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Misconceptions about SBA startup loan requirements.

By Brian Salva, SBA Relationship Manager at HomeStreet Bank

 

When seeking financing for a start-up business, borrowers may consider an SBA 7a startup loan or look at conventional financing. SBA loans are provided by individual lenders and, in return, the lender receives a guarantee from the Small Business Administration for up to 75% of the loan amount. Because this guarantee provides the bank with a strong secondary source of repayment, borrowers looking for startup funding are more likely to secure a loan than they would with conventional financing.

SBA loans are originated through two types of lenders: PLP (Preferred Lenders) and CLP (Center Preferred Lenders). PLP lenders can approve, originate, and underwrite loans on behalf of the SBA. CLP lenders must go through SBA for direct approval after they approve the loan internally. HomeStreet Bank is proud to be part of SBA’s Preferred Lender Program.

 

Three misconceptions about SBA startup loan requirements.

1. A lender’s requirements are the same as SBA’s requirements.

A common misconception about SBA startup loan requirements is that all lenders follow the same qualification standards that are provided by SBA. SBA Standard Operating Procedures list minimum requirements that every lender must follow, however, the lending institution can build their own qualifications depending on the level of risk they’re comfortable taking on.

Here’s a quick glance at HomeStreet Bank’s startup loan prequalification’s compared to the Small Business Administration’s qualifications:

a. HomeStreet Bank’s qualifications:

b. SBA’s qualifications:

 

2. If you have the equity, you will get approved.

Another big confusion for borrowers is when they have the equity to cover a 15% minimum injection – they assume they will get approved if they provide a business plans and projections. The injection is merely a qualification. Beyond that, there is much more that goes into the lending decision. Lenders will look at experience in the industry, financial projections, and the type of equity the borrower is providing when analyzing a package.

If a borrower is looking at equity to cover the injection requirement for a loan, it cannot be “another loan”. This means the borrower can’t pull the money from a home equity line, borrow from family, and can’t pull money from a bank account if it’s been there for less than 3 months. Proper equity can come from a savings account, a spouse that has a job outside of the borrower’s industry or can be a gift from family with no expectation of repayment.

 

3. Any experience in the industry is enough experience.

In order to qualify for a startup loan, a borrower must prove that they have proper experience in the industry their new business will be in. Any transferable skills a borrower has, that can provide comfort to the lender, and prove they can run a new business are important to highlight.

For example, if trying to open a new restaurant, does the borrower have the management experience to lead a team? Do they have the purchasing experience to keep the kitchen stocked? Do they know the ins and outs of running a restaurant? Merely having a few years of hosting experience may not suffice in the lender’s eyes – so the borrower must show that they know how to properly run the business.

The SBA organization provides Small Business Development Centers all over the nation to assist applicants in preparing their business plan, financial projections and resume. This is an excellent resource for first time applicants.

 

Applying for a startup loan can be overwhelming. It’s a risk for the borrower and the lender. Be sure to have a conversation with the lender and discuss their credit appetite and requirements in order to have a clear understanding of what they want to see before you submit your application.

At HomeStreet Bank, we consider our clients business partners. This means that we not only walk you through the application process, but we get to know who you are beyond your business. For more information on our SBA startup lending options, visit homestreet.com/sba.

 

All loans subject to approval.

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Learn more about our SBA startup lending options.

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