If your small business is looking for working capital, a small business administration (SBA) loan may be a great way to go. Set up by the federal government in the 1950's, the loans were built to enable lenders to accept greater risk and encourage the growth and development of small businesses. As a result, SBA loans have lower monthly payments than other loan options and have low, single digit interest rates.
That might sound like a dream. Unfortunately, there are several challenges a small business faces when they attempt to secure an SBA loan for their business. First, not every small business is eligible for an SBA loan. In addition, the SBA process is paper intensive and time consuming, forcing prospects to wait weeks or months before they receive a yes or no answer, and even longer to receive their funds.
Of course, there are a few ways businesses can speed up the process. Here are 6 ways businesses can optimize their chances of receiving an SBA loan:
1) Keep your documents in order
First and foremost, keep your business records straight. The application process will be more seamless if you take the time to keep your financial, accounting and tax records up to date and accurate. It's important for businesses to develop a system or even use accounting software to systematize their records.
2) Maintain good credit
In addition to keeping track of your documents, make sure to pay your bills on time. You'll have to meet some type of credit criteria, so it's important to have the best credit possible. Avoid having foreclosures, bankruptcies, charge offs or late payments. While banks have different credit requirements, good credit is an essential part of the process.
3) Know where the money will go
Are you purchasing real estate or buying a truck? Perhaps you simply need the capital to make an acquisition. No matter the purpose, have a firm idea of why you need the money and how you'll use it. Be able to clearly present the use of your funds and the specifics of how the money will be used. Lenders have different requirements on use of proceeds -- be sure to ask your lender before you get started.
4) Demonstrate sufficient cash flow to pay the loan
If you're an existing business, banks want to see that you have demonstrated cash flow sufficient to make your monthly loan payments. They'll do this analysis by looking at your past tax returns and existing debt.
If you're buying a business or starting one from scratch, you should be able to show detailed financial projections. Provide a financial plan that clearly illustrates you'll be able to make your monthly loan payments.
5) Be prepared to outline your professional background
Banks will be interested in your business, but they'll also take a good look at you. It's important to present your professional background in a way that's relevant to the business and shows that you're poised for success. If you've been in the business a while and have a substantial background in your industry, make that clear.
6) Understand every bank is different.
While the SBA has specific eligibility criteria, not every bank will have an identical approval process. Once you've identified a few good prospects, ask for their specific criteria or processes. Try and find out exactly whom they see eligible for the loan.