Most businesses are still recovering after the devastating effects of COVID-19. However, getting a financial boost is one of the headaches that most small and medium-scale businesses face. One of the best financing options is applying for an SBA loan. It offers excellent terms, flexibility, and lower interest rates than other loans.
For you to qualify for the loan, there are different requirements you must fulfill. This means that you must fulfill the set requirements. Although the loan offers great flexibility, there is a rigorous process you need to pass to qualify. This guide provides tips on the essential requirements to qualify for an SBA loan.
How Does SBA Loans Work?
Small Business Authority (SBA) is a government agency that seeks to help small businesses get funding through low-interest loans where the government acts as a guarantor. Although they are called SBA loans, the agency doesn’t disburse them. The designated lenders process loans, except for disaster recoveries, where the agency disburses the loan directly. You can apply as long as you meet the SBA loan qualifications.
The loan programs are available in different types, and you can apply for one that suits your purpose. They include SBA micro-loans, disaster loans, and community advantage loans. Since the loan features government and personal guarantees, it makes it easy to access for qualifying people or businesses.
5 Essential Requirements for Securing an SBA Loan
Create a Well Detailed Business Plan
One of the mandatory requirements for securing an SBA loan is a business plan. The document highlights the business objectives, operations, and financial projections. Upon examining your business plan, lenders can conclude whether your investment is eligible for financing.
Also, lenders will conduct feasibility assessments to gauge whether you can repay the loan or offer loans based on your risk assessment score.
According to the SBA rules, a business plan should be well thought out, realistic, and applicable. The document must explain all the matters relating to how the money will be used, projected income, and how you aim to repay your loan. Once your business plan can satisfy the lender, you increase the chances of financing your business through SBA loans.
If you have a great business idea but lack experience in drafting a business plan, engaging a specialist will significantly help. You will only need to lay down your points, and they will create a business plan for you.
Borrowers Credit Score
When dealing with loans, one essential requirement that lenders will rely on is borrower creditworthiness, determined by checking credit scores. A credit score is a number that shows how likely you are to pay or default on your loan.
Although many lenders have their ways of calculating credit scores based on your history, they primarily rely on the FICO score system. This system, running from 300-850, was developed to rate borrower’s creditworthiness. A score between 300-579 is considered poor, 570-669 fair, 670-739 good, 740-799 very good, and 800-850 excellent.
If you apply for an SBA loan, lenders will check your score against the FICO system to determine your loan eligibility. The higher the ranking, the better the chance of getting qualifying. To be on the safe side, ensure that your score is always over 640(good) to stand a better chance of getting an SBA loan. Below are tips on how to maintain a high FICO score.
- Always pay your loans on time
- Ensure your credit reports are accurate
- Minimize the number of new credits
- Consider debt consolidations
- Consider timely payment of your bills
Clear Financial Projection
In business, you can either make a profit or a loss. Many reasons can lead to profit generation or loss-making. However, nobody ventures into a business to make losses. For this reason, one needs to have a clear financial projection when applying for an SBA loan. Creating a financial projection is vital since it outlines how the business intends to raise income and how to spend it.
By having a financial projection, you can forecast whether your business will survive in the coming months based on the expected events. As a result, planning for the available resources will reduce the impact on the business.
Lenders use these projections to gauge your preparedness and determine whether you qualify for the loan. Specifically, SBA loans require a business to submit financial projections for 6-12 months.
Creating a financial projection requires significant effort since everything is based on assumptions and forecasting for an unknown future. However, to successfully create a complete financial projection that can attract funding, it must contain the following.
- Sales projection
- Expenses projections
- Balance sheet projection
- Income statement projection
- Cash flow projection
Borrower Must Have A Clean Criminal Records
A criminal history has detrimental effects on your applications for SBA loans. According to the SBA laws, offering loans to anyone with a criminal conviction history due to riot, civil disorder, or any other disaster is restricted for some time, usually 5 years. However, for disaster loans, people with prior convictions must disclose the issue and other related events, including paroles, probations, and others for the past 6 months.
Although the agency is strict on people with past convictions for felonies, non-financial crimes prohibition has been reduced from 5 years to 1 year. However, for individuals with financial-criminal felonies, the prohibition period remains 5 years, according to Reuters.
Apart from the criminal activities, you might not access SBA funds if you or your business engages in other unsupported activities. Some of the activities include political lobbying, indoctrination, non-profit business, and others.
The Business Must Be Physically in The US or Its Territories
Since SBA only offers guarantor services to qualifying borrowers, one condition is that you must have a physical business in the USA or its territories. The main purpose of this policy is to ensure that these businesses contribute to the country's economic growth. As the agency uses government money to guarantee small businesses, businesses outside the US aren't eligible. Also, the tax generated must return to the government to help in service delivery and development.
Besides stimulating the economy, the loan program is designed to create jobs. It’s estimated that for about 1 million dollars used, an average of 5.4 jobs are created. By insisting that only businesses within the US can be funded, it means more job creation.
Conclusion
SBA loan is one of the best financing solutions when you have no other option. It provides flexibility in terms of repayment and comes with lower interest rates. After fulfilling all the requirements, it’s easy to enjoy business funding for up to 85%.
Having a great credit score, a fantastic business plan, and being free from criminal records are some of the boosts to getting your SBA loan approved.
