As company balance sheets improve, banks are beginning to look more favorably at providing loans to businesses. But in some industries and for certain types of financing, however, it still can be difficult to obtain a traditional loan.
That’s where U.S. Small Business Administration (SBA) loans can help fill the void. For example, service industries often utilize SBA lending because they don’t have substantial collateral or tangible assets, says Romona Davis, vice president of SBA Commercial Lending at Ridgestone Bank.
“SBA loans can use cash flow as a determination for valuation. They also have lower equity requirements, providing a unique option for certain businesses,” Davis says.
Like any loan, the SBA loan process goes more smoothly if you provide the right information in a timely manner.
Smart Business spoke with Davis about SBA loan applications and how business owners can have a positive experience.
What do business owners need for an SBA loan application?
If you’re starting a new business, spend time developing a business plan. If you don’t have experience putting a plan together, your local small business development center is a good resource. That plan shows your banker that you’ve thought about what markets you want to serve, how you want to approach those markets and that you’ve addressed the many aspects of owning a business.
Your lender also will need three years of personal tax returns, a personal financial statement and a resume detailing your relevant experience.
An owner of an existing business needs:
- Three years of personal tax returns and a personal financial statement.
- Three years of business tax returns and internal financials like profit and loss statements, balance sheets, accounts receivable and accounts payable aging.
- A short summary of your business.
- Debt schedule detailing current balances, beginning balances, monthly payments, interest rates, original use of funds, etc.
- Information and tax returns about affiliate businesses.
Because SBA loans are government backed and guaranteed, be prepared to pledge your personal assets. That’s non-negotiable, whether it’s a new or existing business.
Does the timeline take longer?
SBA loans can take longer and require a little more paperwork, so find out if your lender is a preferred lending partner (PLP). That means the SBA delegates the underwriting and approval to the bank, eliminating secondary SBA underwriting. Also, a PLP knows what to expect with SBA loan requirements and approvals and will have streamlined processes.
Every deal is different, depending on the size of the loan and industry. On the short side, count on at least four to six weeks. If there’s real estate involved or the deal is complex, loans can take 10 to 12 weeks.
How can owners achieve a smooth process?
- First of all, be organized. If you have notes from shareholders, make sure they are in writing and can be provided to the lender in a timely manner.
- Respond to the bank promptly. Be ready to provide information as soon as possible to avoid delays in the application timeline.
- Document everything. If you spend time and money organizing your financials, shareholder notes, etc., the process will be easier when you request a loan.
- The lender will ask probing questions; be ready with timely answers so the bank can become comfortable with the management of your business.
- You want to come across as professional and organized, just like you do with your customers.
Is there anything else you’d like to share?
Don’t get discouraged if you hear ‘no’ at first. Ask questions about why you were told ‘no’ and what you can do to get to ‘yes.’ Keep working on your plan and documentation, and look for a lender who is experienced in creative loan structuring. There also are alternative lending sources beyond the SBA.
Doing your homework gives you more confidence as you go through the loan application process. This increases the chances of achieving the outcome you desire, and paves the way toward a positive outlook for the future.
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