A Beginner's Guide to Qualifying for an SBA Loan
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If you’re looking for financing for your business, loans backed by the Small Business Administration (SBA) can be a good place to start. However, it can be daunting with so many different types of SBA loans. It’s worth it to dive into the details of each program in order to understand what program and lender are right for you.
In this article, we’ll cover the basics you can take action on now to improve your chances of qualifying for funding through an SBA-approved lender.
1. Improve your personal credit scores
According to the SBA website, even individuals with bad credit may qualify for funding. Having great credit scores, however, will significantly increase your chances of approval. Remember that SBA-approved lenders can add certain qualification requirements to the SBA loans they distribute, which often means more strict credit requirements for borrowers.
Get started by reviewing your credit scores and reports (here’s a list of more than 130 places to get your scores for free). There are three major credit reporting agencies, so be sure to understand which agency's score you’re looking at when reviewing your credit data, and be mindful that your scores can vary based on the scoring model used.
Your credit score often comes with a list of reasons why you didn’t achieve a perfect score, such as having an imbalance of types of credit, paying a bill late or having a delinquency on your account. No matter what your scores are, you can take these measures to boost them:
Pay your bills on time. (This is huge.)
Keep balances low. You may want to consider paying down some of your debt early so that when your balances are reported to credit bureaus, it’s reported that you have little to no debt usage.
Make sure your report is error-free. If you do find errors, you can dispute them with the credit bureaus reporting the error.
Take care of any reported collections accounts. Try contacting the collection agency to discuss payment options and to see if they’re willing to stop reporting the account to credit reporting agencies.
Open a new credit card, or ask an existing credit-card issuer you work with to increase your limit. This can lower your debt-usage ratio, often resulting in higher scores.
If you have blemishes on your reports that you can’t take care of now, be prepared to discuss these with your lender.
2. Establish credit scores for your business.
SBA lenders want to know that your business can repay its debts, and do it on time. Your business credit may be part of this evaluation. In fact, the FICO LiquidCredit Small Business Scoring Service (FICO SBSS) is a business credit score used by the SBA to pre-screen applicants to its 7(a) loan program for loan amounts up to $350,000.
This score can evaluate personal credit data for all owners with ownership of greater than 20 percent, as well as the business-credit data of the business itself. It may even include financial data for the business. Applicants who fail to meet the minimum score requirement may find it more difficult to get approved. (The SBA minimum FICO SBSS score is 140, and many lenders want to see a score of 160-165 or above.)
3. Make sure you meet the size standards for an SBA loan
The SBA has pretty strict definitions of what does and does not count as a small business. They’ve accordingly developed a size standard — which is generally calculated by your number of employees or how much your company makes annually — but which varies by industry.
You can figure out how to calculate your small small business size here. Make sure you follow the SBA’s other general requirements, including:
SBA-approved industry (see here for more information).
4. Invest what you can into your business.
SBA lenders want to know that you’ve put money into your business, because it’s one of the strongest signs that you really believe in its potential. The less you invest, the less a lender will be willing to invest.
5. Prepare or update your business financial statements.
A lender will likely want to look at your profit and loss statement, or P&L, as well as your projected financial statements.
6. Make sure all owners have updated personal resumes.
A bank or lender will likely want to see your business experience. For startups, they’re looking to see if you have experience in an industry or line of business that closely relates to the one your new business operates in. If none of the owners have experience in the field, consider involving someone that does.
7. Determine how you’ll use the loan.
Will you be using the loan as working capital, or do you need it for a specific project such as purchasing fixed assets like equipment and supplies? Your lenders will want to see that you have an actual plan for the money you’re seeking.
I’ve gotten 30 different types of loans over the course of my career, ranging from equipment loans to SBA loans. It wasn’t easy getting my credit in good shape, and the process of applying for the loans themselves was often complicated and frustrating.
I can also say that every single one of those loans was instrumental in helping me grow four businesses. SBA loans, in particular, feature some of the most generous terms available. It can take a while to get approved for one, however, so be sure to start the ball rolling well before you need it.