Traditional bank loans have become increasingly difficult to obtain for small business owners. Fortunately, there are other small business loan options that have less stringent lending standards. The SBA, for example, makes guarantees through approved, local lenders, mitigating some of the risk to the financial institutions, which means, you have a greater chance of receiving approval for a loan.
While the SBA does make it easier for small business owners to receive approval on loan requests, receiving a loan through them is not guaranteed. The application process is extensive, and approvals can take weeks or even months to go through. If you think an SBA loan is a great choice for your business, here are four tips to help you master your application.
1. Create a Comprehensive Business Plan
Your business plan is a crucial component of your SBA loan application and should not be taken lightly. Lenders want to see that you have a well thought out business plan, showing your projections for the next three to five years; it should include a management plan, a financial plan, a marketing and operations plan, and most importantly, your plan for repaying the loan. Without these things, lenders can't be confident in you as a borrower.
The business plan you put together should also explain the resources you'll need to achieve your desired business goals and the costs associated with it. If you're having trouble putting this all together, you can check the SBA website for some pointers on writing a great business plan.
2. Check Your Credit
You've probably guessed that in order to master your SBA loan application you'll need to have a decent personal and business credit history. Instead of crossing your fingers and hoping your score is in good condition, pull your report from the three major credit agencies (Experian, TransUnion, and Equifax) to see where you stand. If your score isn't where it should be, you may want to hold off on sending in your loan application until you're able to do some damage control.
While you can't fix your credit overnight, there are a few things you can do, aside from waiting, to quickly increase your score. If you need a quick boost, the first thing you're going to want to do is check your credit report for any disputable errors. You may also consider paying down your balances and raising your credit limit. Most importantly, however, you want to make sure you pay your bills on time, every time!
3. Increase Your Cash Flow
Lenders will pay close attention to your company's cash flow when looking over your loan application. If they see your margins are too tight or that you wouldn't have money left after your monthly business expenses and loan payments, your chances of getting approved for a loan will be slim to none.
Unexpected expenses can and do arise, so lenders want to see that, even if you get a bad batch of inventory or your roof starts to leak, you can cover those costs without defaulting on your loan payments. So in order to master your SBA loan application, you're going to want to increase your cash flow.
A few of the ways you can increase your cash flow are by collecting your receivables quickly, and slowing down your payables. You could also consider offering discounts to customers that pay early, or require that your new clients provide a down payment.
4. Offer Collateral
In order for you and your business to have a greater chance of receiving approval for a loan, the Small Business Administration guarantees a portion to one of their approved financial institutions. But if you ever default on your loan, this guarantee will only protect the financial institution from losing any money. In order for the SBA to protect themselves, they require you to also put some skin in the game by providing some form of collateral.
The collateral you provide could come from your business such as your business's inventory, cash savings or deposits and equipment. If your business doesn't have adequate collateral, you may have to put up your personal assets, such as your home. If you're unable to provide collateral from either your home or your business, you may need a cosigner who can offer some assets as leverage.
Of course, no one plans to default on their business loan--but it does happen. So make sure you understand the risks that are associated with your potential loan, so that you aren't surprised by any liabilities that could come up.
Beyond these four tips, the most critical thing you can bring to your SBA loan application is perseverance and strong attention to detail. Applications for business loans through the Small Business Administration are notoriously long and tedious, and any piece of paperwork you leave out could adversely affect your ability to qualify. Pay close attention and make sure you check every box along the way, and you'll be in the best possible position to qualify for an SBA loan.