Attaining a favorable working capital ratio might pose difficulties for small business operations. Occasionally, despite the owner’s utmost endeavors, additional finance becomes necessary. Fortunately, SBA loans provide a solution to this situation.
The U.S. Small Business Administration (SBA) was established in 1953 to provide financial assistance to the American people for the establishment and management of small businesses. Although the application process may seem daunting, acquiring an SBA loan is not challenging provided you receive appropriate counsel and fulfill the qualifying requirements.
This article provides a comprehensive overview of the SBA process for business owners and presents a detailed, step-by-step instruction for completing the application.
Essential Information About SBA Loans
The U.S. Small Business Administration is committed to supporting the growth and success of for-profit enterprises in the American economy. It achieves this by giving public funding to enhance a company’s working capital and address any cash flow deficiencies.
As of early 2022, the rates of acceptance for SBA loans are increasing. At present, major financial institutions approve 15.3% of Small Business Administration (SBA) applicants, while small bank lenders approve 21.2%. It is crucial to acknowledge that the pandemic hurt SBA lenders, hence the approval rates may rise as the economy rebounds.
However, overall, there appears to be a favorable trend. The provided chart displays the mean value in US dollars for SBA 7(a) loans spanning the years 2014 to 2018. There is a clear and consistent increase in the data.
Before commencing the application procedure, it is essential to acquaint yourself with the fundamental prerequisites and categories of loans associated with the Small Business Administration (SBA).
SBA Loan Requirements
Small firms must achieve four overarching standards to qualify for SBA loans:
- A fundamental requirement for this firm is that it must be both owned and operated within the borders of the United States.
- To operate as a for-profit business, it is necessary to obtain legal recognition through the submission of articles of incorporation. These articles serve as crucial documentation that provides information about the borrower.
- For owners to be considered eligible for credit, they must actively manage the firm and have a financial stake in it. This need is a fundamental condition for credit eligibility.
- Under the “credit not available outside” credit criteria, you are ineligible to acquire funding from different potential lenders.
- Business owners have the option to request a loan of up to $5 million, but participants in the SBA loan program typically borrow far less than that. This highlights the importance of meeting the collateral requirement, as the average loan amount tends to be about $500 thousand.
Factors Influencing The Acceptance Of Business Loans
When evaluating a loan application, lenders will assess the qualities of your firm and determine if they align with the lender’s criteria for business loans. When evaluating borrowers, lenders prioritize cash flow, credit history, and business tenure. The provided information will be utilized to either approve or reject your loan application and ascertain the applicable interest rate.
Do not lose hope if your firm fails to achieve all of these criteria. If you have a deficiency in one aspect but meet or surpass other requirements, you may still be eligible for a loan.
Manufacturing Sector
Lenders find it more attractive to engage with companies in stable and lucrative industries rather than lending money to organizations in more uncertain areas. For instance, lenders commonly exclude enterprises operating in the casino, real estate, or adult entertainment sectors.
If you aspire to obtain a government-backed loan from the United States. To qualify for assistance from the Small Business Administration, your company must meet specified industry criteria. The majority of industries are eligible for Small Business Administration (SBA) assistance, with the exclusion of gambling, multi-level marketing schemes, and religious institutions.
Business Tenure
Demonstrating your ability to effectively oversee a company over some time is crucial to lenders. The longer your tenure in business, the higher the likelihood of receiving approval. From the viewpoint of a lender, possessing a history of effective business administration indicates that you will responsibly utilize the loan and repay it promptly.
Conventional financial institutions often need a minimum of two years of business track record before granting a loan. However, it is possible to obtain funding from other lenders provided your business has been operational for a minimum of six months. Are you currently in the first phase of establishing your business? Explore the most exceptional beginning company loans.
Credit Score And Credit History
Your credit history plays a vital role in evaluating your eligibility for any form of loan. Increasing your credit score will enhance the likelihood of obtaining approval for a business loan. Lenders want a comprehensive comprehension of your previous debt management to assess your personal and corporate credit scores when determining whether to grant a loan.
