An important source of financing for U.S.-based entrepreneurs is the Small Business Administration (SBA). The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.
Note, however, that SBA does not provide direct loans. Rather, the agency provides guarantees to loans availed through SBA’s partner lending institutions, which includes many community banks. The applicant must satisfy the lender’s requirements before he or she can ask for a guaranty from the SBA, unless the borrower is deemed prequalified based on the person’s character, credit, reliability and experience (prequalification is for loans $250,000 or less).
SBA provides a number of loan programs for most business purchases, including purchasing real estate, machineries and equipment, inventory, or working capital. Some loans focus on assisting businesses affected by specific economic conditions, such as those affected by defense cuts, and those at risk due to changed trade patterns with Canada and Mexico. There are also a number of loans for small businesses engaging in export and international trade, while some loans are geared for environmental concerns.
To avail of SBA loans, you must meet these criteria:
1. A strong business plan
The SBA main loan criteria is your business’ capacity to generate cash flow for the repayment the loan. They want to see if your business will actually earn enough to allow you to pay them. Hence, SBA requires the submission of a business plan.
Through the business plan, the SBA wants to see that you possess a clear understanding of the business you are in; that you have taken steps to research the market, and you have studied the prospects of the business. The SBA wants to see detailed financial plans on how the business can make money. More importantly, they want to know how you can repay the loan and whether the business can earn enough to at least cover the monthly payments.
2. The borrower must have a stake in the business
The SBA wants to see you invested in your own business. In SBA’s view, business owners who have put their own money into the venture are much more likely to push hard for the success of their business. Depending on the loan program applied for, SBA requires the borrower to have invested between 25 to 50 percent of the amount requested. The SBA will not underwrite 100% of the venture. Hence, if you are seeking a $100,000 loan, you should have already invested about $25,000 to $50,000
in the business.
3. A good personal credit rating
The credit history serves as a person’s gauge for credit worthiness. Your track record in paying your bills will form an important component in the loan application process. The SBA partner banks, which provide the money, usually conducts a credit examination of the borrower then submits the results to SBA. SBA will also review the financial statements of your partner, officer or stockholder with 20 percent or more ownership.
SBA requires that you (and principals of the business) to personally guarantee the repayment of loan. Thus, you must show a history of honoring and repaying debts on time. Bankruptcies and poor credit history may lead to difficulty in availing SBA loans.
Borrowers are required to provide collateral for SBA guaranteed loans. Collateral can be in the form of real estate or personal property. They want to be guaranteed that somewhere somehow they can get money back from you, in the event that you cannot repay the loan.
5. Your background and experience in the business
Management capability is a key criteria for banks and SBA-guaranteed loans. SBA and the banks want to ensure that the loan proceeds will be handled productively, and one way to ensure this is for you (or your management team) to know and understand the industry, the market and the business. They want to make sure that you — or someone in your management team — can make the business work.
If you don’t have any experience with the business, have someone on board that knows the business to give banks assurance that someone will guide you through the running of the business.
6. Condition or terms of loans
SBA would want to know three important things: “How much money are you requesting? What will it be used for? and For how long will it be needed?” SBA and their conduit banks oftentimes prefer to approve loans for items that can be identified, has lasting value, and can be repossessed and sold if things fail.
Note, however, that a business that has been existence for more than a year (2 years or more even better) stands a better chance to get an SBA loan compared to a new startup. Afterall, SBA wants to see solid financial statements from their borrowers.
And yes, given all their criteria, one thing is clear: you need to have money to be able to borrow money from SBA.
Recommended Books on Getting an SBA Loan: