Small Business Lending: Does Your Business Qualify for an SBA Loan?

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Although the SBA (Small Business Administration) is not a bank and doesn’t actually make small business loans, they do offer a guarantee to the traditional lenders, like banks and credit unions, which do. The SBA might not be the biggest source of funds available to small business owners, but they are an important source—making funds available to many businesses that might not otherwise qualify for a traditional loan from the bank.

With that in mind, here are some questions an SBA lender will ask to evaluate your loan application:

Do you have skin in the game?

To qualify, the SBA wants to see that you already have a reasonable amount of personal equity built up in the business. They want to see a strong debt-to-worth ratio. In other words, they want to know how much they’re being asked to lend to your business compared to how much you have already invested. You’ll need to demonstrate your investment with invoices or appraisals if your business is a startup. If you’re business is an existing business, be prepared with current financial statements. They won’t want to invest in your business with a low-interest loan if you can’t or won’t.

The SBA describes it 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.

In addition to knowing how much personal “skin in the game” you have, you’ll also need to show that your business will be able to leverage the loan into increased profits. Applications with high debt, low equity, and unsupported projections about their profitability will likely not be approved for an SBA loan.

Can you make the payments?

Any lender, including SBA lenders, want to know your business has the cash flow to support the debt. In other words, can you make the monthly payments? You’ll need to demonstrate to the loan officer that you’ll be able to make the loan payment as well as meet all the other financial obligations the business may have.

Be prepared to demonstrate that you pay your suppliers on time as well as any other loan you might have. They’ll dive into your personal credit score and your business credit profile. (For example, if you don’t have a personal credit score of at least 650, it’s not likely you’ll get approved for an SBA loan.) You’ll also need to have a contingency plan should something go wrong. If things don’t work out perfectly, will you still be able to meet your loan obligations?

You’ll also need to create a detailed cash flow projection report. This is usually a monthly report that shows your cash in and your expenses for the next 12 months. If you can show how all the debts associated with the business will be paid on time, your application has a better shot at approval.

Do you have any collateral?

Collateral is another way to reduce risk for the lender. The SBA will accept equipment, buildings, accounts receivable, and sometimes inventory as collateral. The lender will want to fully collateralize the loan if possible, but if all the other financial considerations are met, the SBA will not deny a loan application if you don’t have enough collateral to fully secure the loan.

You should also be aware that your home and other personal assets may be considered as collateral, and a personal guarantee will be required for every business owner who owns at least 20 percent of the business.

Do you have what it takes to run your business?

Be prepared to demonstrate that you know how to run the day-to-day affairs of your business. In addition to paying your bills on time, are you able to deliver your product or service to your customers, manage your inventory, pay your taxes, etc.?

Although reviewing financial records like you’re profit and loss statements and cash flow reports will give a loan officer a good idea of your ability to stay on top of things, don’t be surprised if they ask to see the resumes of all the principle owners in your business and want to know how long you’ve had experience in your industry. They’ll also be trying to evaluate your personal character (granted, this will be pretty subjective), but they may even ask to see some personal references.

Improving the odds

An SBA loan is a great option for long-term financing to buy real estate, equipment, and meet other long-term working capital needs—provided you can qualify. If you can successfully answer these four questions, you will improve your chances with the SBA.