The minimum credit score required for a business loan varies depending on the specific lender. Financial institutions such as banks and credit unions often have a minimum credit score requirement of 700 or above. Certain online and alternative lenders are willing to consider credit ratings in the range of the mid-500s, provided that your business is financially sound in all other aspects.
Cash Flow
The cash flow of your organization is another crucial determinant. Lenders require evidence of sufficient revenue to sustain your firm and repay the loan.
Lenders frequently impose minimum revenue criteria on loan borrowers, with certain lenders stipulating a minimum yearly revenue of as little as $10,000. However, conventional lenders typically have more stringent cash flow requirements, often demanding a minimum annual income of $100,000.
Loan Amount
The amount of small business loans varies based on factors such as the type of loan, the company’s cash flow, the lender’s type, and other considerations.
When determining the amount of money to request, consider both your existing and projected cash flow. If you run a seasonal business or your revenue fluctuates throughout the year, it is important to be pragmatic and consider your borrowing capacity realistically.
The loan amount you request may not necessarily align with the amount you will be granted. During the evaluation of your loan application, lenders will take into account all of the aforementioned elements to ascertain the maximum amount that you are eligible to borrow.
Collateral
Certain lenders may necessitate the provision of collateral, such as equipment or inventory, which they can seize if you fail to repay the loan. For example, in the case of receiving an SBA 7(a) loan over $50,000, it is necessary to collateralize the loan with business assets.
If the value of your business collateral is insufficient to pay the total loan amount, you will be required to provide personal assets to make up for the shortfall.
Entrepreneurial Strategy
While not all lenders necessitate a business plan, it is advisable to have one. Lenders must thoroughly evaluate your business’s capacity to generate profits and repay the loan, and a business plan will outline this data and elucidate the organization’s potential revenue.
If you possess a well-established firm, a lender can just require evidence of cash flow and earnings to verify the business’s ability to repay the loan.
Indebtedness
Your capacity to finance a company loan can be influenced by additional debts and financial responsibilities. Before submitting a loan application, it is advisable to compute your debt-service coverage rate, which assesses the relationship between your business’s borrowing and cash flow. Given that lenders utilize this numerical value to assess your ability to take on more loans or debts, it is advisable to have a clear understanding of how lenders might perceive your organization and its financial well-being. Creating a corporate debt schedule to track all of your long-term obligations is also beneficial.
LOAN ACCESSIBILITY ACCORDING TO TYPES OF LOAN
Furthermore, the likelihood of obtaining a loan is contingent upon the specific category of business loan for which you are applying.
Although the specific criteria may differ among lenders, the following are some of the typical prerequisites and advantages associated with the most commonly used loan categories.
Type Of Loan : SBA Loans
Purpose:
The objective is to achieve expansion and growth of the firm.
Requirements
- Financial records
- Minimum credit score requirement
- Minimum yearly income
- Minimum duration of operation
Advantages
- State-sponsored
- Highly competitive interest rates
- Diverse loan categories
- Prolonged repayment durations
Type Of Loan : Term Loan
A term loan is a type of loan that is borrowed for a specific period and is repaid in regular installments.
Purpose
Allocate funds for operational costs and acquisitions related to the business.
Requirements
- Minimum credit score required
- Security
- Minimum yearly income
- At least two years of commercial experience
Advantages
- Establishes and enhances a company’s creditworthiness
- Enhances cash flow
Type Of Loan: Commercial Credit Facility
Purpose
Finance immediate operational costs
Requirements
- Collateral
- At least six months of operational history
- Typically necessitates a yearly income of $100,000.
- Minimum credit score required
Advantages
- Eliminate the need to pay interest by settling the payment completely.
- Enhanced cash flow
Establishes and enhances corporate creditworthiness
Type Of Loan : Financing For The Acquisition Of Equipment
Purpose
Acquire operational costs
Requirements
- Corporate credit rating
- Individual’s credit rating
- At least one year of operational experience
- A financial statement showing the revenues, expenses, and resulting net income or loss of a company.
