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Ask the outside expert: Is it harder to get an SBA loan?

  • June 21, 2009 - 10:02 PM

Q With the current state of the economy, is it becoming more difficult to obtain an SBA loan? Also, what steps should I take to prepare myself to apply for one?

ANONYMOUS

A Unfortunately, it is difficult for small businesses to obtain a loan, SBA or otherwise, in today's economy. A couple of factors are at work here, and both are contributing to tighter credit. First, many banks have became more cautious and began tightening lending standards in early 2008, demanding higher personal credit scores and a longer operating history.

Second, the declining housing market has reduced the business owner's net worth and access to cash through home equity lines of credit. When individuals apply for a loan for business expansion, the lender will require the business owner to inject a significant amount of cash into the deal. Historically, home equity has been an important source of this cash.

Despite the challenges, bank financing is available to small businesses under the right conditions. You will need a strong credit score -- probably at least 700.

Also, you will need to demonstrate that your business is viable. What does that mean? A viable business would be one that has a profitable history, even if it is struggling in the current environment. Be prepared to show that you have already made the tough decisions needed to improve your business. That means reducing expenses, including your own compensation, to levels appropriate for today's revenue. Finally, because small business loan administrative costs are high relative to the loan amount, small business loans are not necessarily big money makers for the bank. Lenders will view your application more favorably if they see the loan as just one piece of a long-term banking relationship with your business.

MIKE RYAN

DIRECTOR, SMALL BUSINESS

DEVELOPMENT CENTER

UNIVERSITY OF ST. THOMAS

OPUS COLLEGE OF BUSINESS

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