SBA Loans

Posted on June 17, 2015 By

SBA Loans

SBA loan applications are a frequent target of business loans.  There are a few items that you will need to know about them.  SBA loans are generally backed by the government; however, the loans are subject to the same criteria as non-SBA loans.  Bank will generally grade a loan by the classic:

Five C’s of Lending

  • Character – Reputation of the borrower.  Believe it or not there are people who go from lender to lender with absolutely no intention of repaying the loan.  This might be a small business owner who hires employees or contractors that never intends to pay them.  Perhaps a large tax payment needs to be resolved.  If you have issues in this area, this might be a blemish on your loan score card.
  • Capacity – Ability to repay the loan.  Is the investment going to pay off?  Is it going to generate enough cash to repay the loan?  This is why a business plan is so important.  It shows that you have done some calculations and thought about repayment.
  • Capital –  How much risk the business is willing to shoulder?  Is the loan/investment being 100% by the lender?
  • Collateral – Secured Property for the loan. If the loan isn’t repaid; do the borrowers have something of value that the lender can attach.
  • Conditions – Current interest rates and economy.  Is it likely the economy can support the new venture?  An example is dog walking.  Many dogwalkers go into and out of business each year.  Is there a sufficient pool of customers that will pay for a premium service?  If the economy is in a tail spin, perhaps not.

SBA Loan Types

SBA loans are not issued by the SBA.  They are issued by the lender and are guaranteed in portion by the SBA.  The loans are in compliance with the SBA rules and regulations.  They do not offer grants for for-profit companies.  Occasionally, I get requests to do SBA grants and it’s an urban myth that you don’t need to pay for business investments.

7(a) Loan Program – Generally have good credit, small business as defined by SBA, for profit business, be an eligible business type, and have repaid other federal loans.  See the link for more specific details.

CAPLines – Lines of Credit for up to $5M to help with short term or cyclical working capital needs. See the Link for the exact terms.  Here are the programs names:

  • Contract Loan Program
  • Seasonal Line of Credit Program
  • Builders Line Program
  • Working Capital Line of Credit Program

Microloan Program –  Loans up to $50,000 for small businesses and some not-for-profit childcare centers.  They may be disbursed by community organizations.

CDC/504 Loan Program – Real Estate and & Equipment loans.

Disaster Loans – Low interest loans to recover from a disaster.  As with the rest of the loan programs, make sure you check the current requirements.

Useful Documents:

Business Plan: A comprehensive business plan is exceeding persuasive.  Usually they are five year projections for traditional business loans.  Check with your loan officer and confirm that is what they desire before submitting.  There are some quick track loans that are sometimes available.  You should already have a committed plan before applying for funding; but cross check the actual loan requirements.

Mission Statement:  What is the company’s goal?  This should be a few sentences or a short paragraph.  Mission statements are sometimes flowerly and vague.  Try to be between “World Peace” and “ONE MILLION DOLLARS” in the mission statement.

Strategy:  How are they going to beat the competition?  If you think your company has no competition, you are highly mistaken.

A recent applicant on Shark Tank sells gloves with lights at the ends of fingers for club dancers.  No competition?  Glow Sticks, glow in the dark gloves, glow in the dark fingernail polish.  Those are all low cost alternatives to their products.  They compete by being better and having programmable lights, staging competitions, and having promotional teams go to clubs.

There are always alternatives to your services/products.  Address those concerns in your business plan.

Management Bios: Who is the management team?  Why are they effective leaders? Have they managed similar projects in the past?

Cash Flow Spreadsheet

A spreadsheet showing the ins and outs of money in your company is essential for SBA loans.  They want to see when and where the company is going to be funded and when it expects to be cash positive.  Here is a sample one that I’ve used in the past:

E-PNL-006 Main Sheet

Notice it isn’t the same document as an Cash Flow Statement, which is a traditional accounting report that shows the ins and outs in a highly stylized manner.  Those are created to show high level cash flows.  We want to show the company as having enough cash in the bank to pay their obligations. Two different goals.

Capital Improvements. List of Capital Improvements and the effects on the business.  Try to cover expenditures, revenue inflows, revenue increases, and depreciation.

Marketing and Revenue Planning.  Show how the loan will increase the revenue and gross margin.  If it will make your start up reach a new goal be sure to say Cash Flow Positive or Positive Gross Margin in your description.  Most bankers or investors understand what those terms mean, don’t shy away from those terms.  Amazon spent about 20 years losing money each year, but still seemed to round up plenty of investors to buy or invest in their company.

Laura Dodson
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Laura Dodson

Laura Dodson, CPA is a Seattle Financial Planning & Analysis consultant.She has attended Western Washington University, Pierce College and Bates Technical College. She has written four accounting instructional books. She has worked for small family businesses, mid-sized businesses and a Fortune 500 company.She founded and operated Blue Stone Accounting LLC for five years.She currently runs Paper Butterfly Forge LLC.
Laura Dodson
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