Advantages
- Reduces the financial burden of acquiring equipment
- Establishes and enhances the creditworthiness of a business
Type Of Loan : Merchant Cash Advance
Purpose
Finance immediate operational costs
Requirements
- Minimum yearly income
- Minimum duration of operation
- Minimum credit score required
- Statements that provide information about the financial position, performance, and cash flows of a company.
Advantages
- Efficient and immediate access to funds
- Accessible to all enterprises, including those with below-average credit
- Minimal documentation
- Adaptable authorization
Type Of Loan : Invoice Factoring Or Financing
Purpose
Expeditiously cover operational costs without delay, rather than awaiting the settlement of invoices.
Requirements
- Minimum sales volume refers to the lowest amount of sales that must be achieved to meet a certain requirement or goal.
- Minimum age requirement for your business
- Financial statements, such as tax returns
Advantages
- Rapid availability of money
- Enhances liquidity
- Invoice factoring does not require a credit check.
STEPS TO OBTAIN AN SBA LOAN
The most arduous aspect of obtaining an SBA loan is completing the application process. Nevertheless, it is not an insurmountable task as numerous organizations successfully obtain these loans on an annual basis. To maximize your likelihood of success, adhere to this sequential procedure while finalizing your application.
Step #1: Evaluate How Obtaining An SBA Loan May Benefit You
Before commencing the SBA application procedure, contemplate how this loan will facilitate the expansion of your small business. The benefit of obtaining an SBA loan is the potential for your small business to grow and thrive. Throughout your application and pitch, lenders will want a comprehensive explanation of how you intend to utilize the funds obtained from the loan:
- What impact will the money have on your situation?
- For what purpose will the money be utilized?
- What is the exact amount that you require?
- What is the expected duration for loan repayment?
An advantageous feature of SBA loans is the provision of a lengthier repayment period, which allows for a greater allocation of funds toward other business requirements. Ascertain the optimal quantity and suitable category of loan for your needs. Additionally, it is necessary to furnish precise information regarding the intended distribution of the loan funds by the business. The more precise you are with your intentions for the funds, the higher your likelihood of securing an SBA loan.
Typically, the majority of organizations seek small business loans amounting to less than $100,000. If you find yourself in this situation, it is not advisable to apply for an SBA 7(a) and CDC/504 loan. These loans have periods ranging from 10 to 20 years. If you do not carefully assess how you will use the loan proceeds, it could put your company’s future prosperity at risk. It is important to remember that the main advantage of obtaining these loans is the favorable interest rates. However, it is vital to carefully and precisely consider and include this compensation in your planning.
Step #2: Identify The Appropriate SBA Lender For Your Business
Having determined the purpose for which you require a loan, it is now necessary to identify a prospective lender. The Lender Match Service on the official government SBA funding website enables small company owners to connect with a suitable lending institution that complies with favorable lender criteria and fulfills their requirements.
Unfortunately, there has been a decrease in the number of lenders actively participating in the SBA loan program since 2014. Therefore, small business owners should seek a lender that specializes in serving small to mid-sized enterprises (SMBs). These lending businesses, because they are conversant with the demands of small and medium-sized businesses, are more likely to approve your loan application.
Every lender has different application requirements, thus it is important to thoroughly research and understand the specific documentation needed by each banking institution. During the evaluation of your business credit history and financial documents, some individuals may request a personal financial statement or query about your loans.
It is important to note that a sizable financial institution may necessitate additional time to handle your application and better credit ratings for the approval of an SBA loan. Alternatively, credit unions, local banks, or online lenders who provide SBA lending services, bolstered by the Federal Reserve’s rules, may give quicker outcomes and have less strict credit score prerequisites.
Step #3: Enhance Your Credit Report
Ensure that your organization is up to date on all outstanding invoices and debts. A poor credit rating can have a negative impact and reduce your likelihood of securing financing, particularly when taking into account the FICO standards employed by the majority of lenders.
