The United States, by its nature and rules, promotes business and competition. Hence, it’s survival of the fittest. Despite the competitive environment, many establishments need financial help. Thus, the US government created a law that focuses on helping budding entrepreneurs. This bill that we are referring to is the Small Business Administration (SBA).
There are many SBA loan providers out there. However, before you get this financial help, there are a few things you need to know about this service. This article will discuss some facts about small business loans. Furthermore, you will learn their requirements and reasons why your application may be declined. So without further ado, let’s begin the discussion.
Important Facts About SBA Loans
Back in the day, the government already knew the importance of small-scale enterprises. They knew how it would help the economy. To encourage people to start their businesses, they created a bill that would help entrepreneurs to build a company. Thus, the Small Business Administration was born.
The Small Business Administration is an agency administered by the Federal Government. Its purpose is to help small-scale enterprises to sustain their needs. For this reason, many people thought that it is the one that provides the funds for business owners. However, what they really do is that they give a standard SBA guideline to all financial institutions associated with them. Hence, you need to visit banks that offer SBA loans.
So are small business loans hard to get? It depends on the loan program you choose. There are different enterprise loans that you can acquire. First is the SBA 7a loan. This type is perfect for everyone. Meaning, you can take advantage of this financial support even if you own a well-established business.
Moreover, you can use it for buying a property, renovating a building and even paying pre-existing debts. You only need to show your business plan, as well as your credit score, to get this loan.
The second loan that you can get is the microloan program. This loan is perfect for entrepreneurs who need a small amount of cash. You can use this fund to buy new pieces of equipment to improve your service. However, you can’t use it for purchasing real estate and paying debts.
Nonetheless, it’s easier to acquire this loan than the previous loan program because it doesn’t ask for your credit background. You only need to give your business plan to the lender. Thus, if you have a low credit score, then this financial support is for you.
Third is the 504 loan, which has the longest payment term among all programs. With this SBA financing service, you can borrow $5 million, allowing you to pay your debt up to 20 years. This financial assistance is ideal for those who want to renovate their buildings or expand their firms. However, you need to prove the provider that you’re capable of paying your loan.
Last is the disaster loan, which has the lowest small business loan rate. As the name suggests, it helps small businesses that have been washed away by natural calamities. To get this financial help, you need to declare the state of your firm. In that way, the provider can give you the funds that you need.
How to Qualify for an SBA Loan?
Now that you know the different SBA loan programs, you need to know how to get a small business loan. According to FunDivo.com, there were 23 million of borrowers who got loans in 2013. It was a huge increase since 2007. However, this number is small when compared to the 316 million people who lived in America back then.
There are several reasons for this, but before we proceed to this topic, we will discuss the SBA loan requirements. There are a few guidelines to follow when getting this loan. These tips aren’t only for the top SBA loan providers but for all the institutions associated with the SBA agency. Below are the requirements you must have to get this loan.
- Your firm must be turned down by commercial loans. One of the requirements of this loan is you must be declined by private funding institutions. Hence, you must first approach such financial companies. If they turned you down, then you can ask for the help of SBA lenders.
- You must meet the size requirement of the SBA. Many people are confused with this requisite. They thought that the lenders are referring to the square footage of the building. However, if you review the SBA guideline, the SBA financier is not talking about the size of the establishment. Rather, the lender asks for your annual sales, as well as your number of employees.
For example, you are eligible to get the loan if your business earns $5 million a year. If you have a small company, you must have below 500 workers in your firm.
- You must meet the criteria of the loan you want to get. As mentioned earlier, there are different types of loan programs that you can acquire. Each has different criteria. To know their requirements, you need to read some SBA loan provider reviews. These reviews will help you decide on what loan program to choose.
Why Your SBA Loan Application May Be Declined?
According to Nav.com, 45% of entrepreneurs are declined by SBA companies. Twenty-three percent of them don’t know why they got turned down. The question is, “why small business loan providers declined their applications?” There are a few reasons why they turned down your request. Below are the situations where your application may be declined.
- If your financial statement is a zero down loan. When you apply for a small business credit, you need to provide your Personal Financial Statement to the lender. This document will show where the reimbursement will come from to purchase the firm. Moreover, it will present how much you will need to get the business. Hence, if you don’t provide such details, chances are, they won’t approve your loan.
- The borrower has a criminal record. SBA providers do a background check of their borrowers. If they see a criminal offense in your background, you need to explain to them what happened. In that way, they can decide on whether or not they should grant you a loan.
- If the business has a negative cash flow. Because your business is still a concept, you don’t know whether or not it will provide a positive cash flow. Thus, you need to present your business plan to the SBA provider to help them make a decision. If they tell you that your concept is surreal, you won’t get their approval.
- If the landlord didn’t approve the lease. When you rent a piece of land for your company, you need to provide proof to the loan provider. It’s to show that the landlord has approved the lease and the funds can cover up the rental. For example, if the financial assistance is good for 10 years, your lease contract should be at least 10 years.
- If you have insufficient experience in your chosen industry. One of the things they consider on whether or not they should approve your application is your experience. Because they will give you the funds beforehand, they would like to know if you’re going to succeed. Hence, if you don’t have enough experience in your chosen industry, there’s a lesser chance of getting their approval.
- If the financial cash flow model and the business plan don’t match your working capital. Because of your goal, you go overboard, forgetting that your concept and your funds should match. For this reason, the SBA provider will have doubts on whether or not they should approve the loan. Thus, you need to make sure that your scheme and model complement your funds. In that way, you have more chances of getting your request approved.
- If your financial statement is outdated. As mentioned earlier, financial statement tells where the funds will come from and how much money you need. Hence, if there is a change in details, you need to update the statement before you submit it. For example, if you put your business for sale and someone bought it, then you must include it in the statement.
- If the seller stays in the firm. There are cases when the buyer asks the seller to be a business consultant. If that’s the case, the seller must only stay as a consultant for a year. Otherwise, the SBA firm will decline your application.
- If the applicant’s credit score is less than 700. Your credit score must be at least 720 or higher to get your application approved.
- If the financier doesn’t want to lend in your industry. This reason could be irrational, but there are lenders who don’t want to work with a particular field. Thus, make sure you do your research about the provider before asking for their help. In that way, you will reduce your chances of getting declined.
Do you want to know more about how small business loans work? Visit CrowdReviews.com and read our reviews of small business loans.
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