Starting or expanding a small business can be an exciting and challenging endeavor, but it often requires significant capital. For many small business owners, obtaining financing through the Small Business Administration is essential to getting their business off the ground or taking it to the next level. But what factors are considered when applying for an SBA Microloan? This guide will explore seven key considerations that can help increase your chances of securing the funding your business needs.
1. Business Plan
A well-written and comprehensive business plan is one of the most important factors in securing an SBA Microloan. A good business plan should include information on the company’s products or services, target market, competition, financial projections, and management team. It should also clearly outline the use of the funds and how they will be repaid. Lenders want to see that a business has a clear and realistic plan for success and that the funds will be used in a way that will generate a return on their investment.
2. Credit Score
A small business owner’s personal credit score – typically one above 690 – is one of the SBA Microloan requirements. Lenders want to see that a business owner has a track record of managing their credit responsibly. A good credit score can help increase the chances of getting approved for a loan and can also help secure a lower interest rate.
Collateral is an asset that a lender can seize if a borrower is unable to repay the loan. Common types of collateral include real estate, equipment, inventory, and accounts receivable. Lenders may require collateral in order to secure an SBA Microloan above $25,000, especially for small businesses that do not have a long track record of profitability. Having collateral can increase the chances of getting approved for a loan and may also help secure a lower interest rate.
4. Revenue and Profitability
Both the SBA and the lending bank will want to see that a business is generating revenue and is profitable. They both will require financial statements such as income tax returns, balance sheets, and cash flow statements to qualify for an SBA Microloan. It is important to keep organized, meticulous records in all areas related to cash flow in order to be compliant with SBA regulations.
5. Industry and Market
The industry and market in which a business operates can also be important considerations for lenders. Businesses operating in industries that are considered to be high-risk, such as technology or biotech, may have a harder time securing financing. Additionally, businesses operating in a highly competitive market may also face challenges in obtaining financing. Some businesses, such as religious organizations and companies associated with gambling, are completely excluded from securing SBA Microloans.
6. Management Team
Not necessarily a requirement according to the SBA Microloan guidelines, a strong management team can be an important factor in applying for (and repaying) any small business loan. Lenders typically want to see that a business has a team in place that has the experience and skills necessary to operate and grow the business. A business with a strong management team is more likely to be approved for a loan and may also be able to secure a lower interest rate.
7. Purpose of the Loan
The purpose of the loan is also an important consideration for lenders, and is a requirement for an SBA Microloan. Both the bank and the SBA want to see that the funds will be used in a way that will generate a return on their investment. Loans used for working capital, inventory, or equipment purchases are generally considered to be less risky than those used for real estate or other investments, and these expenses are covered by this type of loan.
Obtaining an SBA Microloan can be a challenging task, but by understanding the factors that are considered by lenders, business owners can increase their chances of securing the funding they need. By carefully evaluating these factors and presenting them in a positive light, small business owners can increase their chances of getting approved for financing.