Successfully applying for an SBA loan is never easy. The SBA has successfully funded many small business acquisitions over the years. Since August 2008, it had become increasingly difficult to successfully apply for an SBA loan as approval criteria was tightened in response to more loans performing poorly. In recent weeks, however, the SBA has become more “user friendly” in a bid to try and help kick start small businesses which in turn will lower unemployment.
If you are a potential business buyer and applying for an SBA loan to help fund part of your business purchase is one of your strategies, to make your loan application more likely to succeed, consider the following:
1. Management experience is one of the more important criteria for an SBA lender to approve a loan. During 2008, the SBA did some research on the reason loans were failing and one of the consistent reasons was a lack of management experience. The bottom line is that you will need a resume to submit with your loan application. Make sure your resume is up to date and make sure it highlights real managerial experience including industry experience in the same industry you plan to buy your business.
2. Something an SBA lender likes to see on a loan application in addition to management experience is also experience managing a Profit and Loss Statement. A P&L reports the monthly flow of income and expenses of a business. If a borrower shows they have this skill and therefore understands cash flow, this is a great asset.
3. Part of the review and approval process for your loan will include looking at your 1040 tax returns, credit report and resume. Therefore, make sure they are consistent with each
4. If the business is the sole source of family income this will need to be presented clearly. If the business has a current cash flow, you will need to explain what cash flow you need to support and pay for the family’s personal needs such as mortgage, weekly groceries, car payments, transportation costs and other household expenses. You will also need to show how the loan and any interest will be serviced.
5. To make sure you are a reasonable credit risk, the SBA lender will require a copy of your credit report and credit score. Before you make your SBA loan application, review your credit report to make sure it is accurate and has no errors on it. Mistakes on credit reports are not unusual but make sure you remove these mistakes or it could mean the difference between loan approval and rejection.
6. The SBA lender will want to see you have cash to use as part of the down payment to buy the business. The SBA lender will not allow the down payment to be borrowed. If the down payment or some of the down payment is being borrowed from a family member, they will require the family member signing a letter saying they will make no claim for the money at some point in the immediate future.
7. Obtaining an SBA loan has never been easy. If an SBA loan is approved then it means a lot of things have been researched and studied and put in place to enable the borrower to be successful. Equally, if an SBA lender rejects the loan it should be for good reasons and help the borrower know what they need to do next time to be successful.