Lenders examine a number of factors when determining whether to extend financing to an SBA loan candidate. The two most important factors are the borrower's business plan and his/her personal income and credit. Therefore, it's crucial to be prepared.

First, small business administration loan applicants should present lenders with a comprehensive and detailed business plan outlining the goals, services, products, prospective clients and vendors, and overall mission of the company. Be sure to include a detailed spreadsheet explaining how the loan will be used, how the business plans to repay the loan, and contingencies for unexpected expenses or emergencies. It pays to do the research and formulate a business plan well in advance of meeting with the lender, so you can be prepared to answer any questions that may arise. Being realistic and open about company expenses, profitability and income is imperative.

Second, borrowers are required to show that they are financially responsible, and therefore less of a credit risk to lenders. Be prepared to provide tax returns for the last three years, financial statements, credit reports, and personal income information. Borrowers who plan to invest a portion of their own income into the project may improve their chances of getting approved, because this shows the lender that they are committed to the success of the project.

Lenders use criteria called “The Five C’s” to help them determine whether your company will qualify for a loan:

1.      Character: This includes your personal history, your reputation in the community, and your timeliness in paying bills, among other factors. Maintaining a long-standing relationship with your bank can help establish your character in the lender’s eyes.

2.      Capacity: This refers to your ability to repay the loan, based on cash flow, liquidity, assets, and the net worth of the borrower and guarantors.

3.      Collateral: Cash flow is usually the primary resource used to repay a loan, but banks also want a secondary source they can fall back on if necessary. Collateral may include real estate, equipment, accounts receivable, inventory, personal assets of the principal borrower, etc.

4.      Capital: You should be able to show lenders that your company is well capitalized (you have enough equity to tide you over through tough times). You should also show that you have personally invested in the company, so that you’re sharing the risk along with the bank.

5.      Conditions: You should be able to demonstrate that you have a thorough knowledge of market conditions, you understand your competition, and you can predict how current and future economic trends will affect your company.

Choosing the right type of small business loan is paramount. Prospective borrowers should meet with their banker to discuss the different SBA loan options and find the one that best correlates with their goals and financial parameters. SBA 7(a) loans are used to finance many start-up costs, including inventory, equipment and machinery, tenant improvements, and working capital. Loans are available in amounts up to $5 million. The SBA 504 program, designed for owner-occupied real estate and large equipment purchases, can finance loans up to $10 million. SBA Express loans and lines of credit for established businesses offer a streamlined application process.

The first step in any loan process is to find a financial institution that’s a Preferred SBA Lender. The U.S. Small Business Administration recently announced that Nevada State Bank, in addition to being a Preferred Lender, is a leader in the state for the number of SBA 7(a) loans it provides to small businesses.

Developing a relationship of trust with your lender, being honest and aboveboard with all your financials, and being flexible in your requests will get you well underway to getting the financing you need.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank. Nevada State Bank is a division of Zions Bancorporation, N.A. Member FDIC