The Atlanta Journal-Constitution
Five keys to finding success when you’re looking for an SBA loan
Have a solid plan, know your numbers and do your homework.
Demand is booming in Georgia for small business loans guaranteed by the US Small Business Administration (SBA). Through April, lenders have made nearly $741 million in SBA-guaranteed loans statewide in the current fiscal year, an 8 percent increase compared to the same period in 2016 and 15 percent vs. two years ago.
SBA-guaranteed loans play a unique role in helping create and expand businesses. Guaranteed by the federal government, these loans help small businesses expand operations, build or renovate existing properties or buy other companies.
SBA loans offer some unique benefits compared to conventional banks loans, such as lower payments over a longer period. For example, a small business owner can receive an SBA loan that amortizes over 25 years to purchase a building it is currently leasing. In comparison, a conventional loan would require full balloon payment after only five or 10 years.
I find that many prospective borrowers who want to expand are often seeking their first business loan; they’ve never applied for financing except when buying a home or car. As a result, a large number are unprepared and risk being denied. To help improve the chances of approval, here are five recommendations:
1. Understand That SBA Loans Can Help Young Companies.
New or young companies are often good candidates for SBA loans because they often don’t qualify for a traditional commercial loan. If a business owner has a new business or has been turned down for a conventional loan, an SBA-backed loan may work for them.
Dr. Denise Dillon worked for another dental office in metro Atlanta until she built a strong client base and decided to go out on her own. As a start-up, she didn’t qualify for conventional bank financing. But she did qualify for an SBA-backed loan to buy property, build out her office and install equipment. In early March, she opened her own practice, Decatur Smiles, in downtown Decatur.
2. Provide Your Lender a Detailed Business Plan.
Business owners need to provide a written business plan showing how they plan to use the proceeds from their loan. An SBA lender will want to see invoices, quotes, and estimates to show applicants have done their homework and understand their request. Without these details, the application may be rejected. It’s not uncommon for a prospective borrower to tell me “I need $100,000 in working capital.” When I ask how the funds will be used, the response often is “because it feels about right.” Unfortunately, that approach won’t work.
3. Be Ready to Provide Collateral and Other Personal Guarantees.
The US government is prepared to guarantee this loan, but it expects the borrower to guarantee it, too. To obtain the loan, a small business owner may need to allow the SBA to place a second mortgage on a home that has equity or pledge other personal assets.
4. Understand Your Company’s Financial Condition.
Small business owners need to avoid a combination of poor credit and insufficient equity or collateral to receive loan approval. Lenders will often work with the owner to overcome one or two issues, such as a start-up with little collateral.
But if the business also has a small amount of equity or questionable credit, it will be difficult to gain approval.
Conversely, a business that has little equity but generates good cash flow and has strong collateral may qualify.
5. Provide Detailed Tax Returns and Personal Records
Be prepared to provide lots of documents to qualify for a loan. The SBA requires each applicant provide three years of personal and business tax returns verified by the Internal Revenue Service. They must also complete a Statement of Personal History to verify that they do not have a criminal background.
People often have passionate ideas or goals for their business, but sometimes have trouble developing a sound business plan with projected cash flow, revenues and profits. For those who need help, the University of Georgia’s Small Business Development Center can help a business owner convert ideas into plans and projections. The center can make a material difference in a business owner’s loan application and often can improve the application.