Apply For SBA Loan
Asking for money is never easy. Likewise, getting a business loan through the Small Business Administration (SBA) can be challenging. To apply for SBA loan requires skill and experience to be successful in securing loan approval.
To successfully secure business financing, the business loan applicant must offer lenders an application that is complete, thorough and persuasive. The persuasion is based both on the compelling facts of the applicant and the business being acquired. Though the facts of a loan application are paramount, the applicant’s confidence, determination and assurance of repayment is also influential in achieving loan approval. Too much, however, and the loan can be rejected for an applicant’s propaganda.
Consequently, it is important to work with an SBA loan broker. The process is an involved one that requires careful completion of the application, production of supporting documentation, fees, and considerable patients.
To apply for SBA loan, the loan applicant must be able to use their documents to portray the business being acquired in the best light possible. This is accomplished by outlining the facts in a persuasive manner to show the business’ background, the creditworthiness of the applicant(s), the business’ financial portrait, the requested loan amount, business plan and how the loan will be repaid.
SBA Broker
SBA Brokers are knowledgeable and skilled in identifying various banks and lenders in their network who are appropriate matches for the applicant and type of business being acquired. With all the various types of businesses, the purpose for the loans and the applicant’s background, some lenders are more suitable than others for particular borrowers to apply for SBA loan.
An SBA Broker is an SBA Loan Specialist. They will determine the right SBA loan program, loan amount, loan terms, and likelihood of successfully securing loan approval. Where the applicant presents with deficiencies in their application, they can be invaluable in assisting applicants to modify, correct and update their loan request to increase their chances of loan approval.
Being well-versed in the ins-and-outs of the complexities involved in getting SBA financing, the SBA Broker can properly guide their clients in securing financing for business opportunities, commercial real estate, working capital, and ground-up construction loans.
SBA Loan Application Process
SBA loan applicants must present their application in a manner that is persuasive to lenders to obtain loan approval. They should come across as knowledgeable and savvy regarding their ability to successfully run the business that they seek to acquire. They also need to show that they understand the market in which they operate, the risks involved and their confidence in being able to manage those risks.
The SBA Loan Application
The SBA loan application requires a complete and thorough presentation of the business being acquired and the applicants background to apply for SBA loan. Both the business and the applicants will be thoroughly scrutinized by the lender to assure that both are worthwhile in the risk-benefit analysis.
The Business
The business can be pre-approved for an SBA loan. This requires an initial examination of the business’ finances over a period of several years to determine whether it’s profitable.
As the application process proceeds, the lender will take a closer look at the business by securing the business tax returns directly from the Internal Revenue Service (IRS). This is done to avoid fraudulent submission of tax returns.
In many cases, the lender will also order an independent valuation of the business to confirm the loan amount requested. This usually occurs when the loan amount requested exceeds a certain amount.
To apply for SBA loan, the business’ financial statement must show that the business is profitable. It must also show that the business has been profitable for the past few years as typically lenders will ask for the past 3-5 years of tax returns and current P&L statement. A business that shows declining revenue and/or profit may likely be rejected unless the borrower and seller can explain any extenuating circumstances that were only temporary negative impact.
The Borrowers
Lenders weigh risks and rewards in their loan approval process. Anything that tips the scales towards approval should be used by the applicant to increase their chances of getting financing.
By showing the lender that they will manage the business properly, responsibly and profitably, applicants will optimize their chances of success. The applicant’s business loan proposal should state concisely all the applicant’s qualifications to operate the desired business successfully. Resumes, personal references, accolades, etc. should all be included to show the lender that the borrower is a safe bet for lending purposes.
Of particular importance is the applicant’s ability to show the lender that they have relevant and/or small business management experience. Good management skills are critical to owning and operating a successful small business. It is incumbent on the borrower to prove up their abilities as persuasively as possible.
The applicant must also show that they are capable of repayment. This is known as the “debt service coverage ratio (DSCR)” and this shows that the business sufficiently cash flows to cover the debt from the proposed loan and the applicant’s financial needs. The ratio between paying the debt and profit must come within a minimum ratio in order for the lender to approve the loan.They can show this by presenting the cash flow of the business, how much they need to draw from the business and whether the borrower has additional sources of personal revenue, such as investment income, a spouses income, other businesses, etc.
You can test the DSCR of the SBA loan that you would like to pursue using this Debt Service Ratio Coverage Calculator. The common minimum DSCR is 1.2. If the number is lower, anticipate a rejection. If the number is 1.2 or higher, especially higher, than it’s reasonable to anticipate good news.
The Loan Amount
Determining the correct loan amount is critical. The borrowers can not be ambiguous or over reach the requested amount or risk loan rejection. Being clear, specific and grounded in the amount requested shows excellent attention to detail and presents the borrowers in a favorable light. Being sloppy with the loan amount is a sure fire way to get the loan rejected because it portrays the borrowers as inattentive to serious financial matters and not a safe bet for lending.
Identifying the correct loan amount is a key element and the borrowers plan to repay is another key. The borrowers can show their repayment plan by providing a forecast of their future business plans that takes into consideration market fluctuations, potential pitfalls and changes they anticipate making to improve operations. Projected income and costs associated with doing business need to be presented.
Equity Injection SBA Loan
Equity injection is a fancy way of saying “down payment”. Depending on whether the borrower is seeking a business or a business with real estate, the equity injection amount will vary.
For most borrowers seeking to purchase an existing business, they will get a business acquisition loan through the SBA 7a loan program. SBA 7a loans, a borrower is looking at 20-25% down payment. In some situations the seller can provide seller financing of part of the down payment but their ability to collect may only occur AFTER the SBA loan is paid off which is typically 10 years. The SBA changes their regulations regarding these so-called “stand by loans” so it’s good to check with your SBA Broker as to what is permissible at the time you are applying.
If the borrower is looking to buy real estate, then they will seek a loan through the SBA/CDC 504 Loan Program. 504 loans can be usually secured with 10-20% down payment dependent on the business’ cash flow, the assets involved, the value of the real estate and the borrowers’ credit worthiness.
For additional information on SBA 7a and SBA 504 loans check out our SBA Loan Broker hub.
Minimum Credit Score for SBA Loan
To apply for SBA loan, all variables will influence the minimum credit score requirement for an SBA loan. For most SBA 7(a) applications, the minimum score is approximately 640. The applicant’s chances to be approved for an SBA loan increase substantially, however, with a minimum credit score of 680 or higher.