It is optimal to guarantee a series of timely payments. As a result, your credit score will rise, guaranteeing your creditworthiness for potential lenders. In addition, those with elevated credit ratings are eligible for reduced interest rates and improved financing alternatives.
Typically, conventional banks need a minimum credit score ranging from 690 to 800 to obtain a small business loan. If your individual credit history fails to fulfill these credit standards or if you possess a low business credit rating, it would be advisable to postpone your application for an SBA loan until you can enhance your score by making regular, punctual payments.
Important Note: Numerous lenders, particularly online ones with more lenient credit requirements, will only consider one application. Therefore, if your initial application is rejected, the chances of being approved on a future effort are minimal.
Step #4: Gather The Necessary Documents
The application criteria differ based on the organization you are applying to, but there are a few items that remain similar throughout the SBA application process. Your lender, whether it is a traditional or technologically advanced institution that reduces paperwork, should assist you in preparing your borrower information. Essential papers that you will be required to provide include:
- Evidence of business ownership
- An identification document, such as a government-issued ID or a driver’s license
- Small Business Administration’s borrower information form
- The business’s collection of permits and licenses
- Incorporation documents
Corporate tax filings and financial records from the previous fiscal year
In addition, it is necessary to furnish a legitimate email address. Utilizing an email not only facilitates prompt communication between lenders and yourself but also assists in the process of establishing your identification. Please note that fields indicated with an asterisk (*) must be completed, and your email address will remain confidential and will not be made public.
By ensuring that you have these documents, as well as your email, readily available, you will not only save time but also demonstrate to potential lenders your commitment to obtaining a loan. Therefore, following this checklist guarantees a more streamlined application procedure and minimizes paperwork.
Step # 5: Apply And Pitch
After finishing steps one to four, presenting and advocating your case to a borrower should be effortless. You have already acquired the necessary paperwork for the loan applications; the only remaining task is to effectively present your business ideas to the lender.
It is advisable to dress professionally on the day of the appointment. It is advisable to don your finest professional clothing to create a favorable initial impact. When delivering your pitch, ensure that you appear resolute and self-assured. It is beneficial to engage in practicing and preparing your pitch, as well as anticipating possible questions and comments from the lender.
ALTERNATIVE FINANCING OPTIONS FOR BUSINESSES
Obtaining a conventional small business loan can be difficult, and in certain circumstances, a loan for businesses with poor credit or alternative lending may be more suitable for acquiring cash for your organization. Take into account these alternative possibilities to traditional business loans.
Corporate Credit Card
A business credit card is akin to a personal credit card, but it is exclusively intended for business-related expenses. Moreover, the credit limit on a business credit card is typically higher than that of a personal card. Certain business owners may opt for a business credit card instead of a business loan because they can avoid paying interest if they settle the entire bill each month. This makes it a more cost-effective option compared to a loan, provided it is managed prudently. Furthermore, business credit cards often provide rewards and advantages, such as a sign-up bonus, a brief APR, or travel rewards.
Grant
Grants are attractive to numerous business proprietors due to their non-repayable nature. However, this also means that they can be highly competitive, and the application procedures tend to be lengthy.
Business grants are commonly provided by federal and state government agencies, nonprofit organizations, as well as private enterprises and businesses.
CrowdFunding
Crowdfunding refers to the practice of raising funds for a project or venture by obtaining small amounts of money from a large number of people, typically via the internet
Crowdfunding serves as an alternative method to acquire the necessary funds for covering initial expenses or fulfilling business requirements. Depending on the chosen crowdfunding model, there is usually no requirement for an application, credit assessment, or interest payment. However, crowdfunding platforms do impose fees, which encompass payment processing charges.
Peer-To-Peer Lending
Peer-to-peer (P2P) financing, like debt crowdfunding, enables businesses to obtain loans from individual investors. Once investors agree to provide funding for your peer-to-peer loan, the borrowed amount is reimbursed with an additional amount of money known as interest, and the monthly payments remain constant. Before applying, individuals are typically required to undergo a credit check and complete an application. Many websites offer the option to get prequalified, which allows individuals to verify their prospective eligibility before proceeding with the application process.
