The Basics of a Small Business Loan
The U.S. Small Business Administration is an independent agency of the Executive Branch of the Federal government. They have four primary responsibilities to the American small businesses. They are advocacy, management, procurement, and financial assistance. Obviously, if you are seeking a small business loan, you will be using the financial assistance portion of the U.S. Small Business Administration.
Financial assistance is provided primarily through investment programs which are handled by the SBA. There are three separate but equally important loan programs associated with the SBA. The SBA sets the guidelines for the loans while the SBA’s partners such as lenders, community development organizations and micro lending institutions provides the actual loans to small businesses. The SBA then backs these loans with a guarantee that will eliminate some of the risk to the lending partners.
How do you become eligible for a small business loan? First, every applicant that applies must have some positive credit factors. To get approval, the applicant must have some positive credit factors. The lenders will look at these credit factors and determine whether to internally approve the loan, seek a guarantee from the SBA, or decline your application altogether. Business loan applicants must also have a reasonable amount of funds invested into the business. This ensures that the business will operate on a sound basis when the applicant’s funds are combined with the funds from the loan. There will also be an examination of the debt-worth ratio of the applicant to see how much money is being asked from the lenders in relation to how much the owner(s) have invested. Owners may either invest assets or cash which can be used to acquire assets for the business.
Adequate collateral is required for all applicants as a security on the requested loan. The SBA will not decline a loan if the only basis for denial is the absence of adequate collateral. Collateral can consist of both assets from the business and assets from outside the business (personal assets).
There are other things that the applicant needs in order to be considered for a loan. First, he/she needs a business profile. This is a document that describes the type of business it is, annual sales, number of employees, and length of time in the business. Secondly, a description of how the loan will be used. This description should include the purpose, amount, and type of loan. You will also need both business financial statements and personal financial statements.
The SBA also requires that the applicant be in compliance with the employment or sales standards developed by the Small Business Administration and it based on the North American Industry Classification System. The following are used as criteria to determine whether a business is eligible for SBA assistance:
� Wholesale: not more than 100 employees
� Retail or Service: a 3 year average in sales of not more than $6 million to $29 million, depending on business type.
� Manufacturing: not more than 500 employees but in some cases up to 1500 employees.
� Construction: an average 3 year sales of not more than $12 million to $28.5 million, depending on the business type.
To apply for a small business loan you must submit a written loan proposal. You will need to make sure that this written proposal looks its best because this may be the only chance you will get. First, begin your proposal with a cover letter. In this letter explain who you are, your business background, and the nature of your business, the amount and purpose of the loan, your requested terms of repayment, how the funds will benefit your business, and how you will repay the loan.
