Business LoansUnderstanding Business Loan Requirements

Small Business Loan Application Requirements: Private vs. Government

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If cash flow is the lifeblood of a business, obtaining financing at the right time can be like getting a life-saving transfusion. Fortunately, there are multiple sources a business can turn to for this key resource. Plus, the Small Business Administration helps the process with its loan programs. To access these potential sources of financing, it is important for entrepreneurs to understand small business loan application requirements.

While there are both government business loans and privately-financed loans available, there is a considerable amount of overlap between the small business loan application requirements in each case. There are also significant, key differences. Knowing the similarities and differences in loan types can help a business owner know what to expect, and how to approach the process of obtaining financing for your small business.

Role of the Small Business Administration

There are various types of organizations which provide financing to small businesses. From small community banks to large national institutions, the banking industry has traditionally been a prominent source. There are also large, non-bank lenders – organizations which specialize in lending, without taking on deposits the way banks do. Another significant non-bank source are credit unions, which operate similarly to banks but under a different regulatory system. There are also individual investors and investment organizations that lend money as a source of income-generating returns. More recently, online peer-to-peer and crowdfunding communities have added a new potential source of financing.

Where does the federal government’s Small Business Administration (SBA) fit into this? The SBA does not make loans directly to small businesses, but it does guarantee loans made by banks, non-bank lenders, and credit unions. That guarantee gives lenders the confidence to make loans they otherwise would not make, or at least would not make under the same interest rate and repayment terms. By supporting lending in this way, the SBA helps make significantly more financing available to small businesses – nearly $20 billion worth in the most recently completed fiscal year.

Because the SBA operates by making loans through independent lending organizations, the application process can flow through many of the same organizations whether one is seeking a government business loan or a conventional business loan. That’s just the first example of overlap between the two; there are also similarities in some of the loan requirements.

Similarities in small business loan application requirements

There are a number of characteristics which are likely to factor into a lender’s application approval process, whether it is for conventional or government business loans. Profitability is one key, as is the amount the owners have personally invested in the business. The credit history of the business and its operators will also be reviewed. Then there is the purpose for the loan – lenders are going to want to see not just that the financing is going to be put to a legitimate business use, but also a detailed business plan showing how that injection of money will lead to expanded sales and profits.

What these similarities come down to is giving the lender a reason to believe that the small business loan will be successful in helping the business grow profitably, and thus provide the means of repayment.

Key differences in small business loan application requirements

There is a lengthy list of business types that are ineligible for government small business loans, so a would-be borrower should check out the SBA’s eligibility requirements to see if a type of financing is even an option.

Beyond that though, perhaps the key difference between conventional and government business loans is the emphasis on collateral. For conventional loans, lenders are typically going to look for a substantial amount of collateral as a safety net in case the borrower is unable to repay the loan. For government business loans, the SBA guarantee effectively serves as this safety net, so collateral is not as much of an issue. The government backing can also help make loans available to businesses with more limited track records or credit histories, especially at times when weak economic conditions have made lenders hesitant.

One important feature of government small business loans is that they are only available to businesses that have been able to obtain conventional financing. This along with the fact that government business loans are provided through independent lenders anyway helps clarify how borrowers should approach the process. Borrowers should look for lenders which provide both conventional and government business loans, and start the process by inquiring about the possibility of a conventional loan. Even if that does not pan out, the same lender that turns an applicant down for a conventional loan may prove to be the gateway to an SBA loan, and provide the transfusion of financing that will help the business grow.


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