Small Business Administration
(SBA) Loans |
By David Ruiz |
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As a new entrepreneur looking for capital, one of your first options
for a loan will be the SBA, or to be exact, asking for an SBA-backed
loan. SBA loan applications are made through a bank. The SBA
guarantees a loan to the bank, so in case the borrower defaults, the
bank is guaranteed a portion of the loan by the SBA. (You are still
liable for the loan, so your obligation does not go away) This makes
it easier for banks to lend to budding entrepreneurs, but it does
not mean that the bank can lend indiscriminately. The bank will
analyze the application to protect its interest as well as the
SBA's.
The SBA does not lend directly to the business owner.
It is important that the bank you are working with is knowledgeable
about SBA loans, as it will initially process your application, not
the SBA. The SBA will review the application once the bank approves
it.
What will the bank look for in your application
Good Credit Score. This is a very important factor in the
consideration for a loan, but not the only one. If your score is not
good right now, work on improving it. Although good credit is a key
factor for getting a loan, is not the only factor. If you don't have
perfect credit, you can mitigate it by providing a thorough business
plan, collateral, a higher co-investment in the project, a cosigner,
etc. You will have to explain any outstanding issues with your
credit. Moreover, lenders have different appetite for risk (large
commercial banks are usually more conservative), so you may be able
to find a lender that will work with you.
Collateral
(security for loan). In some cases a good credit score and down
payment are enough to secure a loan. However depending on the amount
of the loan, you may also have to offer collateral. You can use your
house, stocks, or any other major possession as collateral if the
bank requires security in the event you cannot pay back the loan.
Experience. The relevant experience of the business owner is
an important factor for the loan package. Banks feel more confident
in giving out a loan to business owners who have relevant experience
in the business that they are starting, such as a dentist opening a
private practice.
Owners Investment. If you are
forming a new business, be prepared to invest a certain portion of
the start-up costs personally. Lenders rarely finance 100% of the
business. They will expect you to raise 20 to 40% of the investment
yourself. The higher your personal investment in the business, the
better the loan application looks to the lender.
Good
Business Concept or Plan. A good business concept that is
believable and relatively conservative. Lenders are conservative
organizations that do not like to take large risks.
Capacity to Manage and Pay. The business should be able to
generate enough cash to pay back the loan installments.
Guarantees. The lender will look at how the loan can be secured.
He or she will give importance to the individuals personal financial
statement and see if the loan can be secured against personal or
business assets.
When applying for a loan and writing a
business plan, make sure your financial projections are correct. Do
your research. Know your business. It is surprising to see the
number of entrepreneurs who do not pay enough attention to the
financial aspect of the business. Paying close attention to the
financial details will determine whether your business will survive.
Although most banks want to help entrepreneurs fund and expand their
businesses, their primary responsibility is to make money from the
loans and minimize their risk. Just because you have a great idea
and are motivated to see it through, you may not get a loan. In
fact, banks are very careful with innovation; they are conservative
institutions that tend to lend to tried-and-true businesses.
Whenever you submit your business proposal, always ask yourself,
What would make this a good deal for the bank What assurances
(aside from my good credit and great idea) can I give to the bank so
it will get its money back plus interest |
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