How to Get an SBA Loan

The SBA is an important source of business loans for American entrepreneurs. Know the general criteria set by the SBA for its small business borrowers.

by Lyve Alexis Pleshette

An important source of financing for U.S.-based entrepreneurs is the Small Business Administration (SBA). The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.

Note, however, that SBA does not provide direct loans. Rather, the agency provides guarantees to loans availed through SBA's partner lending institutions, which includes many community banks. The applicant must satisfy the lender's requirements before he or she can ask for a guaranty from the SBA, unless the borrower is deemed prequalified based on the person's character, credit, reliability and experience (prequalification is for loans $250,000 or less).

SBA provides a number of loan programs for most business purchases, including purchasing real estate, machineries and equipment, inventory, or working capital. Some loans focus on assisting businesses affected by specific economic conditions, such as those affected by defense cuts, and those at risk due to changed trade patterns with Canada and Mexico. There are also a number of loans for small businesses engaging in export and international trade, while some loans are geared for environmental concerns.
To avail of SBA loans, the borrower must meet these criteria:

1. The borrower must have a stake in the business.

The SBA wants to see those applying for credit to have invested in their own business. In SBA's view, business owners who have put their own money into the venture are much more likely to push hard for the success of their business. Depending on the loan program applied for, SBA requires the borrower to have invested between 25 to 50 percent of the amount requested. The SBA will not underญwrite 100% of the venture. Hence, a borrower seeking a $100,000 loan should have already invested about $25,000 to $50,000 in the business.

2. A strong business plan.

Like banks and other financial institutions, SBA requires the submission of a business plan. Through the plan, the SBA wants to see that the entrepreneur possesses a clear understanding of the business they're in, have taken steps to research the market, and studied the prospects of the business. The SBA wants to see detailed plans on how the business can make money. More importantly, they want to know how the entrepreneur can repay the loan and whether the business can earn enough to at least cover the monthly payments.

3. A good personal credit rating.

The credit history serves as a person's gauge for credit worthiness. The borrower's track record in paying their bills will form an important component in the loan application process. The SBA partner banks, which provide the money, usually conducts a credit examination of the borrower then submits the results to SBA. Since SBA requires that the borrower personally guarantee the loan, he or she must show a history of honoring and repaying debts on time. Bankruptcies and poor credit history may lead to difficulty in availing SBA loans.