Why use SBA Financing?

As compared to conventional bank loans,SBA loans offer:

• Lower down payment requirements• Longer repayment terms• Easier qualifying criteria

SBA Loan Request Criteria

Below are five criteria used to evaluate anSBA loan:

• Business management experience• Business cash flow• Equity contribution• Credit history• Collateral

Business Management Experience

SBA lenders look for one or more of the following business management experience:

• Track record of successful ownership and/or management of a business in the same or similar industry.

• Education & training, or strong franchisor support.

• If the primary owners don’t have the experience, they can offer another person who has those attributes as a personal guarantor on the loan.

• When buying a successful business, the SBA lender likes the buyer to negotiate some seller second-lien financing.

Business Cash Flow

The lender is primarily concerned with:

• Business’ cash flow • The last three years historical business tax returns• Financial statements

Annual business cash flow is calculated by:• Dividing the proposed annual loan payments for the new company

to get a debt coverage ratio. • Underwriters make adjustments to remove non cash expenses

(depreciation, and nonrecurring expenses, ie. one-time legal fees)

The cash flow benchmark for an SBA lender is a debt coverage ratio of 1.25X or better. The .25 portion of that ratio represents the cash flow cushion the SBA lender likes to see in excess of the loan payment requirements.

Owners’ Equity

An SBA lender cannot lend 100% of the project cost. The small business borrower must have their own “skin in the game.”

Required equity will be at least 10% (or as much as 30%-40%) of the total project cost.

Qualifying equity may arise from any of the following circumstances:

• Cash down payment from the buyer/borrower.• Buyer’s/borrower’s personal assets pledged as additional collateral for the loan.• Seller second-lien financing with payments on standby.

Credit History

For a lender, some of the best evidence for a loan applicant’s likelihood

to repay their loan is how they have paid their creditors in the past.

This information will show up in a credit investigation by the SBA

Lender which includes the following:

• Personal credit report – Equifax, Transunion, Experian• Business credit report – Dunn & Bradstreet• Direct calls to prior lenders• Accounts payable agings

Collateral

Because the U.S. Small Business Administration offers a government-backed loan program, SBA loans do not need to be fully secured with collateral.

• The more collateral offered for the loan, the higher the likelihood of loan approval.

• If the loan is under secured, SBA requires the lender to take other assets for collateral, if they are owned and unencumbered by the small business or its principals.

Homestead and retirement assets are exempt from this requirement.

The Final Analysis

Every business loan application ends up with a summary of strengths and weaknesses in the loan application based upon the five foregoing criteria.

To gain loan approval, the strengths must outweigh the weaknesses.

For a weakness exhibited with oneof the criteria, there must be acompensating strength displayedin one of the other criteria.

SBA Loan Terms

• Loans primarily secured by real estate will have a 25 year repayment amortization and maturity.

• Loans not primarily secured by real estate will have a 10 year repayment amortization and maturity.

• The maximum interest rate allowed for most SBA loans is the Wall Street Journal Prime Rate + 2.75% (currently 6%). The interest rate is adjustable quarterly throughout the life of the loan with changes in the Prime Rate.

• Real estate loans have prepayment penalties for full payoff in the first 3 years.

• Non real estate loans have no prepayment penalty.

• Loan amounts available from $50,000 to $5 million.

Thank You!

Use me any time as a resource for information and assistance with small business financing using the SBA loan program.

Thank you for attending this event! To see educational articles about SBA financing, please visit my blog at brucehurta.wordpress.com.

Bruce HurtaBusiness Lending ManagerMembers Choice Credit Union SBA Lending14960 Park Row Blvd.Houston, TX 77084

281-754-1112 office281-384-2595 cellbhurta@mccu.com