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What the SBA Needs to Know About Your Personal Finances

Posted by Ian Atkins to Business Advice, Loans

Banner: Understand how the SBA uses  your personal finances to decide whether you're eligible for a business loan.

For some, a great idea for a business comes a lot easier than the capital needed to get started. This has led to one of the most important ways the Small Business Administration (SBA) supports business owners. Through their loan guarantee program, the SBA helps ensure entrepreneurs have access to capital regardless of their financial background.

 

Why get a loan through the SBA?

SBA loan rates are lower than most other business loans and have longer repayment terms. Additionally, these affordable loans are made available to borrowers with less than perfect credit and limited collateral.

 

Recommended Reading: 12 Things to Know About Small Business Administration Loans

 

While SBA loans are business loans, both the SBA and the lenders behind the scenes look very closely at the an applicant's personal finances. When applying for an SBA loan, understanding what your personal finances tell the SBA is critical to improving your chances of qualifying.  

 

Make the Right Impression with Your Personal Credit Score

Banner: Understand how the SBA uses  your personal credit score to decide whether you're eligible for a business loan.


In applying for an SBA loan application, lenders will take a look at your FICO liquid score, also known as Small Business Scoring Service (SBSS). The liquid score assesses both your business and personal credit scores. While only established businesses will need to worry about their business’s credit score, all businesses (including startups) will need to rely on their personal credit score.


Your personal credit score affects your SBA loan application because it serves the role of summarizing your creditworthiness, or your ability to pay back any debts. Credit scores can range from 300 - 850. A good credit score is considered to be above 700, and bad credit score is considered to be anything under 650. To qualify for an SBA loan, you typically need a credit score of at least 620, but most lenders prefer a score above 680.


A low credit score suggests you’re a high credit risk (higher probability of defaulting on future loans) and may prevent you from obtaining an SBA loan. There are two reasons why your personal credit score may be low:

1) Bad credit, which is due to high amount of debt, defaults, and negative credit events like bankruptcy, etc.

2) Thin credit, which means you have a limited credit history because you have not utilized many credit lines in the past, and there isn’t enough information in your credit history for the credit bureau to effectively gauge the risk of a future default.


Good or bad, your credit score will be making the first impression on the SBA lender. But SBA lenders will want to dive in deeper and get a better idea of why your credit score is what it is. To do that, they’ll look at your credit report.

 

Show Historic Accountability With Your Credit Report

Banner: Understand why the SBA needs your personal credit report to decide whether you're eligible for a business loan.

Credit reports are the history books of your credit life. Credit scores are essentially summaries of all the information stored in a credit report. Most lenders will take a look at your personal credit history to determine your terms of credit—and, for SBA loans, your credit record must be close to spotless. That means it cannot have red flag events like bankruptcies, tax liens, or repossessions.


Also, while an SBA lender may overlook some late payments, they will not tolerate a history of significant defaults. Defaults on U.S. Government debt (like taxes, past SBA loans, and even federal student loans) can sink your SBA loan application.


Before applying, review your credit report to ensure every detail is correct. You can dispute errors on the credit report that could hurt your chances of SBA approval, but that process can take 3 to 4 weeks before you see corrections. You can get a copy of your personal credit report from one of the major credit bureaus: Experian, TransUnion, and Equifax. You’re entitled to one free report from each bureau every 12 months.

 

Confirm Your Credibility with Collateral

Banner: Understand how the SBA uses  your personal collateral when assessing your application for a business loan.

Most business lenders require collateral (personal or business assets they can sell in case of default on the loan) from all borrowers as part of their approval process. In many cases, lenders will seek to have 100% collateralization or more. That requirement can stand in the way of many young or disadvantaged entrepreneurs.


To make matters worse, lenders often assign collateral a value that is below its current fair market value. This discount is a result of the likelihood that the lender would need to liquidate the assets quickly and the condition of the collateral may decline over time. It’s not uncommon for lenders to value house or residential property at 80% of its current market value, trucks or heavy equipment at 50%, and furniture and fixtures at 20%.


This where the SBA loan guarantee program differentiates itself from most lenders, as it does not require a lender collateralize a loan if the borrower does not have any collateral to provide. Suddenly a borrower who does not own real estate can find a small business loan option with long repayment terms and low interest rates. This increases the number applicants that may qualify for business loans.


Important to note, however, is that if you do have assets that a lender could collateralize, the SBA requires lenders to take it. That’s because, as a government financed program, the SBA loan program must make every attempt to limit taxpayer losses while also achieving their policy goal of expanding the access to affordable capital to small business owners.

 

Determine Your Needs Based on Your Net Worth

Banner: Understand how the SBA uses  your personal net worth when assessing your application for a business loan.

A borrower’s personal net worth (the difference between your assets and liabilities) also tells the SBA a lot about you. The SBA requires all applicants to complete a Personal Financial Statement (Form 413), so they can get a complete picture of your current assets and liabilities.


Surprisingly, a higher net-worth isn’t always better when it comes to SBA approvals. While the lender doesn’t want to see a borrower who is financially upside down, they also won’t want to see a personal with millions in liquid assets. That’s because SBA rules state that the borrower must have used some of their personal funds and exhausted other resources before seeking SBA funding.

 

What Story Do Your Finances Tell?

In order to obtain SBA financing, you’ll want to make sure your personal credit score is making the right impression with your lender. Before applying for an SBA loan, make sure the score is above 680. If it isn’t, take a look at your credit report to ensure there’s no inaccurate information  bringing your credit score down. If your credit score is in good shape, a lack of collateral won’t derail your SBA loan application. After all, the SBA is there to expand access to credit to all small business owners.


There are many types of SBA loans for business owners and entrepreneurs to choose from. Regardless of which one you decide is best for your business, you can count on getting a low rate with a generous repayment term.


If you’re considering taking out an SBA loan for your small business, this guide has 12 facts you should know before you apply.

12 SBA FAQs for SMBs

About the author
“Ian

Ian Atkins

Ian Atkins is an analyst and staff writer for Fit Small Business. He covers small business finance with a focus on traditional and alternative small business lending. Ian has over nine years working in personal and small business finance.


Disclaimer: The inDinero blog provides general information about tax, accounting, and business-related topics. It is not intended to provide professional advice. Read more in our Terms of Use.

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