With a strong economy and low interest rates, are SBA Loans Still A Good Deal?
A strong overall economy has resulted in perhaps the most robust environment for small business lending. In fact, according to the latest Biz2Credit Small Business Lending Index™, our monthly analysis of more than 1,000 small business loan applications.
Business loan approval rates at banks continue to climb as we approach the fourth quarter of 2017. Approval percentages at big banks improved two-tenths of a percent to 24.8%, reaching a new high for the index, which has tracked lending figures since January 2011.
Regional and community banks saw their approval percentages rise one-tenth of a percent to 49.1%. Small business owners in search of loans have a strong chance of obtaining funding. An important factor is that small banks are making millions of dollars’ worth of SBA loans.
The SBA does not actually make loans to small businesses. Instead, the agency sets parameters for loans that are made by banks, CDFIs and other lenders. SBA backing minimizes risk to the banks and increases their confidence that loans will be repaid.
An SBA loan is similar to a commercial bank loan, except that it is structured according to SBA regulations and provides a government guaranty.
How does one increase the chances of obtaining an SBA loan?
1. Write a Professional Business Plan
Creating a business plan that defines your company’s goals and how they will be obtained is the first step toward securing funding. The plan should include:
- Executive Summary (A one- or two-page overview of the business);
- Company Overview (explain the company’s legal structure, location, and history);
- Products and Services Offered (the “need” being filled in the marketplace);
- Target Market (the demographics, geographics and psychographics of the core audience);
- Marketing/Sales Plan (explanation of how the company will reach its target market);
- Success metrics;
- Management Team (experience of the key players);
- Financial Forecast; and
- Appendix (images, infographics and other information).
2. State the Amount and the Use of Funds
Make a realistic estimate of how much money you need to borrow and how it will help your business. Borrow more money than you think you will need because in building any business, delays will occur. Request enough funding so that you don’t have to go back to the lenders a second time, which is an indication that you might not be able to budget well.
3. Credit History
Lenders check borrowers’ credit scores to calculate credit risk and determine the interest rates they will charge. If a company has a solid history of timely payments, the interest rate will be lower. A company with a rocky repayment history may have a tough time securing funding, and if it does, the cost of capital will be higher. One reason that SBA loans are so popular is that the government backing entices banks to lend money to ventures that might not qualify for traditional commercial bank loans.
4. Financial Projections
Obviously, for a startup business, the figures are all guesswork. Be confident and convince the lender that you understand the finances of your company. Be sure to explain how and when the loan will be repaid.
Having collateral — assets that can be used to guarantee repayment of a loan – bolsters lender confidence in the borrower’s ability to pay. A home or property, equipment, inventory, or accounts receivable (for an existing business) all can be used as collateral.
Businesses that do not qualify for SBA loans or traditional bank loans still have options. Alternative lenders approved 57.0% of funding requests in September. They charge higher rates than other lenders because they are willing to provide funding to firms with less than stellar credit scores.