Three Things You Must Know About SBA Loans Before Applying For One
There are many ways you can obtain capital for your business, but getting loans through the Small Business Administration (SBA) is one of the best options because the low interest rates and long repayment times makes them the most affordable. However, here are three things you need to know about SBA loans that could help you better manage the process and increase your chances of getting approved for funding.
The SBA is the Guarantor, Not the Lender
One of the biggest misconceptions about SBA loans is that the money is dispersed by the Small Business Administration. However, this is not true. The SBA acts as a loan guarantor. Essentially, the agency promises to repay the bank a portion of the loan if the business who borrowed the money defaults. This makes banks more comfortable with loaning money to companies who otherwise may be deemed risky borrowers.
Unfortunately, the process of securing an SBA loan is a little more difficult as a result, because you must meet the qualifications of both the agency and the bank before your loan application will even be looked at. Additionally, being approved by the SBA doesn't guarantee the bank will cut you a check. Your application with the bank can still be denied because of a variety of reasons, even if the SBA agrees to be your guarantor.
Thus, it's critical to research the qualification requirements of both the SBA and the banks and make sure your business meets them before submitting your application to save time and avoid unnecessary rejections.
Getting the Loan Will Take Awhile
If you were hoping to get a quick infusion of cash into your business by applying for an SBA loan, you will be disappointed. Unlike regular business loan where you can get approved within a few days (and sometime same day), it can take anywhere from 60 to 90 days to get approved for a loan. This is partly due to the sheer amount of paperwork you must submit—a full business plan, financial statement showing cash flow, and information about the owners for starters—to both the SBA and the bank for consideration. However, SBA loans are unbelievably popular, so you're essentially queuing in a long line of other applicants.
You can shorten the amount of time it takes for your application to work through the system by getting as much of the paperwork ready prior to submitting your request as you can. It may also be a good idea to consult with the SBA and lenders to determine what is involved in the loan process so you can prepare beforehand for each step.
A Personal Guarantee is Required
A third issue you'll face when applying for an SBA loan is that a personal guarantee is typically required. This means, anyone who owns 20 percent or more of the company may be required to become personally responsible for the repaying the loan. The primary reason for this is because the SBA will only repay 85 percent of the loan if the company defaults, leaving 15 percent of it unsecured. The banks want to ensure it can collect its money from someone if the company becomes insolvent and cannot repay the debt.
Thus, you and your business partners need to be prepared to have your personal credit files checked. Before applying, each of you should check your reports to ensure all the information on them is correct. You may also want to avoid making any credit purchases while your company is being considered for the loan, as any new debt can hurt your credit score. Lastly, if there are assets you want to protect in case the bank does come after you for repayment of a defaulted loan, talk to an attorney about your options for legally removing your home or other property out of harm's way.
For more information about SBA loans or to start the application process, contact a local lender.