As the year winds down, how is your business performing in the last quarter? Have you gained new insights, learned valuable lessons, or identified growth opportunities for the future? If you are considering a low-cost capital infusion to scale your business, increase working capital, or for whatever the reason(s) business reason may be, now is the time to prepare.
With 2024’s major U.S. election behind us, 2025 will bring a new administration, which may introduce changes to business policies. Whether you seek to benefit from evolving opportunities or navigate new challenges, proper preparation is key. Here are three steps to position your business for securing a Small Business Administration (“SBA”) backed loan or other financing options; remember to visit our website at Uplyft Capital (https://uplyftcapital.com) to explore various funding solutions available to you including merchant cash advance or “MCA,” line of credit or “LoC,” SBA, and many more.
Focusing on SBA in this article, SBA loans are often a strong choice for long-term funding—typically up to 10 years—because they feature competitive rates tied to the Prime Rate. However, approval requires careful preparation. So, what is the SBA and a SBA backed loan?
The U.S. Small Business Administration is an independent government agency that supports entrepreneurs and small businesses. Recognizing small businesses as the backbone of the economy, the SBA provides tools and resources to help them thrive, including loan guarantees for qualified borrowers. Banks offering SBA loans receive this government-backed guarantee, which reduces their risk. As a result, they require applicants to meet specific criteria. While requirements vary, taking the following three steps can strengthen your loan application with any lender.
Step 1: Check and Improve Your FICO Score
A strong personal credit score is one of the most critical factors for any loan approval. Many SBA lenders require a FICO score of at least 650. Getting a head start on improving one’s FICO score, a couple of months before applying for a loan, directly helps one’s approval odds as well as indirectly positively improving their business credit score. Here’s how:
1. Address negative items: Work to remove inaccuracies or outdated entries from your credit report.
2. Pay down debt: Focus on items with high-interest or small balances for the biggest impact.
3. Consult a specialist: A credit repair expert can identify additional opportunities to improve your score where applicable.
Remember, improving your personal credit can also positively impact your business’ creditworthiness.
Step 2: Understand Your Business Financial Ratios
Do you know what your business’ financial ratios reveal? Metrics like the debt service coverage ratio (DSCR), gross margin, and current ratio play a critical role in loan evaluations. The DSCR, for example, measures your business’ ability to meet its debt obligations. A ratio above 1.0 typically indicates sufficient earnings to cover debts. To improve your ratios you can:
1. Reduce liabilities: Pay down outstanding debt.
2. Increase margins: Cut operating costs, COGS, or overhead expenses.
3. Boost assets: Acquire equipment or capital without incurring new debt.
Ensure your financial records are up-to-date and tell a compelling story of stability and growth.
Step 3: Update and Align Financial Statements
SBA lenders carefully review financial documents, including profit and loss (P&L) statements, balance sheets, and tax returns. These tools help them assess trends in revenue, expenses, and profitability. To position your business for success:
1. Ensure accuracy in reported data: Review and update your P&L and balance sheets to reflect current results.
2. Tell a positive story: Show increasing revenue and decreasing expenses over time.
3. Align tax returns: Review your 2022 and 2023 tax returns and compare them to your 2024 financial statements to ensure consistency. A cohesive and optimistic financial narrative strengthens your case for loan approval.
In conclusion, proactive planning demonstrates strong business acumen and sets the stage for financing success. By improving your FICO score, understanding key financial ratios, and updating financial documents, you can confidently apply for an SBA loan in 2025. As Benjamin Franklin wisely said, “by failing to prepare, you are preparing to fail.”
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