Describe the overall process of obtaining a small business loan. What levels of

Question

Describe the overall process of obtaining a small business loan. What levels of funding are available through the SBA? What criteria does the SBA establish to qualify applicants for loans? What reporting is required of the borrower? Are there special programs for minority owners, and how does one qualify for such programs? How long does the approval process take? What is the success rate of SBA loans? What are the characteristics of successful loan applicants? Apply all the answers to these questions to your current or potential small business.

Explanation / Answer

When trying to obtain a small business loan you are going to want to do your research first. The best place I feel that will be willing to work with you the easiest is the place you bank with. The next step would be to fill out the loan application for the lender to review the application for credit score and history. The lenders will most likely analyze the financial ratios of your business and check to see what collateral and equity you have. All this will be to determine whether you have the ability to repay the loan. After the review is complete the lender will make one of two decisions, approve it or turn it down.

2. Levels of funding are available through the SBA

There are three different types of funding available through the SBA. First type would be one of the many different types of loans available. These loans would include your basic 7(A) loans, microloan program, disaster loans, veteran loans or a special purpose loan. Another possible type of funding would be a grant. All though this type is only available for those that are in a non-profit business. Third one is lease of property.

3. What criteria does the SBA establish to qualify applicants for loans? What reporting is required of the borrower?

Following are the criteria established by SBA to qualify applicants for loans.

Character

·         Strong personal and business credit (680+ FICO)

·         Few (if any) derogatory marks on your credit score

·         No unpaid federal debt, including taxes and student loans

Capacity

·         2+ Years of Historical Profitability

·         A debt service coverage ratio of at least 1.25

·         Debt to revenue of less than 0.2

Capital

·         Plenty of equity in the business

·         Positive net worth of the business

Collateral

·         Loan to value ratio of less than 80% (if collateralized)

·         Debt to asset ratio of 1.0 (using either business or personal assets)

·         No other liens

·         Personal guarantee

Term sheet! The lender will issue a term sheet that summarizes the most important features of the loan. This term sheet isn’t binding per se, because you still need to go through the full SBA approval process, but it should be a good indication that the lender thinks you’ll get approved.

Deposit. This puts an end to the evaluation phase. The deposit will cover third-party reports such as appraisals.

Underwriting and approval. In the next phase, the SBA reviews the file prepared by the lender documents. In theory, the SBA is just making sure that the SBA lender did it’s job correctly. But there are substantial judgmental factors at play, so there’s no guarantee this will be a rubber stamp.

Due diligence and closing: Once you’ve got your approval, you still need to go through diligence. There are various third-party reports (such as appraisals, valuations, environmental impacts and so on). Then you review and sign your documents and you’re funded!

Reporting requirements of the borrower

Lenders are required to provide information necessary to establish the identity of the borrower which includes:

a.Name, address, and taxpayer identification number.

b.The amount, status, and history of the debt.

c.The agency or program under which the debt arose.

d.Each credit reporting agency will have their own data element requirements on credit bureau reporting, in addition to or in place of the above items. Lenders should contact the individual credit reporting agency for the applicable requirements.

4)      Are there special programs for minority owners, and how does one qualify for such programs?

Special programs for minority owners

Minority small business loans are an opportunity for minority business owners to find financing and grow their businesses.These loans might come from the SBA, microlenders, or non-profit companies. While there is no one type of minority business loan, this kind of financing generally helps business owners who lack financial resources access credit.

Qualification to obtain Minority owner program benefits.

a.       Personal Credit Score

Lenders know that you, the owner, is most likely paying the loan back, so they want to know how you’ve historically dealt with debt. The higher your personal credit score, the better. But unless you’re applying specifically for a small business loan for minorities with bad credit, a low FICO score could mean that you’re not eligible for business funding.

b.      Cash Flow

Lenders want to know how you handle the cash coming into your business. They’ll look at things like your bank statements to figure this out. If you have a lot of overdrafts or NSFs, that might make them worry.

c.       Annual Revenue

How much is your business bringing in? Lenders want to know that you’re making enough to afford the loan. Revenue requirements vary by lender, but many have hard minimums. Be sure to ask a lender what their requirements are if you’re not sure if you’ll qualify.

d.      Time in Business

The longer your business has been around, the better. Lenders want to know you’ll be around to pay them back. You can have options as a young business, but once you hit the two-year mark, your options will open up. Minority startup business loans are definitely harder to come

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