Getting an SBA loan can be a great way for small businesses to access lower rates and longer terms than they might qualify for with a conventional loan. However, the application process requires extensive documentation of your finances, and it can be difficult to get approved for a loan if you are a new business. Traditional lenders consider start-ups to be “risky” investments, and they generally require the company to have at least two years of history before considering an approval. In addition to having a consistent, positive cash flow for several years, lenders also look at your debt-service coverage ratio.
This is calculated by dividing your net operating income by your total annual debt. A ratio of 1 means that your cash flow equals your monthly loan payments, while a ratio of 1.35 shows that you have a compensation margin built into your finances. It's important to note that the SBA loan application process is the most difficult compared to other business loans. This is true not only because of the eligibility requirements, but also because of the long length of the application and subscription process.
In large banks, the approval rate for commercial loans, including SBA loans, is only about 25%. In small banks, the approval rate is higher, around 49%, but more than half of borrowers are still rejected. If you've been denied an SBA loan, you're certainly not alone. To increase your chances of approval, make sure you have a strong cash flow and credit history. You should also avoid opening too many loan applications at once, as this can be a red flag for credit bureaus.
Additionally, lenders prefer a debt-to-income ratio of 1.35 for new small business loans. SBA 7 (a) loans are general-purpose business loans that you can use as working capital for your company. To qualify for this type of loan, you may need to provide collateral such as equipment or inventory that you have purchased. The SBA also uses a formula called the Debt Service Coverage Ratio (DSCR) to determine your ability to repay the loan - the higher the score, the better your chances of approval. SBA 504 loans are another option for financing the purchase of real estate, equipment and other fixed assets. These loans may require you to pay a down payment of 10 to 20% and to partially secure the loan.
You may also be asked to participate in training or development programs that are available to your company as part of the microcredit terms. As you can see, getting an SBA loan requires careful preparation and planning. Make sure you have a strong cash flow and credit history, and be prepared to provide collateral if necessary. With the right preparation and documentation, you can increase your chances of getting approved for an SBA loan.