The Small Business Administration joins with financial institutions to offer low-cost government-backed business loans.

SBA loans can be challenging to get, and the application process is sometimes time-consuming. However, for most business owners, the effort is worth gaining access to a low-cost loan option.

How Does it Work?

The SBA does not originate loans. Instead, they guarantee a percentage of the loan amount offered by partner banks. If the borrower defaults, the lender can collect lost funds from the SBA. These loans are a lower risk investment for the financial institution, enabling them to offer low rates and fees. Due to decreased risk, banks are also more likely to approve a loan for your business.

Why Do you Need a Loan?

First, ask yourself why you need this loan. The bank and the SBA will want to know you have a well thought out plan regarding the money you would like to borrow. Are you starting a business, growing your existing business? Do you need more capital for daily expenses? Be prepared to answer these questions and explain how to intend to use your loan.

Do you Have Collateral?

Provide a list of all collateral you’re willing to put up to back your loan. Show that you have assets to offer and be clear and upfront about their worth. All business owners will need to sign a personal guarantee agreement stating they will pay back the loan. The lender will typically require as much collateral from you as possible.

What are Your Goals?

Define your goals and then determine precisely how much money you need. This plan will show the loan officer you have thought through how you will spend the money and repay it. It will also help prevent you from acquiring too much debt. A lender will be more likely to approve SBA loans if they can trust you are organized and responsible.

What is Your Repayment Plan?

The financial institution will need to see enough revenue and potential future revenue to ensure your loan repayment. Be prepared with a detailed personal financial statement, tax returns and proof of cash flow. These loans do not usually require a deposit, but having 10% of the loan amount on reserve to offer is useful in securing your loan.

Is Your Credit Score Good?

Business owners must have a good credit score and enough money to pay back your debt. The bank will review both your personal and company credit histories. Lenders prefer applicants who meet their obligations. If your credit record has negative accounts, be prepared to explain.

The SBA has several types of loans available. SBA loans generally carry the best rates and terms you’ll come across.