Why Should I Apply For An SBA Loan?
SBA loans are one of the best types of business loans available since, because they are partially backed by the US government, they tend to have the most favorable interest rates and terms for the borrower.
However, many people find it a daunting task to assemble all of the information needed due to the fact that, in addition to all of the documents required for a typical bank term loan, there is significant additional paperwork necessary for the SBA.
For those willing to put in the time needed to assemble a strong application package, the potential reward is huge in regards to interest savings and extended repayment terms.
What Will I Need To Apply For An SBA Loan?
While different SBA Lenders may have different requirements for the various types of SBA Loans
, following is the information and documentation most commonly requested:
Statement of Personal History
One of the requirements for an SBA loan is that the borrowers meet the SBA's definition of having "good character" which is based on both the SBA's and the lender's assessment of past behavior, integrity, candor, and any potential prior criminal record. This information is collected via a Statement of Personal History (SBA Form 912)
which can be downloaded directly from the SBA.
In addition to the Statement of Personal History, the SBA will also require a professional resume that demonstrates the borrower's knowledge of the industry and qualifications to run a business. Do not make the mistake of writing this as you would if you were writing a job resume. The objective is not to get a job, but to convince a lender that you are an experienced leader capable of driving your business to success. Time should be given to construct this resume carefully to achieve the objective of securing a business loan.
Personal Credit History
As with most all business loans, except Revenue Based Loans
, the borrower's personal credit history will be a factor as it demonstrates to the lender and the SBA a borrower's debt repayment profile. The SBA lender will obtain the borrowers credit score and history from Experian, Equifax, or TransUnion and may request reports from more than one of these credit reporting agencies. For this reason, it's recommended that a borrower obtain his credit report from all three of these agencies in advance of applying for an SBA loan. If any errors or discrepancies are found, the borrower should contact the reporting agency in writing to have it corrected prior to submitting the loan application for approval.
Business Credit History
If the SBA loan is to expand an existing business that has prior credit history, the lender may also pull the credit report for the business from one of the three agencies listed above. Just as with personal credit history, it's good practice to request these documents and correct any potential errors before submitting the SBA Loan Application.
Personal Tax Returns
As with credit score, the SBA also looks at personal tax returns to analyze the fiscal responsibility of a potential borrower. Borrowers will need to provide the most recent two years of personal tax returns. If for any reason the borrower is behind on tax filings, they will need to show proof of an extension and a written explanation of why the extension was necessary.
Business Tax Returns
To qualify for an SBA loan, the borrower will also need to submit up to two years of business tax returns, assuming the business has been established long enough to have had to file tax returns. This information will be compared to the business bank statements to make sure they are in alignment.
Business Legal Documents
The specific legal documents required for an SBA Loan application will vary somewhat based on the specific SBA lender and the type of business being funded. However, it would be expected that the following documents would be requested, assuming they are applicable:
- Articles of Incorporation
- Any Required Licenses or Registrations
- Client & Supplier Contracts/Agreements
- Partner Agreements
- Real Estate Leases
Business Plan With 3-Year Forecast
A formal Business Plan is a requirement for all SBA loan applications. The business plan should include the company's mission statement and a description of the company's structure, products and services, target markets and methods of marketing and delivery, and information on competition along with financial projections for at least three years. The SBA publishes a Free Business Plan Template
to assist borrowers with this requirement.
Use of Funds Disclosure
To help the lender and SBA assess the risk involved with granting the loan, they will want to know how the borrower intends on using the funds. The SBA enables businesses to use funds from SBA loans for numerous business purposes, but the intended use of funds may determine the type of SBA loan program that is best suited. It's important to make sure the use of funds is appropriate for the specific loan program to which you are applying!
P&L Statements & Balance Sheets
To assess the financial stability of the business, the lender will want to see a year-to-date Profit & Loss Statement and a current Balance Sheet updated within the last 60 days. Additionally, the borrower will also need to provide full Profit & Loss Statements for the most current two full years and the lender may request monthly or quarterly Balance Sheets for the most current two full years.
Schedule of Existing Debts
Most all loan applications will require the borrower to list all outstanding debts currently owed including any mortgages, loans, leases, contracts, and notes payable. Smaller short-term vendor invoices do not typically need to be included in the debt schedule, but all long-term debt where regular payments made against monies owed should be listed. The Schedule of Debts
should include the following information:
- Creditor to whom debt is owed
- Original amount of the debt
- Current account balance
- Interest rate
- Monthly payment amount
- Frequency & Payment Date
- Maturity Date
- Promised Collateral
Even if you're not applying for a business loan, the Schedule of Debts
provides a great way for businesses to keep current on money they owe!
Borrowers applying for an SBA loan will be required to submit the two most recent years of bank statements for both business and personal accounts. The lender will closely compare bank statements and tax returns for the last two fiscal years and will consider any disparity a "red flag", so it's critical to carefully audit these documents before submitting the SBA loan application.
As with any other bank term loan, it's likely the lender will require collateral for an SBA loan. Most anything of value owned by the business or the owner personally can be used as collateral assuming the borrower is willing to forfeit the collateral in the event he defaults on the SBA loan. Some examples of items commonly used as collateral for a business loan include real estate, vehicles, equipment, and inventory.
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