Financing is one of the top concerns people have when thinking about starting their independently owned businesses.
Many small business owners consider SBA (Small Business Administration) funding to finance their business. Government funding through an SBA loan is available for those that meet the SBA’s definition of a small business and cannot get a loan through a traditional lender.
Generally a manufacturing business with no more than 500 employees or a non-manufacturing business with average annual receipts of less than $7,000,000 meets the SBA definition of a small business.
The SBA does not lend money, but guarantees the loan that a small business owner receives through a local bank. The SBA typically guarantees up to 90% of the loan that an owner borrows. SBA funding increases the chances that local small business owners, who are unable to find funding on their own, will obtain a loan.
To get started, find a local lender that participates in SBA programs. Work with a lender that is genuinely interested in your business. Fill out the SBA loan application. There are many types of SBA loans. Most small businesses take advantage of the Basic 7 (a) Loan Program. The Basic 7 (a) Loan is for borrowers starting, acquiring or expanding a small business. Click here for a brief overview of the Basic 7 (a) loan, go to[1].
Prospective borrowers will be asked to provide a variety of information, similar to those items provided for a home loan. The information is used to assess a borrower’s credit worthiness. Additionally, resumes, business Credit Report (if you already own a business), and available collateral are used to assess lending risk.
Legal documents such as business licenses, organizational documents, franchise agreements and leases are also part of the loan package. One of the most important documents submitted for SBA funding is the business plan. Lenders want to see that an independently owned business will succeed!
There are five credit factors that the SBA considers when reviewing loan applications:
- Equity investment
The SBA wants borrowers to make an investment in their own business. Contributing cash or 
operating assets to the business achieves this requirement. The more equity contributed to the business, the stronger the equity investment, and the more favorably the lender will view the loan package. The amount of equity invested is one indicator of how committed a borrower is to their independently owned business. It is difficult for a borrower to obtain financing without making an equity investment in their business. Lenders look carefully at a borrower’s debt-to-equity ratio before approving a loan.
- Collateral
Secondly, the SBA reviews what assets a borrower has that can be used as collateral to secure the loan. Collateral is a pledge by the borrower to forfeit specific property, usually equipment, inventory or other business assets in the event of a loan default. “The SBA will generally not decline a loan when inadequacy of collateral is the only unfavorable factor. Personal guarantees are required from every owner that owns 20% or more of the business.” [2] A borrower may be required to pledge personal assets if the value of the business assets securing the loan does not produce a favorable debt-to-equity ratio.
- Earnings Requirements
A detailed business plan will be reviewed carefully for profitability potential. Do estimated earnings and the operating expenses look reasonable and obtainable? Both net cash flow and net profit are analyzed. Is there enough cash to cover debt service and operating costs?
- Resource Management
The SBA reviews what skills and resources an owner has to operate their business. Will the owner be able to manage daily operations, debt payments, and deliver their product or service successfully? Many of these skills and resources are subjective and are determined by the impression the lender has of the borrower’s abilities and personal character.
- Working Capital
Working capital is the difference between the current assets (cash or assets that can easily be converted to cash) and current liabilities shown on the balance sheet. Working capital measures a business’s short-term financial health by indicating how much cash is leftover to cover a company’s payment obligations in the near term. The SBA will want to see positive working capital in the business plan submitted as part of the loan package.
SBA financing may be the right way for you to finance your local small business. Review the requirements, create a business plan that addresses the five credit factors listed above, put your best foot forward to obtain the financing to start your independently owned business!
Interested in starting your own business? Click the link below to learn more!
Resources:
[1] SBA website www.sba.gov
[2] SBA website www.sba.gov
