Small Business Administration Lending: What It Is And How You Can Apply

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One of the biggest challenges that any business faces is obtaining capital to fuel growth. Even highly profitable companies need cash injections to continue to grow. The challenge for business owners is finding and obtaining that financing.

Banks are often reluctant to lend money to businesses, especially if the business is relatively young or doesn't have an ideal credit profile. A business could also take on new investors, such as friends or family, but that comes with its own set of complications. The new owners may want to exert some control over the business. If the loan or business doesn't work out, that could strain relationships between the business owner and the investors.

small business administration lending

The federal government recognizes the need for capital for small businesses. To help facilitate the financing process, the government operates the . The SBA was founded in 1953 to help small businesses grow and succeed.

The Small Business Administration helps businesses obtain loans, guarantees contracts, and provides counseling to help business owners work through difficult challenges.
how to apply for sba loan

The SBA was founded in the early 1930s as part of The New Deal. Originally called the Reconstruction Finance Corporation, the SBA was launched to lend money to businesses that were damaged by The Great Depression.

In 1953, President Eisenhower transformed the RFC into the organization it is today, the Small Business Administration. For the past 60 years, the SBA has guaranteed loans made by banks to small businesses. That assurance from the federal government helps banks make loans with complete confidence that the loan will eventually be repaid even if the business fails.

Additionally, the SBA backs surety bonds between businesses and contractors. Those bonds help businesses hire smaller contractors who may not be able to afford their own surety bonds. The business has assurance from the SBA that they will be reimbursed for any expenses paid, should the contractor not fulfill his or her obligations.

The SBA also offers counseling and educational sessions to help small business owners work through common challenges and obstacles. Those sessions are offered in group settings or on a one-on-one basis. However, the SBA's primary focus is on facilitating the flow of capital from banks to businesses.

How to Apply For an SBA Loan

It's important to note that the SBA doesn't lend money directly to businesses. Rather, it guarantees the business loans that are made by banks. Since the SBA is the one who may ultimately have to pay the money should the business fail, the SBA sets eligibility requirements, loan terms and amounts, and definitions on how the funds can be used.

sba loans

The first step in applying for an SBA loan is determining how much money you need and what the money will be used for. Lenders and the SBA want to be confident that you are going to use the money for a purpose that will help the business remain viable. It's important that you know that information before you even approach the lender.

You also need to find a lender who works with SBA loans. Many banks operate in the SBA program. You can also find a list of banks and microloan providers on the SBA's website. An initial meeting with the lender can give you a better idea of how the process works. They'll likely have their own set of forms and documentation that you'll be required to complete before the process moves forward.

  • An executive summary explaining why you need the money and how it will be used.
  • Financial statements going back at least several years or as long as the business has been operating.
  • Projected financial statements on how the loan and its intended use will impact your business.
  • Statements documenting your personal credit and financial history.
  • Income tax returns.
  • In some form of collateral. Collateral isn't mandatory, but it will certainly improve your application applications chances of getting approved.

Even though the SBA has a stated goal of helping small businesses, that doesn't mean SBA approval is automatic. In fact, a recent survey by the Federal Reserve Bank of Atlanta of small business owners found that SBA loans are among the most difficult types of financing to obtain. If you're going to pursue SBA lending, you need to have all of your information and documents prepared before you start the loan process. It's also advisable that you take some time to shore up any issues that may appear on your personal or business credit report. If you have too much credit card debt, try to pay it off before you apply for the loan. Similarly, get caught up with any vendors to whom you may be behind on payments.

An SBA loan may be just what your business needs to grow and thrive. However, it's certainly not guaranteed that you will get the loan. Explore all other business financing options while also pursuing an SBA loan in case it doesn't work out.

Read SBA Part II: Types of SBA Loans Your Business Can Apply For.

Content Posted By Analia Gentile

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