Starting a Business: How to Qualify for an SBA Loan

For many individuals, owning their own business is the fulfillment of a lifelong dream. But the road to entrepreneurship is full of challenges, and among the biggest is securing the financing. For those who are unable to qualify for traditional loans, a loan backed by the Small Business Administration (SBA) could be a viable option. Business Valuation

Standard SBA loans can be used to start a new business or purchase an existing business. There are other types of SBA loans that can be used for special purposes, but for those who want to get into a fairly traditional business, the SBA’s Basic 7(a) Loan Program will likely be your source of financing.

Though qualifying for an SBA loan through a participating lender is easier than other types of bank financing, there are still several qualifications you need to meet. For starters, you must ensure that you fulfill the minimum requirements of the lending institution through which you are applying.

This usually means a good to excellent personal credit score (650 or higher in most cases), being current on all government loans (such as student loans and government-backed mortgages), being current on other credit obligations, and not having any recent bankruptcies.

To qualify for an SBA loan, here are some areas of your financial life to focus on:

Raise your Credit Score: Your credit score is one of the major factors in becoming approved for an SBA loan. As mentioned earlier, a typical lender will want to see a minimum score of 650 to be considered. There are certain ways to improve your credit score. The most important is to ensure that all your bills are paid on time. Few people realize how important this one simple thing is to maintaining a decent credit score. If you are late by a day or two that will probably not have any impact, but any payment over 30 days late will.

Another factor is how much you have borrowed verses how much available credit you have. The closer you are to your borrowing limit, the lower your score will be. One way to quickly improve this ratio is to open new credit accounts and not make any purchases with them. The other way is to pay down your existing credit accounts, which can be a bit more painful.

Even if you have done everything right, your credit score still may be suffering because of reporting errors. This is why it is recommended that consumers take advantage of the ability to receive a free copy of their credit report annually from each of the three major reporting bureaus. You can get your free reports from Look them over, and if you find any errors, dispute them immediately with the credit reporting agencies.

Organize your Financial and Legal Documents: In addition to a good credit score, lenders will want to see an organized financial history. At a minimum, be prepared to produce copies of:

  • Three years of personal (and business if you have one) tax returns;
  • Personal and business bank statements;
  • Photo identification (such as your driver’s license);
  • Articles of incorporation;
  • Business licenses;
  • Copies of commercial leases;
  • A strong business plan with financial projections;
  • An adequate amount of collateral to meet the loan qualifications.

Start a Business or Buy an Existing One

Qualifying for an SBA loan is a major step toward business ownership. But should you use the money to start a business from scratch or buy into an existing one? Typically, the investment into a new business will be less, but it is also far more risky. An existing business is already established and has proven its viability. This means you have far more certainty going in that you will make it work. If you are unsure where to look for existing businesses, the best place to start is to speak with a business broker. A business intermediary can search the listings in your area and match you with the business opportunity that best fits your passion, skills and budget.

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