Securing an SBA Loan with Past (or current) Credit Problems
Acquiring a Small Business Administration (SBA) loan can be a game-changer for entrepreneurs and small business owners. However, having prior credit problems can make the process seem daunting.
The good news is that bad credit doesn't necessarily disqualify you from obtaining an SBA loan. In this blog post, we'll explore various strategies and options to help you navigate the path toward securing an SBA loan, even with a less-than-perfect credit history.
1. Understand the Importance of Credit Scores
While credit scores play a significant role in loan approval decisions, they are not the sole determining factor. Although most SBA lenders prefer a minimum credit score of around 650, having a lower credit score does not automatically disqualify you. Lenders also consider other aspects, such as your business plan, current cash flow, projected revenues, liquidity, and collateral. We've seen scores as low as 590 get approved and funded.
2. Improve Your Credit Score
If you have bad credit, it's crucial to work on improving your credit score before applying for an SBA loan. Start by reviewing your credit reports and addressing any errors or discrepancies. Establish a consistent payment history, reduce outstanding debt, and avoid applying for new credit during this process. Gradually, these positive changes will help elevate your creditworthiness.
Of particular focus should be keeping your balances low, but not at zero. We've seen scores swing over 100 points just based on credit utilization alone.
3. Prepare a Solid Business Plan
One of the essential elements in securing an SBA loan is a well-crafted business plan. Outline your business's goals, strategies, market analysis, financial projections, and how you plan to overcome past credit issues. Demonstrating a clear and feasible plan can instill confidence in lenders, even if your credit history has blemishes.
4. Seek a Knowledgable, Experienced SBA Broker or Lender
Many banks and lenders will put their own restrictions and overlays on the SBA guidelines and requirements. This makes it even more difficult for small business owners to qualify.
Choosing the right broker is important here because often they know which lenders are more forgiving when it comes to loan requests off the beaten path, specifically loan requests involving guarantors with past credit problems.
Finding a lender who is flexible when considering applicants with bad credit is difficult. A good brokerage will have spent years researching and identifying banks and lenders who are open to working with your situation.
5. Consider & Explore the many SBA Loan Programs
The SBA offers various loan programs tailored to different business needs. For instance, the SBA 7(a) loan program provides general financing for working capital, equipment purchases, and real estate.
The SBA Microloan program focuses on small loans up to $50,000.
The SBA 504 program features lower interest rates and fixed terms.
By understanding these programs, you can identify the ones that align with your business requirements and increase your chances of approval.
6. Add Collateral or an Additional Guarantor
Offering additional collateral or enlisting a particularly strong guarantor can vastly improve your chances of getting approved, especially if you've had credit problems. Pledging real estate or adding a co-borrower can significantly strengthen your loan application, especially if you have bad credit.
Collateral serves as security for the lender in case of default, reducing their risk.
Bringing in a strong co-borrower (good credit, good liquidity, experience in the business, additional collateral to be pledged if needed) indicates your commitment to repaying the loan and reassures lenders that you are serious about your business's success.
7. Seek Professional Guidance
Navigating the intricacies of SBA loans can be complex, particularly when dealing with bad credit.
Consider consulting with a qualified SBA loan brokerage or a experienced SBA loan officer who specializes in SBA loans. They can provide valuable insights, help you identify potential lenders, and guide you through the application process.
Conclusion
While bad credit poses challenges when applying for an SBA loan, it doesn't have to be an insurmountable barrier.
By focusing on improving your credit, preparing a solid business plan, exploring SBA loan programs, and seeking the right help and professional guidance, you can enhance your chances of securing the financing you need.
Remember, perseverance and determination are key, as your past credit problems should not define your entrepreneurial journey.
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