Are you about applying for SBA funding but don’t know the exact requirements? If YES, here are 10 requirements you need to get SBA loans or grants successfully.
What is SBA?
The Small Business Administration (SBA) is a United States government agency created to provide support to entrepreneurs and small businesses. The agency’s mission is “to maintain and strengthen the nation’s economy by enabling by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters”.
If you are based in the United States and are looking to start your own small business, you stand a chance of getting a small business loan or grant from the SBA. All you need to do is send in your application. However, you must bear in mind that the SBA itself does not issue loans directly to small businesses. Rather, the loans are issued by partners of the agency, which include lenders, community development associations, and micro-lending institutions.
What the SBA does is to set guidelines for the loans and then guarantee the actual issuers that the loans will be paid, thereby reducing the risk to the issuers. So, if you apply for an SBA loan, you are actually applying for a commercial loan that is structured according to the requirements of the SBA and backed with an SBA guarantee.
To increase your chances of having your application for an SBA loan granted, you need to know and meet or provide the following 10 requirements:
10 Requirements You Need to Get SBA Loans / Grants Successfully
1. Equity investment
To boost your chances of getting an SBA loan, you must have a reasonable investment in your business. Even if you have yet to get your business off the ground, you must provide proof of your own personal cash or assets that will go into the business. The SBA will carefully examine your debt to worth ratio, which helps them understand how much loan you are asking for in relation to how much you have invested.
The more you invest in your business relative to the loan you are asking for, the higher your chances of getting the loan. If you have invested nothing, then getting a loan is almost impossible because it sends signals that you are not committed to your business.
2. Earnings requirements
For you to be able to get an SBA loan, your business must be able to meet its debt payment (not just its loan payments) as they come due. The SBA requires that you reasonably demonstrate your ability to repay the intended loan from your business operation.
So, if your business is already running, its cash flow will be the assessed to determine the likelihood of a successful repayment of the loan. Your personal credit history will also be considered. If you can prove that your loan will be paid on time, your application has a better chance of being approved.
3. Working capital
A business’s working capital is the difference between its current assets and current liabilities. Your current assets are the liquid assets, which can be quickly converted to cash, while your current liabilities are the obligations due within one year.
Working capital is simply calculated by subtracting your current liabilities from your current assets. A positive working capital value indicates that your business can meet its operational needs. So, if your business has a positive working capital, chances are high that your business loan application will be approved.
Another requirement for securing an SBA loan is collateral, which is an additional form of security that assures the lender that you have a second source of loan repayment should your primary repayment plans fail. Only your property that can be sold by the lender for cash can be accepted as collateral. Examples include equipment, buildings, inventory, and accounts receivable.
Your collateral can consist of assets that you use for running your business or your personal assets that are outside the business. The more valuable your collateral is, the higher your chances of getting an SBA loan for your small business.
5. Proof that you need the loan
To boost your chances of getting an SBA loan or grant, you must be able to prove that you really need the loan to improve your business. You must prepare to give full details of how you will use the loan and how much growth the loan will bring to your business. Mere words will not convince lenders, you must back up your claims with figures, statistics, and other elements that will boost the credibility of your claims.
You will be required to provide a sound business plan with your loan application. The plan should include vital details about your business, especially projected financial statements such as profit and loss, cash flow, and a balance sheet.
7. Legal documents
You will most likely be required to provide certain legal documents, depending on the loan’s specific requirements. Examples of such documents include articles of incorporation, copies of contracts signed with third-parties, business licenses and registration required for you to start and operate your business, franchise agreements, commercial lease agreements, and so on.
Other requirements you will need to include with your SBA loan or grant application include:
8. Details of your personal background and your resume
9. Your personal and business credit reports
10. Your personal and business income tax returns