Tweet

5 tips for a successful SBA loan

Written by:

Article Overview: An SBA loan has successfully helped many small businesses. At the moment, qualifying to obtain an SBA loan is particularly challenging. The following information will help those looking to get an SBA loan to buy a business.

5 tips for a successful SBA loan

There are five critical areas an SBA lender considers in detail when deciding whether to underwrite an SBA loan. These five areas are Cash-flow, collateral, credit, management experience and liquidity. If you plan to apply for an SBA loan make sure you consider each of these areas. You don't need to be perfect in all these areas but if you are weak in one area you will need to be so much stronger in another.

Let's have a look at each of these in a little more detail.

1. Cash-Flow This is one of the most important areas. The lender is using a concept called Debt Service Coverage (DSC.) In simple terms, the lender wants to know that the business is producing enough positive cash flow to service the costs to run the business, provide an adequate income to the buyer so they can pay their personal bills and feed the family etc plus service the debt that will be incurred if a loan is approved. To use some numbers to provide a specific example, if the buyer of the business wanted to make an SBA loan that required an annual loan payment of $100,000 for the loan only, the bank would want to see the business generate a positive cash flow over and above all expenses to run the business of at least $120,000 per annum or at a Debt Service Coverage ratio of 1.2.

When deciding whether to lender money to the buyer of a business, the SBA lender analyzes the tax returns for all the businesses in which the borrower(s) owns 20% or more and the living expenses of each borrower and any sources of income.

All this information is considered within the time frame of at least the last three years so the SBA lender will need the buyer to provide 3 years of tax returns plus interim financial statements that are less than 90 days old.

2. Collateral As the banks are primarily concerned with risk management, to protect the loan they may extend to the buyer, they look for collateral to take to support the loan. Collateral is simply an asset on standby the bank can take and seller if the borrower defaults on the loan.

When determining how much collateral is available, banks discount the property because they rarely get 100% of its value if the property is foreclosed upon. These reasons include that payments are usually in arrears, they will incur costs to sell the property such as agents and attorney's etc. Typical discounts are 20% for residential properties and 20% for commercial real estate. Additionally, banks view properties ranging from easy-to-sell to difficult-to-sell. For example, factors that make properties harder to sell are: a) location, such as the property being in an outlying area, b) condition, might be old or not kept up, c) type, might be single purpose or raw land.

3. Credit The credit of the borrower is important to the SBA lender. However, other areas of the business loan application need to be strong if the buyer's credit report is poor. For example, if the business cash flow and collateral are strong, poor credit can often be overcome. If either of these areas are weak, however, the credit history becomes increasingly important.

Some banks focus on FICO scores, while others want to focus on the explanations to determine how much weight to give to credit issues. If you are thinking of applying for a loan to finance the purchase of a business, before you start looking for a business to buy, check your credit report and history are in order in case there are errors and you can therefore correct them.

4. Management Experience In recent years, this area has become more and more important to the SBA lenders. Recent analysis of why business buyers failed showed that a lack of management experience in an industry was contributing factors. If the business buyer has not previously owned or managed a business in a particular industry may lead to a quick loan decline. Conversely, a buyer with the requisite management experience has shown the lenders that the owner has a greater chance to maintain revenues/profits at historical levels.

5. Liquidity A business buyer needs to have a certain amount of money in cash to buy a business. The bank doesn't want a hard asset used that needs to be sold so it's critical that initial down payments be in cash. A borrower can borrow their down payment but this new loan payment must be factored into the analysis. Also keep in mind that different if you borrowing for a construction project, it may require even more liquidity to ensure the project's completion. Finally, start-up businesses require significant savings to fall back upon and in the current economy are very difficult to finance.

Successfully applying for an SBA loan requires planning, attention detail, perseverance and follow up.

