How to improve your chances of getting an SBA loan
Small-business loans are competitive but you can take steps to better your odds
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I'd like to apply for an SBA loan later in the year for my
web design business. What can I do to
increase my chances of getting one? -- John
You're smart to prepare early. A banker will look at many
factors when evaluating whether to grant you a loan, from your personal credit
to the recent profitability of your business, so you'll want to make sure you
put your best foot forward on every front. Even small efforts, like paying down some of
your credit card debts to reduce your overall credit utilization, can make a
Fortunately, your timing is pretty good. Even though the
higher loan guarantees offered by the U.S. Small Business Administration during
the recession have expired, there's been an uptick in lending through its
programs recently. The number of loans approved in the popular 7(a) and ARC programs
is up 4 percent in the year-to-date period ending May 1, 2013 compared to the
same period in 2012. While that's not a whopping increase, it does show that
the needle is moving in the right direction. And the dollar amount is up 20
percent over last year's figure.
Before you start working on your application, consider which
SBA loan program is right for you. Currently, the U.S. Small Business
Administration guarantees loans up to $5 million in the 7(a) program, which can
be used for working capital. The average loan amount in fiscal 2012 was
The SBA says that
most lenders don't want to make loans under $50,000. If you need a smaller
amount of money, it's worth checking out the relatively new SBA
Small Loan Advantage Program, which began taking applications in 2011. The
maximum loan size is $350,000, and the application process has been
streamlined. Also ask your banker about loan programs that don't have the SBA
guarantee. SBA lending makes up only a very small portion of total small-business
lending, and your bank may have other options worth considering.
To prepare an application for a traditional SBA-guaranteed
loan, you will need to do a fair amount of paperwork (the SBA has a checklist
of the documents you'll need). Unless you urgently need a loan, I'd recommend
giving yourself a few months to pull them all together, so they don't become a
In addition to forms such as the application, personal
history and personal financial statement, you must supply the lender with business
statements, such as a profit-and-loss statement and one year's worth of projected
financials, such as your expected revenue (along with a written statement
explaining how you'll meet your numbers). Some accounting software, like
QuickBooks and FreshBooks, can help you create these statements more easily.
You'll fare better in the application process if you work on
improving your personal credit score ahead of time. For instance, you might try
paying down some of your personal debts, so the bank won't view you as
overextended. Even though you run a business, the bank will factor in your
personal financial situation when determining whether you will be able to pay
back the loan, which you will need to personally guarantee.
Also work on improving the balance sheet at your business. Are
there ways you can boost sales or lower overhead to make it more profitable?
Since the loan officer will want to see historical data, not just last month's,
it may be worthwhile to put off your loan application for up to a year if it
will give you an opportunity to get your business in shape.
Applying for an SBA-backed loan may sound like a lot of
work. It is -- which has been a perennial source of frustration for small-business
owners. But the pay-off is lower interest rates.
For an SBA-backed loan, the lender can't charge more than the
prime rate (as published in the Wall
Street Journal), plus 2.25 percent for a loan due in less than seven years.
The prime rate is currently 3.25 percent. This would bring your interest rate
to a maximum of 5.5 percent. For loans due in more than seven years, the
maximum interest rate is prime plus 2.75 percent, which would bring it to 6
The SBA allows lenders to pass along certain fees to
borrowers. You may, for instance, be charged an SBA guaranty fee based on the
size of the SBA guarantee and the amount you have borrowed. For example, if you
took out a $150,000 loan, the SBA would typically guarantee 85 percent. The
guaranty fee is 2 percent of the $127,500 guaranteed, or $2,550.
While many business owners use credit card financing, it can
be costly for longer-term purchases. The average annual interest rate on business
credit cards is 12.98 percent, according to the Creditcards.com weekly card rate report.
If you get turned down for a small-business loan, you may
not have many alternatives to credit card financing. In such cases, treat your
borrowing as an opportunity to build a strong credit history. Pay more than the
minimum balance each month, and pay it on time. That way, if you need to try
submitting a bank loan application again next year, you'll be on stronger
See related: Is there any such thing as good debt for a small business?, Creative financing for small businesses, Used wisely, small-business cards can keep business afloat
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Published: May 6, 2013