How to Qualify for an SBA Loan

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Small Business Administration (SBA) loans are financed by the federal government to encourage entrepreneurs to invest in their businesses, expand and innovate. According to the SBA, about 95 percent of all small businesses are eligible for an SBA loan. Understanding the restrictions is key to becoming qualified.

Review your business capital. SBA loans are only given to business applicants who can prove they have in capital reserves at least one-fifth of the amount necessary to complete a specific project. This is often a stumbling block for uninformed business owners.

Review your personal credit and your company's business credit (if applicable). See Resources on how to get a free copy of your credit report. A strong borrowing history is essential in getting approved for an SBA loan. The government is eager to provide businesses with financing to support innovation and drive the economy, but it normally only provides credit to strong borrowers. The government is not interested in becoming debt collectors.

Prepare your business plan, statement of purpose and your financial records. SBA loans are reviewed all the time, and the clearer you make your loan application, the better. Underwriters and loan specialists are looking for specific features (such as cash flow, how unique the business is and credit standing) of the loan package, and it's best to highlight positive attributes of your plan.

Learn the three C's of credit-decision making: character, capacity and collateral. Remember that private banks, not direct funds from the government, will be making all SBA loans. You must prove to a loan officer that your business loan is a strong credit risk. Character is usually based on the strength of your personal credit history; capacity is based on your ability to repay the loan, or your cash flow; and collateral is a secondary source of assurance the loan officer has to strengthen your credit risk.

Apply for a 7(a) SBA loan. These loans are the most common. The requirements for these loans are: a retail company must employ no more than 100 employees; the annual revenue of the company can be no more than $21 million; a wholesale company must employ no more than 500 employees; and a construction company can have no more than $17.5 million in sales.

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