Startup loans are more difficult to get approved for because the business has not yet established a track record or business credit profile. SBA startup loans are also more challenging to obtain than SBA loans for more established businesses because there is more risk involved. We asked experts to share tips for startups applying for SBA loans to increase your chances of approval.
Here are the top 20 SBA startup loan tips, straight from the pros:
1. Apply Through an SBA Preferred Lender
Christopher Hackney, AVP, SBA Lending, First Home Bank
Working with a bank that participates in the SBA Preferred Lender Program expedites the approval process for your SBA loan request, which means your business receives the capital it needs faster. Participation in the SBA Preferred Lender Program is reserved for banks that have demonstrated the ability to successfully process and service SBA Loans.
A preferred lender has been granted the authority to approve loans on behalf of the Small Business Administration. A non-preferred lender must approve your request internally then submit your request to an SBA processing center for final approval. The processing time at the SBA processing centers offices has improved from past years, but still can lead to delayed loan approvals that can be avoided when working with a Preferred SBA Lender.
Check our article about applying for an SBA loan to learn more.
2. Address Your Weakness & Highlight Your Strengths
Matthew Gillman, CEO, SMB Compass
Applying for an SBA startup loan is about addressing your weakness and highlighting your strengths. To start, the biggest weakness of every startup is being new in business. You have a new company that doesn’t have a track record, but you do. Every entrepreneur needs to show why all of their strengths outweigh their one weakness. Have a strong resume and business plan, understand your personal credit, provide personal collateral, and be prepared to provide information to lenders as soon as they ask for it.
3. Prepare Your Personal Liquidity & Asset Statements
Tom Pretty, Head of SBA Lending, TD Bank
With a traditional small business loan, business and personal credit scores can play a large role in the decision factor. While still relevant, credit scores are not as heavily weighed while underwriting for SBA loans, but personal liquidity and personal assets are more important factors when evaluating a startup business for credit.
Also, make sure to have clear revenue records, a written business plan, resumes for key team members, a business license, and tax statements on hand. Be prepared to answer several questions, including: Why are you applying for this loan? How will it be used? What assets need to be purchased, and who are your suppliers? What other business debt do you have, and who are your creditors?
4. Write a Strong Business Plan
Diane Gallion, EVP & GGL National Director, Radius Bank
Starting with a strong, well thought-out, written business plan is an important tip for startups that are planning to apply for an SBA loan. This plan should include business knowledge, which details your prior experience in this business, and the risks associated with how you will execute the model.
Look at the required items in a business plan and write specific to your location and the clients you will serve. Include detailed two-year (or more) projections that focus on key revenue drivers and expenses at a monthly level. Also include the working capital needs and how the business and owners will generate capital, especially if sales are not going as planned. You can also discuss your prior ownership of a business or management experience and how it relates to this business.
5. Use Free Tools to Assess Your Business’ Financial Health
Evan Singer, CEO, SmartBiz
Banks consider several key financial ratios, like debt coverage and business revenue trends, when assessing an SBA loan application. While large corporations have a chief financial officer to crunch the numbers, many entrepreneurs need help assessing the health of their business before they apply for low-cost funds. Now small business owners have a free tool that acts as an Intelligent CFO™. When you sign up for SmartBiz Advisor, your Loan Ready Score™ is generated, showing how your business stacks up. You’ll also get actionable advice to improve your score, saving you valuable time and helping improve your business’ financial health.
6. Practice Your Elevator Pitch
Sheryl Cameron, SBA Expert & Executive Director, Chase
Practice your elevator pitch, then practice it some more. Telling the story to your lender is very important. Your ability to communicate why you are requesting the money goes a long way in the decision process. It is important for a lender to see your vision and how the credit tools being used will impact your business. A lender reviewing your application will need to see your ability to repay the debt as well as who you are as a business. The more the lender understands your business, the more the bank will be able to support your growth. If you’re looking for a test audience, try out your pitch with your business advisor—we’re always here to help.
7. Get Started on the Process Early
Ned Murchison, Senior Vice President, First Bank
The SBA loan process can be very time-consuming and require lots of paperwork. Many customers looking for an SBA loan wait until late in the process to start looking for financing. Also, if your project includes construction, make sure you clearly understand the construction process and timelines so that it does not create issues as you move through the loan process.
8. Make Use of the SBA Website
April Brissette, Chief Credit Officer – FundEx Solutions, Bankers Healthcare Group
Make sure to utilize the SBA website as much as possible. They have some great templates and resources that you can use to set yourself up for a successful SBA loan application. Don’t rush through the application process or get discouraged. Again, it is the single most important part of your application, and what the lender will rely upon most when considering approval.
9. Review the SBA Loan Requirements Before Applying
Chloe Gawrych, Business Expert, Business.org
SBA loans have a reputation for taking a long time to get, but that’s in part because business owners try to apply without realizing all the requirements they have to meet first. For one thing, you should apply to standard lenders and sometimes get rejected by them before the SBA can even consider your application. So knowing in advance all the qualifications can help you apply successfully—and more quickly—for an SBA loan.
