Preparing for an SBA Loan

Preparing for an SBA Loan
The U.S. Small Business Administration (SBA) grants millions in loans each year for small businesses.
The SBA’s loan program is in the spotlight right now because the stimulus package expanded the program in a number of ways. First, there is now a guaranteed fee waiver, which can save small businesses thousands of dollars. In addition, the 75% guarantee has also been raised to 90%, which makes it more appealing for lenders to make loans. Lastly, America’s Recovery Capital (ARC) program helps stabilize small businesses at risk by providing cash to businesses that need assistance paying down existing debt.
These recent changes ultimately mean there are more funds available and greater eligibility for small businesses, including the SBA’s largest vehicle, the 7(a) loan program.
Depending on the loan in which you’re interested, requirements will vary. According to the SBA, common documentation requirements include: purpose of the loan; history of the business; financial statements for three years (for existing businesses); schedule of term debts (existing businesses); accounts receivable and payable aging; projected opening-day balance sheet (for new businesses); lease details; amount of investment in the business by the owner(s); income projections: expenses and cash flow: signed personal financial statements and tax returns: and personal resume(s).
Other necessary documentation may include:
Business profile—A description of the type of business, annual sales, number of employees, length of time in business and ownership.
Loan request—An explanation of purpose, amount and type of loan you’re after.
Collateral—The collateral being used to secure the loan, including business equity, borrowed funds and available cash.
In addition to documentation and other requirements, the SBA wants prospective loan candidates to understand some basic credit factors and the ways in which they influence the loan process:
Equity investment—You should be able to demonstrate a level of equity invested into your business, coupled with a manageable amount of debt. Any loan will involve an examination of your debt-to-worth ratio to correlate the loan amount with the owner’s net worth.
Earnings requirements—This is about cash management and the ability to meet all your debt payments, not just your loan(s). You’ll need to supply a sound cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received. All SBA loans must be able to reasonably demonstrate the “ability to repay” the intended obligation from business operations.
Working Capital—Working capital means the excess of current assets over current liabilities. Working capital measures what is available to pay a company’s current debts. It also represents the cushion or margin of protection a company can provide its short-term creditors.
Collateral—Collateral can consist of both assets which are usable in the business and personal assets which remain outside the business. For all SBA loans, personal guarantees are required of every 20% or greater owner, plus others individuals who hold key management positions. If real estate is being used as collateral, banks and other regulated lenders are now required by law to obtain third-party valuation on real estate-related transactions of $50,000 or more. Certified appraisals are required for loans of $100,000 or more. The SBA may require professional appraisals of both business and personal assets, plus any necessary survey and/or feasibility study. One note: SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.
Resource management—Simply put, it’s your ability to manage the resources of your business. Management expertise and capacity—sometimes called character—are important factors encompassing education, experience and motivation.
The SBA offers several loan programs. Learn more about what you need to prepare, loan types and related information at www.SBA.org