Small business loans enable the business to grow, expand into new territory, fund research and development and enhance sales and marketing. However, getting a business loan is a major hurdle for small businesses due to bank lending standards. The first step of obtaining the loan is determining SBA loan eligibility. For an individual to qualify for a loan, they must meet the minimum requirements such as a credit score of at least 620, a minimum of $100,000 annual revenue, at least 2 years in business and collateral among others. The second step is finding the best SBA lender to work with, and they can be from the local bank or the bank used for business.
The third step is getting the loan making the application, and the information is used to determine if the applicant qualifies for loan. After making the application, the bank sends a letter of intent if the applicant qualifies for the loan. The letter indicates the amount one has qualified for, the rates and terms of the loan. Formal underwriting them takes place 2 to 4 weeks, and during this time the loan officer makes a follow up to confirm business documents. After the underwriting process, the applicant signs a loan agreement form. The last step is paying the loan closing costs and SBA guarantee fees.
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Level of funding available through SB A
There are difference ways a business can receive funds. SBA works with lenders to offer loans to small businesses. The agency does not provide the loans, but sets guidelines for the loans provided by lenders, micro-lending institutions or community development organizations ("U.S Small Business Administration", 2018). Other than loans, SBICs help business owners to find investors who finance the business in form of debt or equity. SBA does not invest directly into the business, but provides funding to SBICs who are experienced in certain sectors or industries. The SBICs use the funds to invest in small businesses. SBA also works with business to help them find grants such as for research and development or exporting. The agency also provides low-interest disaster loans that help entrepreneurs and home owners to recover from declared disasters such as California wildfires and Hurricane Harvey.
Eligibility
There are 8 steps that an applicant must fulfill to qualify for a loan. These are: Credit Elsewhere Test, Eligibility checklist, character issues (SBA Form 912), citizenship, tax return verification, franchise, litigation and environmental issues ("8 First Steps to Determine SBA Eligibility and Prevent Application Processing Delays| SBA.gov", 2018). The Credit Elsewhere analysis determines if the applicant can obtain the funds from an alternative source. The lender must also review the applicant’s proposal to determine if it meets SBA’s eligibility checklist. A statement of personal history is required for all applicants. The lender must also determine citizenship, and where the applicant is not a U.S. citizen they are required to submit a USCIC Form G-845. The applicant’s must submit a tax return verification, which the lender uses to determine the accuracy of their financial data against their income. Also, the lender must verify if the applicant’s business is a franchise. The documents to be submitted in the application include balance sheet, personal and business tax returns, business plan, profit and loss statements and driver’s license.
Programs for Minorities
The Minority Business Development Agency provides a platform for people from minority communities to apply grants for their businesses. The grants are offered through Grants.gov where entrepreneurs can apply for federal grants. The platform has over 1,000 grants programs and provides access to about $500 billion annual awards ("Grants and Loans: MBDA.GOV", 2017). Additionally, the minority groups can seek for SBA loans. The approval process takes 60-90 days, and a significant amount is spent prior to the application since the applicant has to compile all the documents required in the application. However, not all business funded by SBA loans have been successful. A study indicates that 1 in 6 loans (17.4%) awarded between 2006 and 2015 went into default (Voigt & Campbell, 2017). In 10 year period between 2001 and 2010, the number of defaulters increased steadily for nine years and dropped by 0.8% in 2010.
Characteristics of Successful Loan Applicants
Business fiscal health – It is important for an entrepreneur to monitor their business before applying for the loan. The applicant should work with the lender to determine areas they need to concentrate on in order to improve their chances of successful application. The personal credit core should be used to establish a business credit file. The business should have a solid cash flow to show its ability to repay the loan.
Business plan – A business plan is essential in a loan application as it demonstrates that the entrepreneur has market awareness, competitors and product positioning. The plan also indicates why the business needs the funds, the anticipated results and the loan repayment plan.
Plan for the loan – The lender will use the business plan or proposal to determine how the applicants will use the funds. The applicant should have a plan on how the money will be used such as buying fixed assets or inventory.
Documentation – The entrepreneur should have the necessary documents. These include income tax returns for the entrepreneur and the business, financial statements business plan, legal documents and bank statements.
References
8 First Steps to Determine SBA Eligibility and Prevent Application Processing Delays| SBA.gov. (2018). Retrieved from https://www.sba.gov/offices/district/mt/helena/resources/lenders-8-first-steps-determine-sba-eligibility-and-prevent-application-processing-delays
Grants and Loans: MBDA.GOV. (2017). Retrieved from https://www.mbda.gov/page/grants-and-loans
U.S Small Business Administration. (2018). Retrieved from https://www.sba.gov/funding-programs
Voigt, K., & Campbell, C. (2017). 1 in 6 SBA Small-Business Loans Fail, Study Finds. Retrieved from https://www.nerdwallet.com/blog/small-business/study-1-in-6-sba-small-business-administration-loans-fail/
