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Published November 05th, 2016 by

5 Questions You Should Ask Yourself Before Applying for an SBA Loan

5 Questions You Should Ask Yourself Before Applying for an SBA Loan

If you are planning on taking out a small business loan, you have to be prepared. There are a lot of requirements and documents that you would need to produce. And some of the qualifications are hard to meet. That is why you have to be sure that you really need a loan before you take on the process.

You should try to look at your assets first and see if you could afford to build a business on your own. Or you could try borrowing the money from your friends and family. You should try to exhaust all other options before you try with small business loan providers. Lastly, before you go for the loan, try asking yourself these five questions to assess if you are ready for it.

How Does the Process Work?

The first questions you should ask yourself is do you know what will happen once you decide to pursue getting a business loan? What are your expectations? What are the expectations of the SBA loan firm from you? What is the process like? Is it going to be a long and arduous process?

Let’s answer these questions. The process goes like this:

  1. You find out if you are eligible for a business loan.
    1. A credit score of at least 680.
    2. You need a down payment of at least 10% for your business. This is for the SBA loan firm to see that you are really serious with starting a business.
    3. Two years or more experience in the industry you are planning to build a business in.
    4. The business you are planning to build is small as defined by the US Small Business Administration.
    5. You are planning to put up your business in the United States.
  2. Once you establish your eligibility, you will find a bank or an SBA loan company. Visit the company or bank and ask them what their specific requirements are and how much can you loan from them. Ask all the questions that matters to you.
  3. They will give you a loan application package. You need to gather all the requirements and documents that they will ask of you.
  4. Complete the forms and submit it back to the loan firm.
  5. Wait for the decision. It usually takes about two to three months for the whole process to be concluded.

There are actually loan providers that can finish the whole process in just a week. But mostly those are the internet lenders that put very high interest rates on their loans. You can try reading small business loan provider reviews to know which companies can approve your loan quickly.

Who Will Make the Decision If an SBA Loan Is Right for Your Business?

If you tried asking a loan from a bank and were turned down, you can head on to a branch of the SBA in your place. The website of SBA has a map of the local branches, so it will be easy for you to find one.

There you can talk to the SBA staff about what your options are when it comes to getting a loan when you have already been turned down by a bank. They can assist you and point you to an SBA accredited lender. They can explain the process to you, the SBA loan programs available and the eligibilities of each. With the SBA’s help you can decide if an SBA loan is right for you.

After you have find a legitimate loan provider, you can start the process by contacting them and inquiring about their own specific process. The loan companies can give you more details about their programs and they can tell you more about which type you should go for. You could go back to a bank or apply for an SBA-backed loan. During the loan application process, this loan company will also be your point of contact. Be sure to check out small business loan company reviews to be sure that you are dealing with an accredited and legitimate company.

While the process is ongoing, you could follow up with the firm once a week. This is so you know what is happening with your application and to inquire if you might have missed any documents that they need. Constant communication will also tell the lender that you are serious about your loan.

How to know which loan is right for you?

You can check out this article to know what kind of business loans are available to small businesses. But the US SBA has four kinds of loans that they offer.

  1. 7(a) loan program. This is the most common loan program that SBA loan providers offers. This is for startups and small business wanting to add to their capital. This is the most common because this is also the most flexible. The money from this loan can be used for a lot of general purposes including to buy inventory, purchasing additional real estate, upgrading equipment and facilities, and supplementing the day to day working capital. This loan is payable in 10 to 25 years depending on where the money was used.
  2. CDC/504 loan program. This is used for long term loans and usually used to finance acquisition of major assets like real estate and buildings. This loan is structured with 40% of the cost provided by the SBA, 50% by the lender and 10% by the borrower. The limitation for this loan is that it cannot be used as working capital and to purchase additional inventory.
  3. Microloan program. This is the loan that is easiest to be approved because it this type of loan can only provide up to a maximum of $50,000. This loan can be used to buy inventory, supplement the working capital and purchase fixtures or machineries. This cannot be used to pay existing loans or buy real estate.
  4. Disaster loans. This loan is only available for state declared disasters. If your business was affected by a disaster, you can apply for this loan. It can be used to fix damaged equipment, real estate and other assets.

How to Prepare for the Meeting With the Lender?

This article about how you can convince an SBA loan provider to finance your business can help you prepare with your meeting with the top small business loan providers. But here are more tips to help you make a good impression with your lender.

  1. Net worth. Your lender will want to know your net worth. To get this you can subtract your liabilities from your assets. But the lender will want supporting documents about your claims, so be sure to bring all relevant documents before you meet with the lender. Being prepared will already make a good impression with whoever you will be talking to.
  2. This is defined as any of your assets that can be converted into cash, within three days. This includes stocks, bonds and marketable security. Lenders will look at this because they want to see that you have another source of cash other than your business that can pay the loan when things do not go well.
  3. Cash flow. The lenders will also look for your financial statement. Both your personal and business financial statements. They want to have a clear grasp of your financial situation.
  4. Free cash flow. This is any money left after all the expenses, including tax and leases, are subtracted. Lenders require a certain amount of free cash flow for you to be approved.
  5. Credit score. Credit score is always looked at whenever you take out a loan. Most small business loan providers will require a credit score of at least 680.
  6. Bring your resume, because the lenders will want to know what your experience is about the business you are planning to build. Your chances of getting approved are higher if you have more experience in the industry.

What Will You Need for the Loan Application?

You can find a checklist of requirements from the SBA website. But here they are just in case you cannot access the site:

  1. SBA loan application form.
  2. Personal background.
  3. Financial statement including statement of personal history and financial statement.
  4. Business financial statements including profit and loss, and projected financial statements.
  5. Ownership and affiliations.
  6. Business license.
  7. Loan application history.
  8. Income tax returns.
  9. Borrower’s resumes.
  10. Business plan including the business overview and history.
  11. Business lease.

There are more requirements depending on the type of loan you are getting, but the ones mentioned above are what is needed no matter what type of loan you are applying for. There are many myths surrounding business loans that you might believe, thus hindering you from applying. Do your research and don’t be afraid to try even if the process might seem daunting.

Now that you have asked these five questions to yourself, the next one is are you ready? Do you think you can do the process? If yes, then start searching for small business loan companies and start applying.

Finally decided to apply for a small business loan? Check out reviews of small business loan companies to know which lending firm you should go for.

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