Inside SBA Loans For Small Businesses

Small businesses need money. Banks have money. Match made in heaven. Simple, right? Kind of!

I have a great credit score, doesn't that mean I should be able to get a loan? Yes, but the question becomes how much and what terms. Let's look inside the anatomy of a loan first.

A lender has to ensure 3 major criteria before lending money.

1. The borrower's behavior and intentions are disciplined about returning someone's money. This is reflected in your credit report and score.

2. The borrower has capability to make the loan payments (income). Just because I have 800+ credit score, doesn't mean I have the income to pay a loan of $1M.

3. And in the worst case scenario of default, there should be some way to recoup at least a significant portion of the principal (collateral/guarantee).

Depending upon the quality of these data points (and more), the amount, rate and terms of the loan vary. For example: with a credit score of 750, a $1M collateral (property), and an income of $200K/YR, a lender might choose to lend you $800K at 4% interest. Or, with a credit score of 780, income of $300K/YR, but no collateral, a lender might choose to lend you unsecured loan of $100K at 7% interest.

In addition, different lenders have different risk appetites. There's a reason some banks asked for bail outs in 2008-9, while some didn't! Just because one bank is willing to offer me a rate and loan amount, doesn't mean other banks will match the offer, but most likely, a number of them would try to be close enough.

Typically, small businesses struggle at all 3 points when it comes to business loans, specially when they are just starting out.

Luckily, there are ways to make these points stronger. The most common is to attach your personal credit report, in lieu of your business credit report. This also attaches yourself as the personal guarantor of the loan, which means your personal assets (including the equity in your primary home) are the collateral. The loan amount will be determined by your household plus business income and liabilities. So much for creating the LLC or S-Corp to protect yourself from liabilities!

Even then, most times, you can't get enough loan amount, as most people are highly leveraged due to their primary mortgage. Here comes the SBA as a godsend, kind of!

The biggest favor SBA does to a business is that it provides "guarantee" (another form of collateral) to the lender for up to 75% of the principal amount. Wow, thank you SBA! But, it doesn't come completely free.

SBA adds more conditions, before extending this big favor. In addition to charging a guarantee fee, SBA needs to ensure mainly 2 things -

1. You have the capability/experience and the business has the probability to be successful.

2. You have the intention and discipline to make the business successful.

Proving these 2 points can be tricky, but not impossible. A franchise is a short cut example - the franchisor proves the business success probability, your qualification & capability and you becoming full time owner/operator establishes your intention and discipline.

A good business plan, resume and experience proof could help you navigate through SBA loan process. Don't forget though, that SBA still doesn't eliminate the need of you being the personal guarantor of your business liabilities. However, if you don't have enough equity in your primary home, it won't be attached as collateral. Now that's a secret tip!

Good luck, real small businesses, I’m rooting for you.