Tag: SBA loans

SBA Loan Overview

A small business administration loan can aggressively assist a new entrepreneur or an established business owner with expanding or developing their operations. The SBA was founded to provide loans to smaller businesses given that many banks have in the past reluctantly shied away from providing large amounts of credit to small business owners. This is primarily due to the fact that small businesses do carry a significant amount of startup risk and operating risk. As such, the government created the small business administration in 1953 with the intent to provide guarantees to individual borrowers so that a bank would feel far more comfortable providing capital to them. Most financial institutions love SBA loans given that approximately 80% to 90% of the total amount of principal is guaranteed by the federal government. As such, banks are able to generate a extremely high return on their investment as it relates to the capital was at that is at risk. Generally, most SBA loans carry a premium of two to five points over the prime rate. If there is a tremendous amount of collateral involved in the loan rate is typically two points over prime. One of the most important things as it relates to obtaining an SBA loan is that a properly developed business plan is going to be required. In almost all instances, lending banks require that a three-year financial statement is provided. This financial statement needs to include a cop and loss statement, cash flow analysis, balance sheet, breakeven analysis, and business ratios page.

Small business administration also requires that a complete demographic and competitive analysis is submitted as part of the overall loan application. One of the important things as it relates to developing a SBA loan package is that the owner is going to need to not only develop a comprehensive business plan but is also going to provide comprehensive financial statements as it relates to total assets, total liabilities, income in each of the last two years, and the anticipated revenues and profits generated by the business during the three-year period. This is one of the things that many entrepreneurs struggled to develop given that it is very hard to determine what the anticipated revenues and profits of the business are going to be when it is done on a pro forma basis. One of the ways that this issue can be remedied is that a business plan writing firm can be hired to assist the owner with the developing the documentation that is going to be required by the bank.

SBA loans are going to continue to increase in popularity over the next 10 years given that more people have turned to entrepreneurship rather than working for another individual. The Congress and federal government have worked to ensure that these loans can be provided quickly and with. One of the things that is interesting that has been developed over the past 10 years is the SBA express program which allows for much more streamlined lending protocol for companies that are seeking $100,000 or less. If these types of financial instruments are completely appropriate for individuals such as freelancers, attorneys, people starting small retail locations, and service-based businesses that do not need a substantial number of assets to commence revenue-generating operations. A CPA can be consulted in order to have a good understanding of what loans may be appropriate for any specific financial situation.

Prior to submitting a package to the SBA lending bank, a CPA should review all documentation including prior tax returns to make sure that they are accurate. The SBA typically takes about 60 days to 90 days to render their decision as it relates to issuing a guarantee for the business. Once this guarantee is acquired and then the individual can take it to any number of SBA enrolled lending banks in order to obtain a business loan. These financial institutions may require additional documentation beyond what was requested by the small business administration. As such, it is important to have all of your financial matters in order so that if there are additional requests for information they can be fulfilled very quickly. Generally, from start to finish it takes about three months to four months to acquire a SBA loan for a new business or for expansion purposes. These financial instruments are also available for individuals who are purchasing existing businesses.

Banks and the small business administration love to lend to individuals that are looking to acquire an existing business given that the risks related to a startup are eliminated. In the event that an entrepreneur requires a company they’re going to required to submit tax returns as well as a business plan. Beyond these two documents, full tax returns for each of the last three years for the company that is being acquired needs to be provided as well. The owner of the business that is being sold should furnish either the entrepreneur or the business broker with all necessary documentation so that an SBA guarantee can be acquired quickly once all other documentation has been produced.

The small business administration has developed very good programs that actively assist entrepreneurs with launching new business operations. They will remain as one of the mainstay government departments that assists with entrepreneurship and the development of small business and employment within the United States. Although control of Congress and the presidency changes hands quite frequently – almost all politicians are committed to the continued advancement of small businesses given that they create jobs in local communities.

Credit Scores and Business Plans

The things that is often brought up to us is whether or not a discussion regarding individual’s credit score should be put within the business plan. Usually, when we develop a business plan on a customized basis for a client we do not include information regarding the individuals personal credit. This is primarily due to the fact that the individual bank or financial institution is going to pull all three major credit reports when they are examining the loan application. However, especially for service-based businesses there may be times when it is appropriate to discuss the underlying credit of the individual borrower directly within the business plan. This is especially true if the individual is applying for a small business administration loan given that the credit score is going to be a very important factor when making a lending determination. As a whole, most banks consider three primary factors when developing and reviewing a loan application. First, they thoroughly review the business plan to ensure that the business is going to be able to remain economically viable in most economic climates. This includes an overview of the anticipated revenues, expenses, and pretax profits. It is important within the business plan to show that the business can satisfy the debt obligation by more than 20% per month within the first years of operation. Most banks and lenders focus substantially on the ability of the individual entrepreneur to make timely monthly principal and interest payments regardless of how the business is doing.

Second, the loan officers or lending committee will look very thoroughly at the individual bar themselves in regards to their experience, educational background, and their ability to effectively operate the business on a day-to-day basis. Most people that seek small business administration loans or conventional business loans are new entrepreneurs. The small business administration programs were developed specifically so that newer and younger entrepreneurs could have access to affordable credit. This is going to be one of the key factors moving forward as it relates to the federal government support of these programs. One of the nice things about getting a small business administration loan is that the terms are flexible especially for an entrepreneur that does not have a substantial amount of experience operating businesses on a day-to-day basis. Most importantly, a full resume and biography should be included within the business plan so that the bank has an understanding of the individual’s ability to effectively bring a new enterprise to profitability with a positive cash flow within the first 24 months of operation. If this is specific for a professional practice, such as a dental practice, then a substantial amount of information regarding the practitioners history and their ability to render services to the public should be included as well.

Third, there is going to be an examination of the collateral that is going to be used for the loan. Most banks and lenders strive to have his much collateral as possible so that in the event of a default they are able to recoup their investment. Common types of collateral include real estate, furniture, fixtures, related equipment, retirement accounts, checking accounts, 401(k) accounts, and any other asset that has a salable value. For SBA loans, most banks want to see that at least 80% of the loan is collateralized. This is why a 20% capital injection is typically needed by the borrower in order to ensure that the bank is comfortable providing this investment to the entrepreneur. Of course, one of the other frequent questions we get is whether or not the individual entrepreneur is going to need to provide a personal guarantee for the loan. The short answer is yes. Almost all banks and lenders require that the individual entrepreneur personally undersize the loan in conjunction with their company. After the credit crisis of 2008 and spanning through a recession for three years – most banks have implemented much more stringent lending protocols so that in the event of a default the bank is able to recoup a significant portion of the loan. This is one of the things that an entrepreneur should discuss with their certified public accountant given that when a small business administration loan is undertaken – a substantial amount of the individuals personal assets can be put at risk. As such, it is up to the entrepreneur to make an appropriate determination as to what they consider to be a can reasonable risk for their personal assets. Many people have a significant amount of concern specific for their primary residence. This of course could mean that a house could be lost in the event that a business fails. As such, it is important that the entrepreneur determine whether or not they consider this to be acceptable risk.

In closing, lending is a very complicated process especially for small businesses given the high-risk nature of these operations. The small business administration seeks to alleviate some of the risks associated with banks providing small business loans by issuing guarantees. However, it is still very much incumbent upon the entrepreneur to have an airtight business plan that will ensure that even if revenue targets are not met the business is able to satisfy the underlying debt obligation. This is going to be something that we continue to discuss on this website also focusing on how to properly develop a business plan that is specific for a SBA lending bank.