliability as a small business owner gets measured a few different ways, but the single most important factor is your personal credit score—especially for young or new businesses.
Why do lenders care about your personal credit?
It’s simple: your credit score reflects how savvy you are with debt, and lenders figure that your personal financial habits will inform your business decisions. By maintaining a higher credit score, you’re proving that you pay back loans on time, have different kinds of credit lines, use only a portion of your available credit at any given time, and more.
In short, a high credit score means you’ve been a good borrower in the past. It's a strong indication that you’ll continue to be one in the future. (That’s why you should check your credit before you apply for an SBA loan.)
Besides your personal credit, lenders will also look to a few more documents to determine whether they can trust you to repay them:
- Business credit report (especially for established businesses)
- Personal tax returns (to verify your income and see how you manage your personal finances)
- Loan application history (how much debt have you taken on, how regularly, and for what?
SBA loan applications can take a long time, but the more prepared you are when you come to the table, the faster things will be. Gather these documents ahead of time to get your business financed with the most affordable loan available—without too much waiting.
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