To determine if you qualify for
SBA's financial assistance, you should first understand some basic
credit factors that apply to all loan requests. Every application
needs positive credit merits to be approved. These are the same
credit factors a lender will review and analyze before deciding
whether to internally approve your loan application, seek a guaranty
from SBA to support their loan to you, or decline your application
all together.
1. EQUITY INVESTMENT
Business loan applicants must have a reasonable amount invested
in their business. This ensures that, when combined with borrowed
funds, the business can operate on a sound basis. There will be
a careful examination of the debt-to- worth ratio of the applicant
to understand how much money
the lender is being asked to lend (debt) in relation to how much
the owner(s) have invested (worth). Owners invest either assets
that are applicable to the operation of the business and/or cash
which can be used to acquire such assets. The value of invested
assets should be substantiated by invoices or appraisals for start-up
businesses, or current financial statements for existing businesses.
Strong equity with a manageable debt level provide financial resiliency
to help a firm weather periods of operational adversity. Minimal
or non-existent equity makes a business susceptible to miscalculation
and thereby increases the risk of default on -- failing to repay
-- borrowed funds. Strong equity ensures the owner(s) remains committed
to the business. Sufficient equity is particularly important for
new business. Weak equity makes a lender more hesitant to provide
any financial assistance. However, low (not non- existent) equity
in relation to existing and projected debt -- the loan -- can be
overcome with a strong showing in all the other credit factors.
Determining whether a company's level of debt is appropriate in
relation to its equity requires analysis of the company's expected
earnings and the viability and variability of these earnings. The
stronger the support for projected profits, the greater the likelihood
the loan will be approved. Applications with high debt, low equity,
and unsupported projections are prime candidates for loan denial.
2. EARNINGS REQUIREMENTS
Financial obligations are paid with cash, not profits. When cash
outflow exceeds cash inflow for an extended period of time, a business
cannot continue to operate. As a result, cash management is extremely
important. In order to adequately support a company's operation,
cash must be at
the right place, at the right time and in the right amount.
A company must be able to meet all its debt payments, not just
its loan payments, as they come due. Applicants are generally required
to provide a report on when their income will become cash and when
their expenses must be paid. This report is usually in the form
of a cash flow projection,
broken down on a monthly basis, and covering the first annual period
after the loan is received.
When the projections are for either a new business or an existing
business with a significant (20% plus) difference in performance,
the applicant should write down all assumptions which went into
the estimations of both revenues and expenses and provide these
assumptions as part of the application.
All SBA loans must be able to reasonably demonstrate the "ability
to repay" the intended obligation from the business operation.
For an existing business wanting to buy a building where the mortgage
payment will not exceed historical rent, the process is relatively
easy. In this case, the funds used to pay the rent can now be used
to pay the mortgage. However, for a new or expanding business with
anticipated revenues and expenses exceeding past performance, the
necessity for the lender to understand all the assumptions on how
these revenues will be generated is paramount to loan approval.
3. WORKING CAPITAL
Working capital is defined as the excess of current assets over
current liabilities.
Current assets are the most liquid and most easily convertible
to cash, of all assets. Current liabilities are obligations due
within one year. Therefore, 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 give their short term creditors.
Working capital is essential for a company to meet its continuous
operational needs. Its adequacy influences the firm's ability to
meet its trade and short-term debt obligations, as well as to remain
financially viable.
4. COLLATERAL
To the extent that worthwhile assets are available, adequate collateral
is required as security on all SBA loans. However, SBA will generally
not decline a loan where inadequacy of collateral is the only unfavorable
factor.
Collateral can consist of both assets which are usable in the
business and personal assets which remain outside the business.
Borrowers can assume that all assets financed with borrowed funds
will collateralize the loan. Depending upon how much equity was
contributed towards the acquisition of
these assets, the lender also is likely to require other business
assets as collateral.
For all SBA loans, personal guarantees are required of every 20
percent or greater owner, plus others individuals who hold key management
positions. Whether or not a guarantee will be secured by personal
assets is based on the value of the assets already pledged and the
value of the assets
personally owned compared to the amount borrowed. In the event real
estate is to be used as collateral, borrowers should be aware that
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.
SBA may require professional appraisals of both business and personal
assets, plus any necessary survey, and/or feasibility study.
Owner-occupied residences generally become collateral when:
1) The lender requires the residence as collateral;
2) The equity in the residence is substantial and other credit
factors are weak;
3) Such collateral is necessary to assure that the principal(s)
remain committed to the success of the
venture for which the loan is being made;
4) The applicant operates the business out of the residence or
other buildings located on the same
parcel of land.
5. RESOURCE MANAGEMENT
The ability of individuals to manage the resources of their business,
sometimes referred to as "character," is a prime consideration
when determining whether or not a loan will be made. Managerial
capacity is an important factor involving education, experience
and motivation. A proven positive
ability to manage resources is also a large consideration.
Mathematical calculations on the historical and projected financial
statements form ratios which provide insight into how resources
have been managed in the past. It is important to understand that
no single ratio provides all this insight, but the use of several
ratios in conjunction with one another can provides an overall picture
of management performance. Some key ratios all lenders review are:
debt
to worth, working capital, the rate at which income is received
after it is earned, the rate at which debt is paid after becoming
due, and the rate at which the service or product moves from the
business to the customer.
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