Qualifying for SBA Loans

For many business owners qualifying for a loan with the U.S. Small Business Administration (SBA) can be quite a challenge. Although the SBA does not lend directly to small business owners, the loans are backed by the SBA. A number of factors are used to determine if a business qualifies for a small business loan. The SBA does encourage lenders to be flexible when lending to small business owners. Although the lender has some degree of flexibility, the applicant must still convince the lender of its possible success in repaying the loan.

The most important factors in qualifying are:

1) Business Plan. Small businesses that apply for SBA loans without a business plan are more likely to be denied. A lender must feel comfortable that the business has the potential to repay the loan. In addition, the business owner must be able to justify the loan and give detailed information on what the borrowed funds will be used for.

2) Cash Flow. The business must show financial stability. Business owners are required to submit credit histories, income tax returns, and financial statements. Some lenders may even use personal credit to determine the business's credit worthiness. Therefore, any mistakes or discrepancies that exist on personal credit should be corrected prior to applying.

When submitting financial records, it should contain the business's cash flow, accounts receivable, accounts payable, balance sheet, and income statement. Businesses are also required to disclose all debt and existing creditors. A minimum of one full year of operating history is generally required.

It is very important for small businesses to display an adequate amount of cash flow relative to the amount requested. If the cash flow is too high, it may be perceived that the loan is not necessary. If the cash flow is to low, it may alter your chances of qualifying for the loan.

3) Repayment History. Lenders seek to help borrowers who they feel will make an honest effort in repaying the loan. A business owner that has demonstrated commitment in repaying prior loans has a very good chance at qualifying. Prior late payments or collection issues could affect the approval of a SBA loan.

4) Collateral. Not all SBA lenders require collateral. Sometimes collateral can play a very important part in the lending process. The greater the risk, the greater the possibility that the lender will request collateral. Some lenders may substitute collateral with a well prepared business plan and a good financial statement. It can also determine how quickly the lender will process the application and the actual loan amount. For example, if you are requesting a SBA loan of $100,000 and you are using $50,000 of equipment as collateral, a lender will be more likely to assist you with acquiring the desired loan. On the other hand, if the collateral exceeds the loan amount, there is a high probability you will be awarded the loan.

You should evaluate these factors prior to submitting an application. You should also seek out and compare multiple lenders, because each lender has different requirements. Businesses with a solid financial history along with good cash flow usually have great success in acquiring a SBA loan.