Related Articles
  Guaranteed Car Loans
  Bad Credit Auto Loans - Proper Solution for Your Online Car Financing
  How to Getting Approved Tips for Bankruptcy Car Loans
  Mortgage Modification Saving Tips
  SBA Loan Programs

Article Tags: Andrew Rogerson, Business broker Sacramento, business escrow, business opportunity, business plan, business transaction, due diligence, Murphy Business and Financial Sacramento, Sacramento Business Broker, Sacramento business ownership, SBA 7a loan, SBA Loan



Related Forum Posts
Re: home loan - Hello, It's hard to say whether or not a bank would be willing to give a loan with those credit scores. Typically in the past it would still be possible to get a loan, you would just end up with a higher interest rate. But with the turn the economy has taken and the extra restrictions lenders are imposing, I'd say your best chances of getting a loan in a year would be to continue working on increasing your credit score in the meantime. It's possibly to turn your credit score around in 6 months to a year, so I would suggest doing a search on "how to increase your credit score" and start putting some of the tips to use now. Best of luck to you! Stephanie Horne
Financing - Actually, his suggestions will work for any business. A few details were adjusted to fit the content and subject of the book, but the tips to prepare for a loan application, acquiring financing etc are consistent. What sort of business venture are you working on? You could easily take that article and insert almost any business where it says "pizza shop" and the principles are the same. To apply for a loan, people need to have good credit, the same documents need to be collected and its a great idea to know how much you need and to have a business plan to support your numbers etc. Chris
loan - What are all mortgages loans for first time buyer? What is the current interest rate on mortgages loan? I am looking for some personal experience from the first time buyer. Where is the best place to get mortgages loan? Is there a federal mortgage loan? I am looking to buy in the next few months and I need some one to guide me on loan and everything about home buying for the first time.
Fear of going into debt - Hi everyone, What are best the best ways for young entrepreneurs to raise capital? I am absolutley horrified at the idea of taking out a loan because I don't want it to hinder me from getting a student loan for University. Canada is supposed to be very supportive of new ventures.... Do we have a seperate loan for younger entrepreneurs that won't have the potential to ruin their future?
timeframe for loan process - In general, it should not take more than 10 - 12 weeks once the lender has your loan package. Unfortunately, I have heard horror stories where 4 - 6 months after the person submitted their loan package, they still have not closed on their loan and some cannot even get in touch with the lender for an update. (not with my business and the lenders we deal with, but others have told me this when they contacted us after they were fed up with their current lender). I think it's dependendent upon whether or not you have gone to the right lender for your type of business loan and also dependent upon whether you have packaged the loan properly. When a loan has not been packaged properly, lenders will not even review it. It can sit on their desk for any legnth of time before they get around to sending it back to you "declined" (for improper packaging). It's best to have your loan professionally packaged. That's the beauty of dealing with a loan broker or other professional who provides this type of service. It's best to seek out professionals who specialize in your specific type of business loan. The loan goes through diffrent stages. The first stage is the initial review by the lender, where the Lender will decide if you are favorable for loan approval. If you are, the loan will be sent onto the underwriters and you may or may not receive a proposal letter from the lender (it depends upon the lender). this letter may need to be signed and returned. The lenders initial review should take anywhere from 5- 10 business days. The second stage, is the underwriters review where your loan with either be approved or denied. This is a crucial stage and can take about 3- 4 weeks. Once approved you will receive an approval letter that needs to be reveiwed by you (or your lawyer) carefully. this letter needs to be signed and returned in order for your loan to go through the final stage. The third and final stage is your loan closing. This is where everything is finalized so they can fund. This stage can take another 3 - 4 weeks. Keep in mind that if you are dealing with a loan broker, you should add another 2 - 3 weeks to your loan timeframe as it will take about this long for the loan broker to gather and process all your documentation and package it and get it off to the lender (this includes delivery time).


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Looking for an Easy Online Business Opportunity?

Coaching Tip: Identify Your Core Values

3 Key Factors For Raising Capital

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.