What to Consider Before Applying for a Small Business Loan

Small businesses are the backbone of every country's economy and they also provide the largest employment opportunities in almost all nations across the world.

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If you are the owner of a small business, you probably know how much an injection of fresh funds can save you from a bad spot. Smaller companies often struggle with relatively smaller capitals and the ability to afford payments each month. From employees’ wages to equipment costs, to advertising expenses, the relatively tight cash flow of a small or medium-sized company must account for all the expenditures.

Because of this, small business loans every once in awhile can help a company stay afloat and survive, or, in the best cases, allow it to grow and extend its reach. Although there are many options available to borrow money from a lender, some of them are more interesting (and favorable) than others, such as a Small Business Administration (SBA) Loan.

However, applying for these federal-granted loans can be tricky since a lot of paperwork is needed. A business owner must know how to prepare his documents before application to maximize the chances of getting accepted.

What is a Small Business Administration (SBA) Loan?

The Small Business Administration (SBA) is a federal agency that helps entrepreneurs and small businesses in the United States, Puerto Rico and Guam. It provides resources to those who need additional resources to grow their companies by acting as a guarantor with other private credit institutes. The SBA uses federal money to guarantee a loan provided by a bank that participates in the financing circuit. Anyone who requests an SBA Loan can thus use these funds for literally everything – from renovating their machinery to replacing seasonal inventory, buying real estate, setting up new shops or even providing monetary coverage to old debts.

Why Ask for an SBA Loan?

Compared to other forms of traditional loans, SBA loans possess many inherent benefits. First, their interest rates are very low, and they’re suitable for a broad range of business purposes. The down payments are also small, and the payment terms are also extremely long, so the risk of falling into the infamous “debt trap” pitfall is minimal. There are several types of SBA loans available to fit your needs too. Plans like the CDC/504 loan used to buy the commercial real estate or other fixed assets, and the Microloan program if you need to borrow less than $50,000.

Knowing your credit score

Since the SBA agency does not provide cash but simply incentivizes financial institutions to lend money to small business owners, banks still determine the criteria to qualify for the credit. This means that lenders will want to review your financial statements and credit status, and may often require you to secure the loan with collateral such as a house or car. Since this process may require months, knowing your credit score beforehand is vital to avoid applying when you have no chances. Normally, your credit score must be above 700 to secure a favorable loan with attractive interest rates. If your credit is under 600, however, you can ask an accountant to check for errors, such as payments made on time but then reported as late. You might have some space to increase it a little bit.

Prepare your documents

Other than your credit history, a lender will look for several other items to be sure you can effectively pay the debt back. This means that you must show reliable evidence that your cash flow is robust enough to afford a monthly payment on a stable basis.

If your earnings are low or unstable, you can provide the lender with a solid financial statement and track record from prior years that can show profitability and the potential for growth.

If your company is new (such as a startup) or has not enough track records, you may overcome this problem by writing down an excellent business plan. Try to be as practical and precise as you can when discussing how the borrowed money will be used (i.e. purchasing new materials or equipment). A well thought out a marketing strategy that shows the lender that your company will make enough money to sustain itself and pay the loan back can go a long way towards convincing them.

Although SBA loans are extremely affordable, the eligibility requirements are very strict and the application process is quite lengthy. You better brace yourself for filing a lot of time-consuming paperwork and facing a lot of bureaucracy. However, if you are not scared by the idea of waiting for a little more time than usual before accessing these funds, SBA loans can be the best solution to access some much-needed capital.

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