Small businesses are having an easier time obtaining credit than before thanks to the current economy. According to Small Business Trends, 25.2 percent of small businesses in December 2017 were approved for loans by large banks. This represents a 0.1 percent increase over November and a 1.3 increase compared to 2016.
But while this may be an improvement, that still means that almost 75 percent of small businesses are not approved for loans from large banks. While there are other institutions which that 75 percent can turn to, businesses which have been rejected for loans should turn to the Small Business Administration (SBA) for help securing credit. For over 60 years, the SBA has helped new businesses obtain the loans they need.
The SBA itself states that they do not lend money directly to small businesses, but rather “sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions.” It guarantees banks that you will repay the loan, and gets you your loan at a fair price.
However, securing an SBA loan is not as simple as filling out some government form and getting a check. The process is stringent, and you will have to be prepared, organized, and have a clear plan towards success. Here are certain concepts to consider before beginning the loan application process.
Why do you need the loan?
This may be a simple question, but far too many businesses do not plan what they would do with new capital beyond vaguely talking about “growth” or “financing.” Knowing what kind of loan you need is especially important when dealing with the SBA. There are three different kinds of SBA loans, and each one is suitable for different situations and businesses.
The most common is the 7(a) loan program, which provides up to $5 million in capital for growth or financing purposes. There are different subsets of this program such as loans for veterans or business serving underprivileged areas you may be able to take advantage of.
Then there is a CDC/504 loan, which helps businesses make fixed asset purchases of things such as equipment or an office. Finally, the SBA offers microloan programs which can help extremely small or new businesses get the small amount of capital they need.
Even if you decide not to work with the SBA after all, knowing what you intend to do with a loan is critical in order to persuade banks to give you capital.
Preparing an Application
When you are applying for a loan with a bank, you have to document your business’s financial history, your future strategy, your credit history, and many other documents. This remains true when you apply for a SBA loan. You want to show that your business plan can work, that you have the credibility to carry out the plan, and that you have collateral which guarantees that you can repay the loan.
So what documents are the most important? SCORE has an excellent list detailing what you need when talking to lenders. Bank statements, tax returns for the past three years if your business has been in operation that long, and your personal financial history including your credit score give lenders and the SBA an idea of your financial background.
Consider working with small business development centers or finding an accountant to help organize and gather the necessary information, but just get it done.
You need the SBA and lenders not just to approve of your financial numbers, but of you. You have to show yourself to be a friendly, organized, and competent individual who knows the details of your business and industry and is willing to cooperate to make things easy for the lender.
Do not just let the numbers stand for themselves, but organize a presentation which shows how you can repay the loan and grow your business over the long term. Dress professionally even if your business is wildly radical and innovative, and be prepared to quickly answer questions in detail.
Even if you are not interested in applying for SBA loans at this moment, begin cultivating a relationship with bankers who know your industry. A good banker is just as crucial to your business’s survival as a good accountant and lawyer. And while you cannot hire a banker for your business like you can with the other professions, you can cultivate good relations which will pay off over the long run.
An SBA loan is not a lifeline tossed towards desperate businesses trying to stave off bankruptcy for a month. It is a chance for businesses granted by the government to show bankers that they possess the skills and business know-how to turn their capital into something impressive. That requires organization, knowing your business and industry’s past, present, and future, and showing that you are a skilled, friendly person who is more than deserving of a small boost.