5 questions every business owner should answer before applying for an SBA loan
SBA loans are one of many loan products available to small business owners - and it's the only loan backed by the federal government specifically designed to help small business owners. SBA loans are offered by banks, just like any other loan, but the majority of the funds are guaranteed by the federal government.
If you think an SBA loan might help grow your business, there are a few questions you should be able to answer. Carefully considering the answer to each can help you make the best choice.
Do I meet the qualifications?: SBA loans are available to businesses across industries, but there are a few specific requirements your business must meet to be eligible for any SBA-backed loan product:
• Businesses must be for-profit
• Businesses must operate in the U.S. or its possessions
• Businesses cannot have more than $15 million in maximum tangible net worth and a two-year average net income after federal income tax of $5 million
• Businesses must show that the loan can be repaid from existing cash flow
The requirements are strictly enforced and help ensure SBA loans go to U.S. businesses that are considered "small businesses" with ability to pay it back.
How much do I want to borrow?: Broadly speaking, there is no "floor" for an SBA loan. For general small business loans used for things like working capital, the SBA specifically doesn't set a minimum. However, banks may choose to have their own minimums for originating a loan. For those seeking smaller amounts, it may be best to consider an SBA microloan. This unique program provides up to $50,000 (the average is about $13,000) for small business owners seeking a loan for working capital, inventory or equipment and furniture.
On the other end of the spectrum, the maximum for SBA loans will vary depending on what you plan to do with the loan funds. Loans that can be directly tied to job creation have a maximum as high as $10 million, while an SBA express loan maxes out at $350,000.
What is my credit situation?: A credit score is a way for a bank to assess your relationship with credit in the past - this holds true both when evaluating loans to businesses and individuals. For businesses with a borrowing history, the business entity itself may have a credit score. However, entrepreneurs who are just starting out will often find they need to rely on their personal credit history when applying for small business loans.
SBA loans generally have more relaxed credit requirements than other business loans, with the approval threshold typically running in the upper 600 range. Traditional loans, on the other hand, will require scores in the 700 range and above.
What interest rate am I comfortable with?
Because of the relaxed credit requirements, SBA loans, in many cases, will have a higher interest rate than traditional loans. A lower credit threshold means a higher risk level for the lender, and interest is added as a compensating factor. While the exact interest rate is set by the lending institution, the SBA requires lenders to follow strict guidelines in the maximum rate that can assessed.
Who can I go to for advice?: When considering which loan is right for your business, there are a variety of factors to keep in mind, including which resources to rely on for help. Small business owners don't have to - and shouldn't - go it alone. For example, in addition to loan products, the SBA offers mentoring and business development centers to help you. Consider the advice of your bankers, too. Small business lenders work with business owners every day and know the loan products better than anyone. They're great resources for you and your fledgling business.
• Michael Pankau, business banking group executive, Fifth Third Bank.