Whether you are applying for an SBA loan or a traditional bank loan, there are certain factors that improve your ability to obtain financing. This self-test is designed to assist you in understanding important issues that lenders consider when making a decision on a small business loan.
Research indicates that good personal credit history is one of the most important factors in identifying borrowers that will repay their business loans. When a lender makes a decision on a small business loan, he/she will consider the personal credit history of the borrower. A bad credit history can be the basis for denial for a small business loan.
a) If you do not have a recent credit report, find out about ordering one by calling TransUnion (www.transunion.com), Experian (www.experian.com), or Equifax (www.equifax.com). If you have credit problems but they can be explained by a one-time incident such as a medical problem, provide information to a potential lender about the problem and how it has been rectified.
b) If you have filed for bankruptcy in the past 7 years (10 yrs for an SBA loan), or have slow payments, collections, etc. then it may be difficult to obtain financing now. If your poor credit history can be explained by a particular incident, supply information on the situation and how you attempted to repair past credit problems. If you have consistent credit problems, you will need to "repair" your credit history and rebuild your credit track history. Call your local Consumer Credit Counseling Agency (CCCA) for assistance. For the Arkansas CCCA nearest you, call 1-800-255-2227.
(For start-up businesses)
All loan programs require that the business owner put their own money into
the business. This owner equity injection shows that the owner believes in
the business enough to risk his/her own money and reduces the amount of monthly
debt payments that the business must make. Virtually all loan programs,
including SBA loans, will require a reasonable contribution from the owner(s).
A good rule of thumb is 20% or more equity injection. The more equity, the
more favorably potential lenders will look upon the loan request. Neither
banks nor SBA provide 100% financing.
Lenders and government loan programs alike want to see that an individual has met his/her tax obligations for both filing and paying taxes. Many of the loan programs are in partnership with government agencies. These loan programs do not look favorably on individuals or businesses who have unpaid income and/or business taxes. For SBA loans, an income tax verification is obtained from the IRS before a loan is closed.
(For existing businesses)
If the business is profitable, this helps to demonstrate repayment ability of
the new debt. If a business is not profitable, it becomes very important to
prove how it will be profitable in the near future so that a loan can be
repaid. Arkansas Small Business and Technology Development Center (ASBTDC) training seminars
and consulting can assist you in this process.
(For start-up businesses)
You must demonstrate that the business will be able to repay the loan payments.
It is very important that you find as much data as possible on comparable
businesses or industry statistics in order to "prove" the revenues you intend
to generate and the expenses you anticipate incurring. This is accomplished
by writing a business plan. Writing a business plan provides an organized
system for researching your business as well as insight into your business to
facilitate funding and investment. ASBTDC live training seminars such as
"Starting a Business in Arkansas" and "How to Write a Business Plan" can
assist you in this process. The ASBTDC also offers online training, including
"Crafting a Business Plan" and "Creating Financial Projections." For assistance
in locating industry research or information, contact your local ASBTDC office.
Business and personal assets can be considered collateral, or a way to repay the loan if the business defaults on the loan. Most collateral is valued at an amount less than market value based on a variety of factors. Although the SBA will not deny a loan due solely to the lack of, or amount of, collateral, the more collateral one has, the more likely a deal will be favorably considered. Unwillingness to pledge assets can be a basis for decline.
(For existing businesses)
The net worth of the business should be positive. If there are loans from
shareholders on the balance sheet and you are able to subordinate these (not
pay the shareholders) while you pay the bank loan back, you may consider
these loans from shareholders as equity.
(For existing businesses)
Businesses that have too much debt will find that their profits are directed
at paying back loans and not building retained earnings in the business that
can fund future growth. Consequently, banks and government loan programs look
more favorably at loan requests that do not add too much debt to the business.
Banks often look for a debt to net worth ratio of 3 or less (total liabilities
divided by equity). ASBTDC consultants can assist you in assessing your debt
situation.
Most business owners are asked for a personal guarantee in order to obtain a business loan regardless of the legal structure of the business.
(For existing businesses)
As businesses expand, they need more sophisticated management as it relates
to strategic planning, marketing, record keeping, inventory control, personnel,
etc. If there are aspects of your business with which you need assistance,
we strongly recommend that you attend one of the ASBTDC's entrepreneurial
training classes or contact the ASBTDC for assistance.
(For start-up businesses)
For a new business, it is important for the business owner to demonstrate
that he/she has experience in the industry and/or entrepreneurial experience.
If you have never owned or operated a small business before, we strongly
recommend that you attend one of the ASBTDC's entrepreneurial training classes.
STOP: If you cannot answer yes to all the questions above, then you may have difficulties obtaining financing at this time. We suggest that you evaluate the needs of your business and take advantage of the ASBTDC's live training classes, online courses, or contact your local ASBTDC office to speak to our knowledgable staff.