ADVANTAGES OF OBTAINING AN SBA LOAN
An SBA-backed loan offers various advantages, such as reduced interest rates and extended loan durations. Nevertheless, your circumstances will be distinct to your enterprise. The decision between an SBA loan and a conventional loan may ultimately be influenced by factors that are not typically included in a standard list of advantages.
Kale Gaston, the president of Lendstream Small Business Finance, expressed that SBA loans effectively facilitate lenders in approving loan applications. He further emphasized that SBA programs offer improved opportunities for small business owners to obtain cash and increase their credit. For instance, the SBA guarantee reduces the risk of loan failure, enabling lenders to offer money even when the available down payment is insufficient or the business’s cash flow does not meet the requirements of typical lending choices.
The following are the primary benefits of SBA loans:
Reduced Interest Rates
For instance, the highest possible interest rate for a 7(a) SBA loan exceeding $50,000 is the WSJ Prime rate plus an additional 2.75%. The cap signifies that you will receive an interest rate that is lower than the interest rates typically offered by traditional banks. The rate is employed to attract lenders, while also granting the borrower the opportunity to propose a rate that aligns with the fair market value.
The current WSJ Prime Rate is 3.25% as of January 2022. By incorporating the 2.75% prerequisite, you have the opportunity to secure the most favorable company financing with a just 6% interest rate. That is significantly lower than the interest rates provided by most banks to small firms, particularly those facing financial difficulties.
Various Payment Alternatives With Adaptable Terms
The SBA’s lending program offers flexibility in loan repayment due to its inherent nature. This statement is particularly accurate when it comes to loans intended for disaster relief. Companies have the option to postpone SBA loan payments, restructure the loan, or make interest-only payments until economic conditions improve. Please note that this advice is tailored to the unique circumstances of your business. A minimum down payment of 10% is required.
Simplified Eligibility Criteria
The credit score prerequisites for SBA loans are less stringent compared to the criteria for traditional business loans. Meeting the SBA guidelines enables you to obtain a loan. This renders it a favorable choice for emerging enterprises and other organizations experiencing financial adversity, who may not meet the eligibility criteria for a conventional bank loan. By utilizing the services of the Small Business Administration (SBA), you are solidifying your reputation and trustworthiness as a potential borrower. Furthermore, it modifies the vetting procedure, enabling the bank to collaborate with the Small Business Administration (SBA) in acquiring and analyzing your financial data.
Extended Durations
SBA lenders can offer extended repayment periods. Gaston stated that instead of a real estate transaction with an extra payment at the end and a duration of five or 10 years, the lender can offer 25-year terms, so removing the necessity for a balloon payment or the requirement to renew the loan every few years. For assets with shorter durations, such as equipment, the terms could extend up to 10 years, which is longer than the typical three to five years.
Extended loan durations provide borrowers with a greater amount of time to reimburse the amount they have borrowed. Depending on the specific circumstances of your business and the predetermined schedule for amortization of your loan, opting for a longer loan duration could potentially offer certain advantages. It has the potential to offer reduced monthly expenses and enhance the future adaptability of your organization. Similar to the availability of flexible payment choices, this potential advantage is closely tied to the unique financial circumstances of your firm.
Increased Potential For Advancement
The likelihood of obtaining an SBA loan may be higher than that of securing a conventional loan, contingent upon the condition of economic activity and global affairs. SBA disaster aid loans are specifically designed to provide financial support to small businesses affected by crises in their respective areas. Entrepreneurs have the option to collaborate with nearby financial institutions to secure the necessary capital.
During the COVID-19 epidemic, the Small Business Administration (SBA) implemented a newly authorized lending program that was approved by Congress. This enabled specific enterprises to obtain expedited licensing and more flexible limitations.
DISADVANTAGES OF AN SBA LOAN
Here are a few disadvantages associated with receiving financing from the Small Business Administration (SBA):
- The loan closing process often spans from 60 to 90 days, which is considerably lengthy compared to the duration of loans provided by other lenders.
