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SBA Loan Basics

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The Small Business Administration or SBA is an excellent source of financing for entrepreneurs who cannot obtain financing with reasonable terms through normal lending channels.

While there is a misconception that the SBA lends money directly to small businesses, it does not. The SBA guarantees private commercial loans structured to SBA requirements. Therefore, the prerequisite for obtaining an SBA guaranty is that the applicant must meet the private lender’s requirements.

Before applying for any type of loan, it is imperative that you examine your personal credit history. You need to obtain copies of your credit reports from Experian, Equifax, and TransUnion because each receives information from different creditors. Review those reports, spot any issues, and resolve those issues that can be resolved. If there are any issues that cannot be resolved that were caused by circumstances beyond your control include a detail explanation of those circumstances with supporting documentation in your loan application. Lenders use your credit history to gauge your credit worthiness and to gain insight as to how you repay your debts. This is important to your lender, because they will require a personal guaranty even if you are incorporated.

The next step is to prepare a draft loan package. The keyword here is “draft.” You will need a professional to review your draft and prepare your final loan package before submission to any loan officer. A basic draft loan package will consist of an executive summary, a business plan, and financial statements. The loan package will cover the purpose of the loan, loan amount and terms desired, how the loan will be repaid, and what collateral will be used to secure the loan. Your executive summary will summarize your loan package and serve as an overall roadmap. It will emphasize the positive effects of the loan as well as how the business will generate enough cash flow to service the loan payments. The business plan will set out your present and future business strategies as well as the overall direction of the business. Include in your package business financials covering at least 3-5 years (cash flow statements, income statements, and balance sheets) and a personal financial statement.

Finally, review your loan package using the 3 Cs - character, capacity, and collateral. Character – Is your credit history spotless? Do you have enough experience in the area of business you are planning to go into? Do you have the necessary specialized knowledge or education? Do you have a solid management team and supporting cast? Capacity - Will your business generate enough cash flow to service the loan payment without jeopardizing the growth of the business? Collateral – Is there enough collateral to secure the loan amount in case of default? These questions address the minimal inquiries. If you feel confident that your loan package satisfies these then you are one step closer to obtaining financing and are ready to seek professional help.

Aaron Gabriel Adams is a practicing attorney in the Houston area focusing on Business, Intellectual Property, and Real Estate Law.

Copyright Adams & Associates LLC
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.