Are SBA Loans the Best for Your Startup?

Bank employee offers to read and check loan agreement form. Financial consultant advises to take loan on business purpose, new house buying. Company partner invites to sign mortgage contract. Close up

In 2015, Americans founded 3 million new businesses, according to the Bureau of Labor Statistic. Every new business among those 3 million startups required capital to start.

Most entrepreneurs fund their business ventures themselves. They use their personal funds, loans from family and friends, or credit cards to pay for their startups. New business owners often find banks and other lenders unwilling to extend credit for an untested venture.

For entrepreneur seeking loans, an SBA loan sounds appealing. The SBA, or the Small Business Administration, is a taxpayer-funded, government-run center to assist, develop and grow small businesses nationwide. The SBA offers a range of loans for small business owners. But is taking out an SBA loan the best idea for your startup?

SBA Loan Requirements

The SBA itself does not offer loans. Rather, it partners with banks, credit unions, community development organizations and similar groups to offer loans. The difference between SBA loans and traditional small business loans offered through the same lender is that with SBA loans, the SBA guarantees part of the repayment. This takes some of the burden off of the lender and encourages them to take more risks with the entrepreneurs seeking their help.

There are many types of SBA loans, each with their own requirements. In general, SBA loans require the following:

  1. Personal background check: The lender will most likely conduct a personal background check, even if you own a corporation. This is to ensure that there is nothing in your personal history that warns them you won’t repay the loan or act irresponsibly with the money. Background checks include where you have lived, other names you may have used, criminal background checks, education record, etc.
  2. Resume: Some lenders will request a copy of your resume. They may verify previous employment.
  3. Business plan: All lenders require a formal, written business plan before they’ll even consider your loan request. They want to know the details of what they are potentially investing in, so have your business plan, including estimated budget, prepared before applying for a loan.
  4. Credit report: Lenders will check your personal credit history, so it’s a good idea to run your own credit history report before meeting with the loan officer.
  5. Business credit report: Businesses, like people, have a credit history. Banks will check into your business’ credit history before considering SBA loans, if your business has at least some track record.
  6. Income tax returns: You’ll be required to submit both personal and business tax returns for the past three years before applying for an SBA loan.
  7. Financial statements: Many lenders require that anyone with 20% or more stake in a business submit their financial statements as part of the loan package.
  8. Collateral: Many lenders require you to pledge some form of collateral, so decide in advance what this might be.
  9. Legal documents: Legal documents that will accompany your loan package include the articles of incorporation for your company, licenses and registration, franchise agreements, and any other documents pertaining to your business.

You should also be prepared to answer questions such as:

  • Why do you want a loan?
  • How will the loan be used?
  • What other business debts do you have?
  • Who else is on your management team?

Is an SBA Loan Right for a Startup?

SBA loans are a mixed blessing. For some startups, they are a great options. Many entrepreneurs find that traditional loans aren’t available to them. They may have poor credit, past business failures, or other problems. SBA loans may be open to them even when other doors are closed.

Women and minority-owned businesses may find SBA loans easier to acquire. Because the SBA is a government-run agency, the government sets the lending policies, and they tend to favor small businesses owned by minorities. If you are in this category, and you meet the other lending requirements specified by the SBA, you may find that an SBA loan is good choice for your startup.

Individuals with bad credit ratings who struggle to find a lender willing to consider their application may find a more willing listener with the SBA-inspired loans. Although a credit score of 680 and higher is necessary or recommended for several SBA loan categories, some consider a credit score of 660 or less.

Individual lenders who work with SBA loans may also be more open to dealing with individuals with poor credit histories if they are willing to offer additional collateral or other information to guarantee the loan.

Try an SBA Loan: Find Your Lender

If you meet the extensive criteria outlined for an SBA loan, it may be a good option for your business. Entrepreneurs who wish to expand or who need capital to see them through a tight period can find no better friend than the banks and lenders who partner with the SBA to offer loans.

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Marc Prosser

Marc Prosser and David Waring launched Fit Small Business in 2013 to help small business owners navigate the questions and difficulties that arise when running a business. Fit Small Business covers topics ranging from small business financing to managing employees to finding customers and building relationships. At our site’s core are our product and service reviews, which help small business owners make the best and most cost effective buying decisions possible.