Five important things to know for an SBA loan
I have been in business lending for several years and have even done my own SBA loan for a side transportation business. My process was completely different from most people simply due to the fact I knew what questions were going to be asked and how to answer them. I am going to sum up some of the common mistakes and how to mitigate them below.
1. You know your idea is great, your banker not so much
In your head, it makes perfect sense to want to open a boutique dog leash shop in the middle of town. You have done your research, gotten a few verbal confirmations and feel ready to apply for a loan. Your lender does not own a dog, knows little about the “high demand” and stares at you with a blank face.
Most businesses are built on passion and lenders make decisions on numbers and facts. This is both a good and a bad thing because it adds a different perspective but can also be frustrating as hell! Trust me, I have sat on both sides of the desk. The key is to come to a common ground where they can feel comfortable with the idea and you can understand their hesitation. That meeting point is where your business is born.
2. Have a good business plan
This is the key to getting any loan from a $2,500 food stand to a $3 million dollar real estate loan. I have a personal saying that the latter is easier with a good plan than the former without one. The reason that the business plan is so crucial is that you are providing information to back up your great idea. In the plan, you will discuss market conditions, competitors, Funchal projections, and possible pitfalls. By addressing these issues you preemptively bypass your banks objections. This is also a place to convince yourself of the great idea.
3. Know your numbers and how to justify them
Your bank is going to want numbers to back up your claim of being a successful business. You don’t have to go into a lot of fancy terms such as ROI, ROE, Inventory turn ratios, and such. You do have to address the basic question of how is your income going to be greater than your expense and thus a profit is created. The false assumption is that all small businesses don’t make money in the first few years and, while this is a large portion of the businesses out there, many are profitable after only a short time. The key lies in the type of business but they all have the same layout. Income must me greater than expenses to survive. You will need to show projections on how the business will operate over a period of time. Most banks will want 3 year projections, with the first year broken out by month.
4. Have adequate “skin in the game”
All of the banks that do SBA loans will require at a minimum 10% of the loan you are requesting. This can vary greatly based on the type of project you are looking to finance. In the example above, you would need $250 for the food stand and $300k for the building. This is called an equity injection and most recently the SBA changed the requirements to state it must be cash. Typically the bank will need to show 3 months of that money being on deposit to count as equity. The more you have, the easier the process will go. This serves two purposes. It will show that you are as serious about your business as the bank should be and it will give you some liquid funds for unforeseen startup expenses (trust me they happen).
5. Use free resources
I cannot speak more highly about the resources available to small businesses from the SBA. The SBA has spent tons of money to develop programs to help businesses start and grow. I also see many companies charge large amounts for “business consultations” when those services are offered free at your local Small Business Development Center.
Whatever you do, I wish you the best on your adventure. I hope that I was able to give you some information and that you find it useful. If you have specific questions, please let me know and I can try to answer them to the best of my abilities. Now go open your leash store!
Thank you for taking the time to read my blogs. I am in no way a matter expert and these are simply my opinions. I welcome any thoughts and discussion.
