How To Get An SBA Loan

how to get sba loan small business administration

While I often advocate for bootstrapping your business, some individuals or businesses will need financial assistance at some point to be competitive. If that scenario applies to you or your company, you'll be searching for capital somewhere. One of the main ways to secure that capital is through an SBA (Small Business Administration) loan at a local, regional, national, or international bank / credit union. They are known for offering small sba loan for entrepreneurs to get the funding they need in growing or starting their business. Applying for a business loan can be a little daunting, but if you follow these 5 suggestions the process should be a little more manageable. 

1. Prepare Your Business Case 

For an SBA Loan, one of the first questions a prospective lender will ask you is ‘Why do you need a business loan?’ Long before they do, you need to ask yourself the same question, and prepare a business case to establish: 

• If, and how much, you can really afford to borrow 

• Exactly how you will use the finance to improve or grow your business 

• Whether the financial benefits of borrowing will actually outweigh the costs 

These are crucial questions, because borrowing can be a risky strategy. If you invest borrowed funds in growing your business but don’t manage to generate the expected increase in profits, you could quickly find yourself struggling to meet your repayments

Unfortunately, many businesses fail because they chase sales growth that doesn’t translate into greater profits or more cash in the bank. 

As well as outlining your strategy for using the loan funds, it’s important to run financial projections to check the probable impact on your profitability and cash flow (and remember to factor in the impact should interest rates rise.) 

2. Choose The Right Lender 

If you’re planning to apply to your bank for a loan, you may need to think carefully. Since the global financial crisis it has become very difficult to get a small business loan from one of the big banks.

A rejected loan application can have a negative impact on your credit rating, so it’s important to check whether you are likely to qualify before you apply. Expect your bank to have very strict lending requirements, including that you’ve been in business for at least two (or even three) years, that you have assets to offer as security and that your credit rating is high. If you don’t meet the bank’s criteria there are plenty of other lenders to choose from in Australia’s thriving alternative finance market. Take some time to check your prospective lender’s reputation – or get recommendations from other businesses or a reputable broker. 

3. Compare Loan Products 

Once you’ve narrowed down your potential lenders it’s time to compare costs. Be wary of advertised annualized interest rates. To calculate the real rate you’ll pay, use this simple formula: 

Annual interest rate: Number of repayments per year x loan balance = interest paid 

If you’re applying for an unsecured business loan your interest may well be calculated as a ‘factor rate’ rather than an annualized rate. A factor rate is a multiple of the loan balance (e.g. 1.15). This will be calculated at the start of your loan, on the full balance, rather than as a percentage of your reducing loan balance. Use this calculator to convert from factor rate to APR. 

You will also need to be aware that most loans have a lot of other fees and charges built in. To find the true comparative cost you’ll need to add in the application or facility set-up charges, as well as any fees for ongoing administration and for transactions, transfers, etc. 

4. Check The Fine Print

As well as being more expensive than secured bank finance, loans from alternative lenders can come with terms which could interfere with the way you do business. These lenders don’t fall under the same regulations as Australia’s banks and may seek to reduce their risks by restricting your activities. Be sure to check all the terms and conditions of the loan before you apply, so you won’t end up locked into an arrangement that could harm your business. 

5. Prepare Your Paperwork  

A successful loan application takes preparation. As well as your business case you’ll need to provide supporting documentation to enable the lender to assess your request for a loan. It’s important that you prepare these in advance, so you can submit them with your application. 

If you have decided to apply to a traditional bank, expect to be asked for two or three years’ full financial statements, plus cash flow projections, copies of contracts or sales orders, and your strategic plans. You’ll need to provide details and proof of ownership of the assets you are offering as collateral, and you may also be asked for information about your business operations and management team. 

For an unsecured loan from an alternative lender you’ll generally need to provide six months of bank statements and sales records, plus identity documents for yourself and your business. You may need to provide a personal guarantee for the loan, which means you could be asked for your tax return or personal bank statements too. 

Once you have your supporting documents ready you can submit your application – while your bank may require you to do this in person, most alternative lenders offer a quick online application process and a quick response. 

Bank Better And Get Approved For Your SBA Loans

Keep these suggestions in mind while securing an SBA loan for your comany and the process will be much more streamlined. Just make sure you pay your Small Business Administration loan back promptly to avoid penalties!

I hope you enjoyed this article about how to secure the right SBA loan for your company in need of funding from a bank

Interested in more articles about frugal finance and loans?

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