Three Keys to Qualifying for an SBA Loan

In order to grow and create jobs, small businesses need capital. But, banks are often wary of small business loans because they can be risky. That is why the SBA makes a guarantee to SBA lenders that they will cover the loan if the borrower defaults. Furthermore, the SBA sets some standards for those loans so the small business owner knows they are being treated fairly. And that is one of the major reasons why they are attractive to business borrowers.

But, how does a business or individual qualify for an SBA loan? There are three things that are key to qualifying. First, the SBA almost always requires that you, the borrower, have “skin in the game”. In other words, you need cash to put into the deal. This makes it less likely that you will simply throw up your hands and walk away when things get tough. The percentage varies depending on specific defined parameters of the deal and which SBA program you are utilizing. But, you can expect the lender to require somewhere between 10% and 30% of the total project cost as your cash injection. This is sometimes called “owner equity”.

The second key to winning an SBA loan is your FICO credit score. Lenders are not required to offer you a loan. But, if they do, the SBA has limits on the interest rate they are allowed to charge you. The lender’s decision to offer a loan, as well as the interest rate, is partially determined by your FICO credit score. You will get the best rates with a FICO score of 700 and above. But even scores as low as 580 can qualify for subprime SBA loans (higher interest rates).

Where the money will come from to pay the loan back is the third key lenders look for. Strong business financials tell the lender there is sufficient cash flow to cover the debt. Every lender determines their own criteria but each one will calculate a Debt Service Coverage Ratio (DSCR). This is simply the total income over the total expenses and it must be higher than 1. In other words, you will make more money each month than you will have in debt coverage. All lenders have a minimum, some as low as 1.15.  Others require higher ratios such as 1.25 or even 1.4 on some deals. This can also depend on the type of loan or the industry.

When seeking an SBA backed loan, these three items are key to your qualification. If your credit score will keep you from qualifying then get assistance in enhancing that score. But be careful, not all credit score enhancement companies are worth your money. If you need more cash to inject than consider a home equity loan or rolling in an old 401k or borrowing from a relative. But, if the business financials do not show adequate cash flow (whether historical or projections) you will only qualify if you are in a growth mode. If you have questions about any of these things, feel free to call us. We love to help small businesses succeed.

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