Small Business Administration loans provide a traditional method of small business financing. Whether you need money to purchase real estate, cover construction costs or to use as working capital, these small business loans offer attractive repayment terms and low interest rates.
If you think an SBA loan may be a good fit for financing your business, check out our most recent video in the Small Business Success Series. Guidant CEO David Nilssen discusses the five “C’s” of SBA loan eligibility: capital, credit, capacity, collateral and character.
No time for a quick video? Here’s the transcript:
David Nilssen: If you’re starting or buying a small business, the last thing most people want to think about is financing. But in reality, it should be one of the first things you consider. We help entrepreneurs from all walks of life to acquire the financing they need to buy or build a small business or franchise.
One of the most common ways that we do that is with SBA loans. Now, SBA loans go up to $5 million, but more than half of them fall within $350,000 to $1 million. The small business administration was created to guarantee loans for banks, so they feel more comfortable lending to you as an entrepreneur. But the underwriting requirements can be really complicated and for that reason, a lot don’t get approved.
So, before you start that process, I wanted to cover the five C’s with you, so that we can talk about the main categories that a bank looks at before deciding to give you a loan. That’s capital, credit, capacity, character and finally collateral.
Now, capital is what they call equity injection — that’s the amount of money they require you to put down as equity for the business itself. In general, with the startup, they’ll ask for 30 percent down, and if you’re buying a new business it’s somewhere between 10 and 20 percent.
From a credit standpoint, they just want to make sure that you have effectively managed your credit obligations. So, they’re generally looking for a 680 credit score (FICO) or a little bit higher.
Capacity is about the ability to pay that loan back. So, they want to know that your personal income and the business’s opportunity match the ability to service the debt ongoing.
Character is about whether or not you’ve got the experience to operate the business that you’re trying to purchase or start.
Then finally collateral, which is really defined as “worthwhile assets”. The bank is going to want to take some security for the loan that they’re providing to make sure that they can get a paid.
Now, while the application process for the SBA can be very difficult, we’ve figured out a way to make it streamlined. Biz2Credit reports that 21 percent of people that fill out the full SBA package will actually get approved. We’re seeing four times that success. So, if you’re thinking about getting an SBA loan, you might consider working with Guidant Financial.