Obtaining an SBA loan is a popular method of funding a start-up business. The Small Business Administration has loan programs that allow banks to offer loans, while the SBA provides the bank guarantees on the loans to prevent or minimize losses. Different SBA loans have different requirements, but some requirements are basic to all SBA loans.
Purpose of the Loan
SBA loans can be obtained for a variety of business uses. Some loans are used to start a business; others to expand or improve an existing business. Regardless of the use, the SBA will need to have a good idea of how the loan proceeds will be used.
Some SBA loans require a certain number of jobs to be created based on the amount of the loan.
Loan to Value
Different SBA lenders and different SBA loans have different equity requirements. Many loans require the borrower to retain 10 to 20 percent of the equity in the business.
Many SBA loans call for personal guarantees. Some of the guarantees bind the borrower's personal credit to the loan; others call for the borrower to pledge personal assets to the loan. In some cases, SBA loans even require the collateral assignment of life insurance death benefits so that if the borrower passes away, the loan will be repaid.
Contrary to popular belief, SBA loans are not for borrowers with poor credit or no business plan. The borrower must posses a valid business plan, good credit and committed capital in the business.