Each year, around 400,000 new businesses are started nationwide. These startups require funding to begin, with average business costs varying wildly. So if you need to secure financing for your new venture, you’re far from alone.
There are several ways to secure funding for a new small business. One popular option is SBA loans. Continue reading to learn six must-know facts about SBA loans so you can decide whether they’re suitable for your situation.
1. The SBA Isn’t the Direct Lender
Contrary to popular belief, the SBA isn’t a direct lender. Instead, the bank is the direct lender. This means that you would go to a qualified bank, and they would handle the loan.
What the SBA does is guarantee a certain percentage of small business loans. The SBA will guarantee between fifty and ninety percent, depending on several factors.
This guarantee provides the bank a safety net when they lend to you. If you were to default on the loan for any reason, the SBA would pay the guaranteed percentage to your bank. By doing this, banks will offer loans to certain individuals they may not otherwise.
2. Personal Credit Matters
When qualifying for an SBA loan, your personal credit score and history matter. This is especially true for startups. For established businesses, personal credit still matters but is significantly less important.
With a genuine startup company, there is no credit history for the business. There’s also likely to be little (or no) collateral available to place against the loan.
Instead, banks will look at your personal credit history for an idea of how you handle money. As a result, people hoping for an SBA loan for a startup with a poor credit rating are unlikely to qualify.
If you have poor credit, start improving it before you apply for a small business loan. A great place to start is by paying off any debts you have listed on your credit report. Another way to help build your credit history is through a secured credit card.
3. Quality Over Quantity for Business Plans
Creating a business plan is an essential first step in achieving your goals. However, not all business plans are made equally. To be approved for small business loans, you need your plan to be the best it can be.
A common mistake is creating a lengthy business plan with too many details. Long business plans can be challenging to follow and end up doing more harm than good.
Instead, value quality information over providing unnecessary details. Focus on the most critical questions and answer those in concise detail.
- Who will be running the business?
- Who are the investors (if applicable)?
- What is the purpose of your business?
- What are your goals for the business?
- Why are you starting this business?
- Why is there a need for this business?
- How do you plan on achieving your business goals?
- How do you plan on creating income? (Products, services, etc.)
- When do you plan on starting your business?
- When will your business be ready to serve customers?
Be sure to answer each of these questions in your business plan. Before adding anything else, ask yourself whether it’s relevant to one of the pain points listed above.
If you believe it is relevant, go ahead and add the information. However, if you feel the information isn’t relevant to answering one of the questions above, you’d do better to forgo adding it.
4. There Are Size Restrictions
You must qualify as a small business to receive SBA loans. This means there are limits to how much gross revenue your business brings in and how many employees you have. These limits vary by industry.
For example, companies in the wholesale sector can have no more than 100 employees. If your business is in manufacturing, however, you can have up to 500 employees. Gross income limits will also vary slightly according to industry.
5. The Process Doesn’t Take That Long
Many people incorrectly believe the SBA loan process is long and drawn out. However, if everything goes well, it should only take one to two months to close. Of course, there are things you can do to help move the process along.
Most importantly, keep all your important, relevant documents together. When asked for documentation, you’ll want to provide it quickly to avoid delaying your application. Having everything you might need in one spot can help with this.
Of course, there are a few things outside your control that may affect the time to close. The purpose and complexity of your loan are prime examples. If your business plan or necessary documentation is complex, it may take longer to close on your loan.
6. Working With a Preferred Lender Is Best
Certain banks or loan providers are preferred SBA loan lenders. These institutions are your best choice for several reasons.
Most importantly, preferred lenders will handle many SBA loans each year. This lets them know the ins and outs of eligibility requirements, the loan process, and how to help you best.
Preferred SBA loan lenders will have valuable insight into the various loan structures offers by the Small Business Administration. These professionals can help you decide the best loan structure for your unique situation.
A preferred lender will also stay updated on the latest news and regulations for SBA business loans. The requirements for receiving a loan may change over time, and only preferred lenders will keep up on this essential information.
If You Need Assistance With SBA Loans
SBA business loans may be the right choice if you meet specific requirements, as outlined above. If you need assistance with applying for an SBA loan, reach out to us today. We can help you understand the possible financing options for your unique situation.