- To be eligible, your business must have been in operation for a minimum of two years.
- To proceed, you must possess a well-developed and comprehensive business strategy, as well as a proven track record of experience in the relevant area.
- All partners who possess a minimum of 20% ownership in the business are obligated to provide a personal guarantee.
- The SBA charges a guarantee fee for the specific percentage of the loan that it is guaranteeing.
FINAL THOUGHTS
Is obtaining an SBA Loan challenging? Indeed, the task can be arduous unless one possesses a well-structured business plan and proven industry experience. Well-prepared small business entrepreneurs can quickly obtain the required capital to advance their businesses. Typically, obtaining a business loan requires a strong credit score, essential documentation, a carefully crafted business plan, and a knowledgeable loan applicant who can demonstrate integrity and skill in their industry.
If you are willing to assess your eligibility for an SBA loan or explore alternate options such as refinancing debt, please contact AdvancePoint Capital now to receive a complimentary quote. Our committed team is ready to support small business owners and lead them through the application procedures. What is impeding your progress? Now is the moment to support the advancement of your firm until it reaches its desired level of development.
FAQS
What Minimum Credit Score Is Required To Obtain A Business Loan?
The required credit score for a business loan differs depending on the lender, although it is feasible to obtain a loan with a credit score in the range of the mid-500s.
What Is The Level Of Difficulty In Obtaining A Small Business Loan?
Obtaining a small company loan might be challenging for certain businesses. When evaluating a firm, variables like as high yearly revenue and a strong credit score might increase the likelihood of approval, whereas startups with low yearly sales or a poor credit score may face more difficulty in obtaining approval.
What Are The Prerequisites For Obtaining A Business Loan?
The requirements for a loan may differ depending on the lender but often considered factors include annual revenue, company strategy, business credit score, personal financial records, years in business, industry, debts, and other commitments.
What Is The Required Amount For The Down Payment When Applying For An SBA Loan?
For numerous instances, the required down payment to obtain an SBA loan is significantly less than that of other loan types. An SBA loan typically necessitates a 10% deposit, whereas other kinds of loans may demand a higher down payment ranging from 20% to 30%.
Which Individuals Or Entities Meet The Eligibility Requirements For SBA Loans?
The following are the eligibility conditions set by the Small Business Administration (SBA) for businesses to qualify for a 7(a) loan:
- Your company is required to conduct its operations within the territorial boundaries of the United States.
- The corporation must operate with the primary goal of generating profit.
- There must be a fair level of ownership for you (the owner) to make investments.
Before seeking money from the SBA, it is advisable to utilize financial resources such as personal savings and assets, rather than relying solely on a loan.
What Is The Standard Duration For The Approval Process Of An SBA Loan?
The approval of a loan is generally contingent upon the specific sort of loan that you are applying for. The evaluation and approval procedure often spans from 60 to 120 days, which is not uncommon.
Funding Circle states that the processing time for SBA Express loans is approximately 36 hours. However, it is important to note that obtaining clearance from the lender may take several weeks.
The Small Business Administration (SBA) normally approves basic loans within a timeframe of seven to 10 days. The lender may also require some time to reach a conclusion, which might take six weeks or longer. Businesses are typically required to present more financial and logistics data for an SBA loan compared to a bank loan, resulting in a need for a thorough assessment of comprehensive documentation. In addition, your business plan must undergo scrutiny by both officials at your local bank and the Small Business Administration (SBA) before it can be approved.
Is It Possible To Obtain An SBA Loan Without Any Capital?
The answer to this question is contingent upon the comprehensive financial condition of your business. If your company is facing difficulties due to an external calamity, such as a hurricane or tsunami, you may be eligible for assistance, even if you are experiencing severe financial hardship.
This principle also applies to companies that have been impacted by the COVID-19 outbreak and other significant economic occurrences. However, if your business has been mismanaged and has a negative financial track record that is not attributed to a nationwide occurrence, you may still be ineligible to receive a loan from the Small Business Administration (SBA).