August 24, 2016

Steps To Obtaining An SBA Loan

Want to apply for a SBA loan? The loan process can seem daunting but with the help of CGS acquiring your loan can be a much simpler endeavor. In this series we will focus on what you should consider before applying.

Step One: Check Your Credit

Consider your personal credit. All lenders as well as the SBA will review your past payment history. It is easy to go to one of the credit reporting agencies and pull a free credit report. Review the report for late payments and charge-offs. The credit score is not as important as all accounts being current for the last 12 months with no losses showing to other creditors. If there are mistakes, contact the reporting agency. If there are charge-offs, contact the debtor and find out if it is actually your debt.

Step Two: Determine Your Financial Needs

Continuing our conversation as to the SBA application, HAVE A PLAN! This is NOT a 30 page treatise on the state of your industry, but a quick 2 pager that explains who you are, what you do, who in your company actually does it, and what you are trying to accomplish with your proposed loan. As to this final step, put together a USE OF PROCEEDS. How much money is there and where will it go? Be specific: purchase inventory, working capital to finance receivables, money to purchase equipment, funds for land and building, money for purchasing an existing business, etc. OVERESTIMATE EVERYTHING! You never want to be short! Next week we will talk about historical debt service coverage, projections, and accompanying assumptions.

Step Three: Gather the Info You’ll Need

Following every good business plan is a summary of how the proposed debt will be repaid by the historical cash flow of your business, or a set of COMPLETE projections. Historical cash flow makes the loan process easy, if it is adequate to service the proposed debt. The simple cash flow model is net income after taxes, plus interest expense, plus depreciation and amortization, plus any expenses that no longer exist (like a one-time loss, or rent disappearing if you are buying a building), typically taken from your tax returns. Then add up all your monthly payments for the next 12 months, including the new SBA loan (google amortization schedule of loan). Take your cash flow number and divide by the 12 months of payment. If this number is over 1.25, you should be fine. If less, we move on to projected financial statements, which is next week’s topic!