The first step in applying for a loan is to find a qualified private lender. Research shows that it is best to begin with the financial institution that carries your business' checking account. Fill out an application with that lender and submit it for their review.

Lenders then review the application for its credit and management merits. They analyze the financial ratios of the business, assess the business' collateral and equity, visit the applicant's place of business, review relevant credit reports, and determine whether the applicant can repay the loan. There are three possible decisions available to the lender after completing the initial review of the loan application. The lender can either:

• Approve the loan entirely by itself;
• Certify that the loan will be approved only with a federal guaranty. At that time, the SBA will review the application and lender's analysis before making its own determination; or
• Decline the loan both internally and/or with a SBA guaranty

If you are turned down for an unsecured loan, ask to apply for an SBA loan guaranty. The lender will supply you with an SBA application, which will look very similar to the initial application you filled out for the private lender. This is because the borrower must prove to the lender and the SBA his or her credit and character merits. The lender, may, then, in most cases submit the application to SBA.

All basic loan application begin with a written statement describing the business. This includes a description on how the business generates income, a brief history on how the business started and got to the point where it now seeks financing, and an explanation of the loan's purpose and repayment strategy.

Applicants should spend most of their time preparing historical and current financial statements. Lenders must have an accurate representation of your business' income and expenses so they can determine whether they should undertake the risk of lending your institution capital. It is therefore necessary to update company balance sheets, profit and loss or income statements, and provide a cash flow statement.

Lenders are looking for adequate equity investment, reasonable earnings projections, sufficient working capital, collateral, and management skills.

• Equity Investment - Applicants must have a reasonable amount invested in their business. Lenders will examine the business' debt-to-worth ratio to estimate how much the lender is being asked to lend in relation to how much the applicant has invested. Investments can be either assets applicable to the company's operations or cash.
• Earnings Projections - Applicants must present an analysis of the company's expected earnings and the variability of those earnings. Earnings are valuable to lenders because loans are repaid with cash not profits. Proper cash management is therefore essential for lenders to demonstrate. Applicants must provide a cash flow projection broken down on a monthly basis and covering the first annual period after the loan is received so that lenders can determine when income becomes cash and when expenses must be paid.
• Working Capital - Estimates of working capital are necessary because it demonstrates the ability for the company to meet its short-term debt obligations. It is defined as the excess of current assets over current liabilities. Current assets are those most easily convertible to cash and current liabilities are the obligations due within one year. Working capital measures what can be liquidated to pay a company's debt.
• · Collateral - If worthwhile assets are available, they will be required to secure any SBA loan. Collateral can consist of assets used in the business and the owner's personal assets.
• Management Skills - Lenders are more likely to approve the loans of those entrepreneurs that have a history of successfully managing their company's resources. Education, experience, and motivation are valuable character assets applicants must convey to lenders and the SBA. To determine resource management, lenders will analyze several ratios to get a picture of the company's overall performance. Lenders will review debt-to-worth ratios, working capital ratios, the rate income is received after it is earned, the rate at which debt is paid after becoming due, and the rate at which the company moves the product or service to the consumer.

Some of the questions that a banker will likely ask you as a prospective lender include:

1. Can the business repay the loan? (is cash flow greater than debt service?)
2. Can you repay the loan if the business fails? (is collateral sufficient to repay the loan?)
3. Does the business collect its bills?
4. Does the business control its inventory?
5. Does the business pay its bills?
6. Are the officers committed to the business?
7. Does the business have a profitable operating history?
8. Does the business match its sources and uses of funds?
9. Are sales growing?
10. Does the business control expenses?
11. Are profits increasing as a percentage of sales?
12. Is there any discretionary cash flow?
13. What is the future of the industry?
14. Who is your competition and what are their strengths and weaknesses?

We have created a list of required documents each applicant will be asked to prepare for either a conventional or SBA loan. To get explanations, examples, and/or links to tutorials on these important documents, just click on the topic of interest.

If you find that you need further assistance in preparing your application or its supporting documents, the SBA provides management assistance services such as Small Business Development Centers (SBDC) and the Service Corp of Retired Executives (SCORE). To locate the SCORE chapter near you, review the list provided on the SBA Web Site at www.sba.gov/gopher/Local-Information/Service-Corp-Of-Retired-Executives

The SBA also provides a list of SBDC networks in your area at
www.sba.gov/gopher/Local-Information/Small-Business-Development-Centers