For more information, check out our article about SBA loan requirements.
10. Free Up Funds for a Down Payment
Edward Kinney, SVP – Commercial Lending, Settlers Bank
Aside from writing a well-thought out business plan, another way to increase your chances of approval for an SBA startup loan is to ensure that you have enough money for down payment, as this will be your personal cash investment for the business. Typically, the minimum cash investment is 10%, but a higher amount will improve the chances of approval. Also, you can secure the loan with your personal assets as additional collateral.
11. Make Sure Your Bookkeeping Is Accurate
Paola Garcia, Vice President, Excelsior Growth Fund
Preparation is key when applying for any small business loan, including SBA-backed loans. Small business owners, even startups, should learn to become more loan-ready by focusing on the issue of bookkeeping. Many small business owners are held back from qualifying for loans because they are still relying on paper ledgers and are not able to generate the financial reports needed for a strong loan application. So make sure your financial statements are accurate, up-to-date, and always properly done.
12. Get Your Personal Finances in Order
Paul Kassabian, Legal Product Counsel, LegalZoom
Before diving in to start a business, entrepreneurs should do their research on how personal finances can impact their ability to get operations up and running. For example, a good personal credit score is critical to prove reputability to lenders, but we found that less than half of Americans (46%) realize that their personal credit impacts their ability to take out a business loan. Poor credit is the number one reason entrepreneurs are denied a Small Business Association (SBA) loan.
13. Open a Separate Bank Account for Your Business
Yuko Kawamoto, Finance Staff, Founder’s Guide
It’s essential to keep your business and personal finances separate from the start. Make sure to open a separate bank account for your business while it is still new. If possible, apply for a secured credit card under your business name too, as this allows you to slowly build your business credit. You will likely get approved for a loan if the lender sees that your business has its own bank records that are separate from your personal finances.
14. Organize Your Paperwork
Drew Johnson, Owner, Lagerhead Cycleboats
Startups that are applying for an SBA loan should be organized with all the paperwork. The amount of paperwork required could also be overwhelming to the loan officers. Since your goal is to convince them that you are a good applicant, present them with documents that are well-organized. You can use a secure online file sharing system that allows you to share files, as well as a shared Google document to track the status of all of your files real-time.
15. Find Out What the Lender Requires as Collateral
Sean A. Tomalty, DMD, CEO, Tomalty Dental Care
Does your company have inventory? Are you willing to personally guarantee your loans? These are very important and difficult questions you must ask yourself. As a small business owner, personal guarantees are a necessary step that will be required by most banks. If you are growing your company, will your bank require you to cross-collateralize your operation? If so, make sure that you are acutely aware of the verbiage of your loan documents, as these can be very tricky and difficult to get out of.
16. Improve Your Personal Credit
Adam Clark, CEO, Tangible Solutions
As an entrepreneur, it’s possible that you’ve done some damage to your credit. It’s important to know where you stand when it comes to your credit, and do some research on how to improve it. Doing this at least a year before you apply would be best, but no time is ever too late. Try to build a good personal credit score, as this may be a factor that will affect your startup SBA loan application.
17. Put Together Detailed Cash Flow Projections
Megan Hanna, Small Business Finance Editor, Fit Small Business
After you’ve developed a budget, the next step is putting together detailed cash projections so you know how much funding you’ll need and when. Understanding the amount and timing of any potential cash flow gaps is essential to making sure you have enough cash on hand to fund your startup business operations. With this information, your potential lender will be better equipped to help you get the funding you need. Plus, you’ll avoid any unpleasant surprises if you run into a cash flow shortage. It’s always easier to ask for funds from lenders before you need them.
SBA offers different types of loan programs, and it’s important to know which one is right for you based on your business profile, financing needs, and growth plans. SBA recommends that you check out the SBA’s Online Loans and Grants Search Tool, which will suggest government financing programs for which you might qualify based on the business information you provide.
Lenders consider both your personal and business credit scores when determining whether or not to approve your loan application. This is why Score.org recommends making building your credit a priority. Make sure to pay your personal and business liabilities on time and keep your credit utilization ratio low. Build your credit score because this will help increase your chances of getting approved for a loan.
According to Entrepreneur, most lenders will usually ask for a detailed budget before approving the loan and releasing the funds to their clients. A budget is an essential aspect of your business plan that should guide you with your venture. Make sure to create your budget plan before you shop for financing.
You need a sufficient amount of money to start a business. Startups have yet to establish their business, making it more challenging to get approved for a loan. SBA loans are a great option because it is partially guaranteed by the government, making it less risky for the lenders. If you’re planning to apply for an SBA startup loan, make sure to use the above SBA startup loan tips to help increase your chances of getting approved.