Feature

Key Steps in Applying for a Small Business Loan

by Brett Keener
The number of women-owned businesses in the U.S. has been growing at about twice the rate of all businesses, according to the Census, and now stands at about 6.6 million. That’s a remarkable trend when you take into account the fact that many women have limited personal capital to use for a business start-up or expansion. Also, some women entrepreneurs have not established personal credit as strong as their male counterparts.

So, how are women finding the money to launch successful businesses? Some know how to “work the ropes” of the small business loan process. In this article, we’ll help you learn more about loans specifically designed for small companies.

Three Resources to Unlock Capital

To obtain a small business loan, your business doesn’t need to have profits, employees or even much history. But you do need three other resources:

1. A solid business plan in writing. The plan should be conservative, realistic, and clear. Don’t exaggerate your experience or prospects. Explain step-by-step how you will grow a successful business.

2. Collateral. In a small minority of cases, the financial forecast for the business may satisfy the lender that principal and interest will be repaid. But it’s more common for lenders to require other collateral, including the personal assets of business owners.

3. A commercial lending relationship. The first loan request you make should be to one or more commercial lenders (banks, finance companies, thrifts), who will evaluate your loan package. Depending on the outcome of this step, you may then decide to apply for a loan under special programs offered by the U.S. Small Business Administration (SBA) and some states. But since even the SBA and state programs involve loans made through commercial lenders, it helps to have a “familiar local face” reviewing your loan package.

Commercial Loans

If your local bank (or other commercial lender) will directly loan the money your business needs, this can be the quickest and simplest way to finance your business. If your business succeeds, your credit will be enhanced with the lending institution, and you may eventually grow into an important commercial customer.

How much personal collateral should you be willing to pledge to secure a business loan? It may depend on the amount you are borrowing, the degree of risk in your business, and the potential of your business to generate cashflow. Just remember that strong collateral often can attract loan offers from more lenders at better interest rates.

SBA and State-Sponsored Programs

Once you have shopped commercial lenders and are convinced that they can’t meet your needs, the next step is to look into loan programs sponsored and partially guaranteed by the SBA and many states. There are three key differences between these programs and regular commercial loans.

  • These programs are only available to qualifying small business-defined by annual gross revenues or number of employees. Large corporations need not apply.
  • The deal is made directly between a lender (e.g., bank) and borrower. However, the SBA, a Federal agency, or comparable state agency defines the terms of the loan, including the maximum interest rate allowed. The agency also guarantees part of the debt (up to 85%), should the borrower default and collateral not cover the balance due.
  • The loan request process and paperwork is somewhat complex, due to SBA or state requirements. The lender first must approve the loan internally and then submit it to the SBA or state for a second approval.

    • A lender will often recommend SBA or state-sponsored small business loans when a borrower does not meet requirements for a standard commercial loan. Since a government agency assumes part of the risk in these loans, the lender can apply lower credit standards.

    To qualify for the SBA’s basic loan program, which is called 7(a), a business must meet criteria for small size, and it must be a for-profit business. The loan proceeds must be used for expansion, acquisition or working capital, not to refinance existing debt, reimburse the owner, or pay delinquent taxes. Business owners with a 20% or greater interest must pledge personal assets as loan collateral. You can learn more about the program at:
    http://www.sbaonline.sba.gov/financing/sbaloan/7a.html

    State-sponsored programs mirror SBA terms while adding requirements involving the percentage of business operations in-state or the potential of the business to positively impact the state economy.

    Thanks to these loan programs specifically designed for small businesses, you may have even greater access to capital than you think.


    Registered Representative of Park Avenue Securities LLC (PAS). Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Certified Financial Services, LLC is not an affiliate or subsidiary of PAS or Guardian.
    PAS is a member NASD, SIPC.

    Brett Keener is a financial representative at Certified Financial Services, LLC in Paramus, NJ. Mr. Keener helps clients in their personal, estate, and business planning. He is a graduate of the College of William and Mary.