Overall Process of Obtaining a Small Business Loan - Essay Sample

Introduction

The first step in obtaining a small business loan is preparing a justifiable business case in which a small business owner (SBO) provides statements of required funds and justifies the need for funding (“Steps in the life of an SBA loan,” 2020). The process can be achieved by preparing a business plan, which assures the lenders that funding will not be mismanaged. Secondly, the SBO finds a suitable lender. In this case, they can choose from SBA preferred lenders or opt for a bank they utilize for personal banking (“Steps in the life of an SBA loan,” 2020). Thirdly, the SBO completes a loan application package once they have identified a suitable lender. The loan application mostly comprises of a bank application form, personal financial statements, borrower information forms, a business plan, business tax returns, and personal identification (“Steps in the life of an SBA loan,” 2020). Fourthly, the lender reviews the loan application and analyzes the benefits and risks involved to determine if a business is worthy of credit (“Steps in the life of an SBA loan,” 2020). The creditor then decides whether to approve the application and the process takes between 60-90 days. If a lender is not registered with the SBA, the lender forwards the application to the SBA for approval of loan guaranty and analysis of whether the business can repay the loan (“Steps in the life of an SBA loan,” 2020). Once the SBA approves the guaranty, the lender completes loan underwriting and collects information such as collateral documents, personal guarantees, and other security interests. Finally, the loan is closed and the lender disburses the funds to the SBO.

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What Levels of Funding are Available through the SBA? Give One Example.

There are eight levels of funding through the SBA, which include the Paycheck Protection Program (PPP), Standard 7(a) loans, CDC/504 Loans, Microloan, Home and Personal Property Disaster Loan, and Economic Injury Disaster Loan Programs (“Types of 7(a) loans,” 2020). Notably, Standard 7(a) loan program is the most common type of SBA credit financing. It comprises of the 7(a) small loan programs with a maximum loan amount of $350 000, the Standard 7(a) with a maximum of $5 million, the SBA Express, Export Express, Export Working Capital, International Trade, preferred lenders, Veterans Advantage and the CAPLines loan programs (“Types of 7(a) loans,” 2020). The 7(a) loan is popular since the express programs have a response time of less than 36 hours (“Types of 7(a) loans,” 2020).

What Criteria Does the SBA Establish to Qualify Applicants for Loans?

Applicants seeking SBA loan support must fulfill specific requirements to be eligible for the loans. They must be operating legal for-profit ventures that are registered officially (“Terms, conditions, and eligibility,” 2020). They must also prove that they have a reasonable and sound business idea that requires funding. The SBUs should not be on parole and their organizations must have less than 500 employees and collect revenue below $7.5 million on average for a period of three years (“Terms, conditions, and eligibility,” 2020). Moreover, applicants' net income after taxes must be less than five million dollars and tangible assets must not exceed $15 million. Noticeably, the business must be operating in the country and conduct business with the state or its territories (“Terms, conditions, and eligibility,” 2020). The SBA also requires applicants to prove they have tried and failed to secure alternative forms of funding from non-SBA loan facilities. They should also not have any defaulted loans to the government.

What Basic Reports are Required of a Borrower?

The basic reports required for a borrower include a borrow information form, personal background, and financial statement, business financial statement, business license or certificates, loan application history, income tax returns, resumes, business plan, and lease agreements among other additional documents according to requests (“Terms, conditions, and eligibility,” 2020). The borrower information form captures all business owners with more than 20% stake, the management, and other persons guaranteeing the credit (“Terms, conditions, and eligibility,” 2020). Noticeably, a business plan outlines the challenges and history of the business and outlines reasons why the SBO requires the credit and how it will benefit the venture. The business plan must also include projections of future cash flow, revenue collection, and profit margin (“Terms, conditions, and eligibility,” 2020). Loan application history and debt schedule are required to assess the borrower’s loan repayment habits.

Are There Special Programs for Minority Owners, and How Does One Qualify for Such Programs?

The 8(a) Business Development Program offers a wide range of assistance to organizations, which are operated by at least 51% of economically and socially disadvantaged individuals or entities (“Types of 7(a) loans,” 2020). The program makes government contracts and loans readily accessible to minorities and offers business mentorship by paring small ventures with established businesses. Notably, the SBA 8(a) program does not issue loans but help minorities qualify for SBA loans (“Types of 7(a) loans,” 2020). The requirements for the SBA 8(a) program qualification include proving of long-term financial success, be operated by individuals with a net worth of less than $4 million, and be 51% owned by US citizens facing social and economic challenges including minorities (“Terms, conditions, and eligibility,” 2020).

Additionally, the SBA Community Advantage Loan is also available for minorities since they offer support for persons or entities that do not qualify for the SBA 7(a) loans. The community loans are issued by local creditors mostly non-profits and can amount up to $250 000 (“Types of 7(a) loans,” 2020). Notably, the SBA guarantees only 85% of the loan making it accessible for minorities (“Terms, conditions, and eligibility,” 2020). Moreover, the SBA Microloans can also be ideal for minorities although the package is not specifically designed for them. The package is readily available for persons who want the funding of up to $50, 000 for either business expansion or start-up. Noticeably, to qualify for the microloan, applicants must have a positive credit record.

How Long Does the Approval Process Take?

Different loans have varying approval periods ranging from 24 hours to 60 or 90 days depending on the type of SBA plan. Notably, SBA preferred lenders are likely to process the loan faster than non-preferred creditors (“Terms, conditions, and eligibility,” 2020). The SBA Express Loan Program is one of the fastest options with a processing time of less than 36 hours.

What is the Success Rate of SBA Loans?

The success rate for SBA loans is about 80% given that the failure rate for small businesses is about 20% annually according to the Bureau of Labor Statistics (Lewis, 2020). Most of these small businesses are back by SBA loans. Getting an SBA loan does not guarantee success since most debtors end up defaulting payments. According to a study carried out by Nerdwallet, 17.4% of the loans issued between 2006 and 2015 were defaulted (Campbell & Voigt, 2017). The situation presents a scenario where more than one in every six loans is likely to be unsuccessful.

What are the Characteristics of Successful Loan Applicants?

One characteristic of a successful loan applicant is a well-developed business plan, which outlines the venture’s sustainable goals, justifies the need for funding, sound strategies, analysis of potential challenges, and forecasts for future business growth (Lewis, 2020). Without a sound business plan or strategies to foster growth and increased revenue, applicants are likely to invest in endeavors that are unsustainable. Additionally, successful loan applicants have attractive financial statements that outline their ability to manage losses and profits successfully Campbell & Voigt, 2017). The trait allows a business to continue operating amidst challenges and permit debtors to repay their loan obligations. Additionally, successful SBA loan applicants have justified reasons back-up by forecast evidence on how the loan will facilitate their business growth.

References

Campbell, C. W. & Voigt, K. (2017). 1 in 6 small business administration loans fail, study finds. Nerdwallet. Retrieved from https://www.nerdwallet.com/blog/small-business/study-1-in-6-sba-small-business-administration-loans-fail/#:~:text=Getting%20one%20of%20these%20SBA,a%20recent%20NerdWallet%20study%20shows.

Lewis, D. (2020). Business loan statistics 2019. Finimpact. Retrieved from https://www.finimpact.com/small-business-loan-statistics/Steps in the life of an SBA loan. (2020). US Small Business Administration. Retrieved from https://www.sba.gov/content/steps-life-sba-loan

Terms, conditions, and eligibility. (2020). US Small Business Administration. Retrieved from https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility

Types of 7(a) loans. (2020). US Small Business Administration. Retrieved from https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans