September 26, 2014
In the second of two Q & A's with Brian Burke, he discusses SBA loan documentation and some of the most important things to keep in mind when considering SBA programs.
Q. What is the most important information and documentation a small business owner needs to have at hand when undertaking this process?
A. Any small business and its owners need to demonstrate that there is a sound plan for serving their market, surviving economic and competitive threats and maintaining a sustainable competitive advantage in their market. Along with that, the plan needs to demonstrate sound supportable cash flow projections and assumptions that can be proven to support the debt comfortably. Most lenders look for a 25% cushion in debt service coverage, often stated as 1.25 to 1 coverage.
Typically lenders will require 2-3 years of historical tax returns and financial statements. These include annual profit and loss and balance sheets for the business AND the principal owners/operators. Those who own more than 20% of the business must also personally guarantee the business loan.
For larger businesses and larger loan amounts, the lender may require additional project and financial information, both historical and pro forma, to establish the reasonableness of the request and the chances for timely and orderly repayment. Additionally, lenders look to secondary and tertiary sources of repayment (if plan A - the primary cash flow of the business fails or is seriously interrupted). This is known as collateral and can include additional financial guarantees from individuals, corporations and the government (example SBA).
Q. What are the most important things small business owners should keep in mind when considering SBA programs?
A. SBA loans offer the business excellent flexibility and well-structured loans that are built to last. They also, however, involve more up front effort, due diligence and paperwork. Patience and positive attitudes are rewarded with excellent terms.
Know your numbers or have a trusted advisor that can help you present your business in all respects including the all-important financial characteristics.
Understand the fundamental principal of leverage. If you have a sound equity capital base, debt may be a healthy and smart tool to grow your business. But don't ever overextend yourself or your business.
Not all lenders are created equally. While many offer the same fundamental financial products, there is a wide range of expertise, savvy and integrity when it comes to finding the best financial products to support your business.
Q. Is there anything else that you want to add?
A. Small businesses are the backbone of the American economy. We need healthy, growing businesses to stabilize our communities, to create and sustain jobs. Growth is positive when it is well managed and appropriately supported with the right structure of equity and debt capital.
A good lender is "worth their weight in gold." Seek them out, nourish a trusting and healthy relationship and show some loyalty for those who supported you when others were unable or unwilling to take measured risks with you in your growth cycles.
Posted by: CRFUSA