This article was contributed to VentureApp by Marc Prosser, the co-founder and managing partner of Fit Small Business, a site that provides reviews and articles for small business owners.
The time has come for you to seek financing for your small business, and an SBA-backed loan is at the top of your list. After all, these small business loans offer low interest rates, and many banks (probably yours) offer them.
Still, wanting an SBA loan and being approved for one are two different things. There are certain criteria that the SBA looks for when it gives money to small businesses. Knowing what those qualifications are ahead of time can increase your odds of being approved.
You Can’t Be a Business Newbie
If you haven’t launched your company yet, you may not get approved for an SBA loan. Ideally, the SBA is interested in companies who have been doing business at least two years. Why? This is long enough to show that your revenues are steady, and gives lenders a sense of how much money you pull in, in a given year. This helps them determine the likelihood of you paying back your loan in the allotted time period.
What you can do: If you’re still new in your business, you can apply if your other criteria fit the bill, but you may want to look at alternate forms of financing in case you get turned down for a loan.
You Should Have Good Personal Credit
Because you, as an individual, will be the backer of your SBA loan (meaning if anything goes wrong, you will have to pay the loan payments out of your personal accounts), you need to be able to show the SBA that you have solid credit. Having a credit score of at least 680 should put you in the SBA’s good graces and help you get lower interest rates. Of course, all of these factors will contribute to the decision on your application.
What you can do: Now is the time to review your credit report and make sure there are no discrepancies on it. If there are accounts that are no longer open or accounts that don’t have accurate information, contact them to get your report cleaned up. Make sure you pay your credit cards on time and keep low debt on them.
Your Business Should Be Profitable
It may seem counterintuitive to apply for a bank loan when money is flowing into your business, but that’s exactly what smart business owners do. The SBA isn’t interested in loaning money to a business that is floundering because there is no guarantee that you’ll be able to pay that loan back, making you a risky investment. Why take out a loan when times are good? Here are a few reasons:
- Expanding product line
- Hiring new staff
- Building business credit (and having funds available should things not be so good later)
- Growing office space
- Investing in equipment that will grow your business
What you can do: Keep an eye on your cash flow so you don’t get into a situation where you’re desperate for money and can’t qualify for an SBA loan. Even when your business is doing well, consider applying for a loan so that you can grow your empire.
You Need at Least $30,000
An SBA loan isn’t for small amounts of money. You’re better off getting a microloan if you don’t need much. If you need more, an SBA loan might be right for you. Just be sure you calculate monthly loan payments, including interest on your SBA loan. The last thing you want to do is take out a loan so big you can’t afford to pay it back.
What you can do: Create a budget so you know exactly how much you need, and have a specific purpose for the funds. This will keep you from haphazardly spending the money once you get it and disabling you from being able to pay it back.
You Need Assets
In addition to being confident that you’re steady in creating profit, the SBA also wants you to have collateral so that, in the event you can’t pay your loan back, it can take these assets to cover costs. Typically collateral includes real estate or expensive equipment, and may include personal assets if your business doesn’t have any.
What you can do: Look at what assets you have. If you’re shaky on some of the other requirements but have solid assets, that could still put you in good standing when it comes to having your SBA loan approved.
Knowing what the SBA looks for in a good business borrower can increase your odds of becoming one. And even if you’re not ready to apply for a loan now, these are good practices to position you to be ready for one down the road.
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