Fiscal year 2015 was a good year for SBA lenders. While the SBA is not a direct lender, they guaranteed 63,000 loans totaling $23.6 billion—that’s 22 percent more loans and 23 percent more loan dollars than the previous year. The current SBA Administrator, Maria Contreras-Sweet is working hard to help as many small business owners as possible have access to SBA loan programs. Will your business qualify?
Here are five clues that may help you determine whether or not you could qualify for an SBA-guaranteed loan. While this list isn’t all-inclusive of current SBA loan criteria, it may help you to begin determining whether an SBA-backed loan is the right fit for your business:
- You already have some equity built up in your business: The SBA likes to see a strong debt-to-equity ratio. In other words, they want to compare your requested loan amount to how much you’ve already invested in your business (they typically like to see a ratio of at least one dollar of equity for every three dollars of debt). You’ll need to demonstrate your investment with either invoices or appraisals for a startup or current financial statements if your business is an existing business. The SBA, in its own words, looks at your equity this way:
- Strong equity investment shows a lender you are fully committed to the business.
- Sufficient equity is particularly important for new businesses, to convince the lender that you are serious.
- Weak equity will make a lender more hesitant to provide any financial assistance. However, low equity in relation to existing and projected debt (your current obligations plus the new loan) can be overcome with a strong showing in all the other credit factors.
- Non-existent equity can make obtaining a loan almost impossible, as you have not shown a commitment to your business by investing your own money or assets in it.
You’ll also need to demonstrate how the loan will increase the profitability of your business. High debt, low equity, and unsupported predictions about profitability will likely not be approved.
- Can you demonstrate your ability to make regular and timely payments? Every responsible lender, including SBA lenders, want to know that your business has the cash flow to support the debt. In other words, you’ll need to demonstrate your ability to make the periodic payments. This is one reason they will likely want to see a detailed cash flow projection report. This monthly report will show your cash in and your expenses out for the coming 12 months. If you can show how the debt can be paid on time, your application will have better odds of approval.
- Your personal credit score is OK: In other words it is at least 650. The SBA will still guarantee a loan for a business owner with a personal credit score below what many traditional lenders will accept (that threshold is typically a 680 personal credit score), but 650 is usually the minimum. The lender will look at your credit profile to determine whether or not they believe you will make timely payments. Regularly monitoring your credit profile (both your personal credit score and your business credit) is a good idea so you will have a good idea before you apply for a loan whether or not the odds are in your favor.
- Do you have collateral? While the SBA will not require that you fully collateralize the loan, they typically will want to collateralize as much of the loan as possible (this might not apply to every SBA program, but collateral is a requirement with the 7(a) program, among others)—provided all the other financial requirements are met. In other words, an otherwise strong application won’t be rejected because you lack the ability to fully collateralize the loan—but the ability to collateralize the loan will likely help. You should also be aware that your home and personal assets may be considered as collateral as well as a personal guarantee (which will be required for every business owner that owns at least 20 percent of the business).
- Can you demonstrate a history and track record in your industry? The SBA will want you to demonstrate that you have the ability to successfully run the day-to-day operations of your business. In addition to the financial documents that will be required to make the application, don’t be surprised if they want to see the resumes of all the principle owners and want to know how long you’ve had experience within your industry—they may even ask for personal references.
An SBA-guaranteed loan is a low interest loan that could be a good fit for a number of business purposes. Particularly for long-term financing to buy real estate, equipment, and meet other long-term business needs. If you can meet the above five criteria, you might be well on your way to a successful SBA loan application.
But remember there are other loan options available for small business owners depending on your particular need or use-case. Click HERE to learn more about an OnDeck loan.