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Posted 02/09/2022 in Business Loans

Factors to Consider Before Approaching a Bank for an SBA Loan

Factors to Consider Before Approaching a Bank for an SBA Loan

Admit it; running a business is a hectic experience if you’re starting out for the first time. You’d have to ensure you have the necessary finances to rent an office space, pay for inventory from your vendors, put your staff on payroll, acquire business assets, run marketing campaigns, and many more. 

If you don’t have the necessary finances to fund these aspects of your business, the logical solution is to take a loan. Typically, the first place you’d look for approval for an SBA loan is from banks. 

Banks have been existing since we started humans started learning how to trade. So, naturally, your first instinct is to visit a bank. However, that might not be an excellent decision to take. And we’re going to tell you why. 

Lengthy Approval Periods

SBA loans are crucial to achieving your business's long and short-term goals if you don’t have the necessary cash available. The problem with going to a bank to request a loan is that they can take more extended periods to review your request. 

Some of the approval time can be anywhere between 2 to 3 months. If you’re in urgent need of cash, 2 to 3 months will not fit into your timeline. If there’s a window of opportunity you need to take, you’re going to miss it and not be happy about it. 

The worst part? You could wait for 3 months and still get ignored if you do not meet their requirements. 

Strict Criteria for Acceptance

Another factor you need to consider is that before going to the bank, their criteria may be too stiff. Requirements for loan approval may vary from a bank, the eligibility status remains strict. 

Some noticeable requirements may include having a high revenue, an impressive credit score, business longevity, and many more. If you’re just kickstarting your business, going to a bank might just be a bad idea – as your business may not fall into those categories. 

But if you still apply, remember that you’d have to wait for a more extended period before being notified if your request was approved or not. 

Too Much Paperwork

One apparent demerit on approaching the bank to grant your loan is that they will crosscheck every information you send to them. More so, they will ask for the following documents:

  • Debt schedule
  • Tax returns for the business
  • Bank statements
  • Income statements
  • Business permits
  • Employee payroll records
  • Balance sheet. 

If you require a loan for a specific situation, get ready for more paperwork. The most annoying part is that you’d find yourself submitting the same information across different forms – which can be frustrating. 

Bank Loans Require Collateral

One of the things banks will require from you when you apply for an SBA loan is collateral. It is could a personal or commercial asset or similar items of value. The reason is this: they don’t have confidence that you’d fulfill your end of the bargain. 

Collateral is usually required when you do not meet their minimum requirement, or your credit score isn’t impressive enough. You will not get the loan if you do not have solid collateral to go with your loan application. 

You may not have collateral of value for a small or new business that you can submit as part of your loan application. You may be renting office space instead of buying the entire property.

That’s why it’s recommended to seek an SBA loan from certified lenders. They understand the condition you may be facing and will be more willing to grant you a loan without asking for collateral. More so, you can even get the best rates and repayment terms when you contact a lender. 

Bank Loans May Require A Personal Guarantee

One of the factors banks consider when business owners apply for an SBA loan is whether they’d be able to repay the loan. Thus, they may require a personal guarantor. This means you may be asked to sign as a personal guarantor for your business. 

Personal guarantors are designed to stand in place for your business if it fails to pay off the loan. In such cases, you will have to use your private funds to foot the business bills. 

It Will Result in a Hard Inquiry

Having an impressive credit score makes things easier. You can apply for a mortgage or car loan and get the best employment when your credit score is satisfactory. It’s virtually the same thing when it comes to businesses. 

For a bank to determine your business’ creditworthiness, they will run a hard inquiry on its credit. Hard inquiries or checks reveal your payment history, outstanding loans, debt-to-income ratio, and many more. 

Whether they approve your loan or not, a hard inquiry impacts your credit report, reducing your credit score. If you’re desperate to get funding and reach out to multiple banks, multiple hard checks will be conducted on your business credit. 

Imagine what that does to your credit score!

It’s recommended to instead consult a certified lender to approve your loan. They will carry out a soft check which doesn’t show up on your credit report or impact your credit score. 

They’d Need a Detailed Business Plan

Before approving your SBA loan request, banks want to know how you intend to spend the money and how it will be repaid. Thus, they want to see your business plan. 

Mind you, the bank will critically review your plan for inconsistencies or inaccurate information they can latch on to decline your request. You may be tasked to provide a mission statement, your marketing strategy, a rundown of your team, your competitions, and other information. 

This could be time-consuming and mentally exhausting. You won’t have to go through those hassles if you contact a lender. 

Final Thoughts

Applying for an SBA loan from a bank may not be wise when considering the factors above. Because of the difficulties involved, it’s recommended to contact a lender to apply for a business loan. 

Here at Bunny Lender, you can look up certified lenders in your city, review their terms and get the SBA to loan your business needs. 

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