SBA Loans: Would You Get Approval for an SBA Business Loan?

What Do You Need to Know Before You Apply for An

SBA Business Loan?

A quick word here about SBA business loans, mostly because I do still get asked about this often enough for me to believe enough people aren’t aware of the SBA’s general views and guidelines regarding financing for an online business.

The SBA (Small Business Administration) was created in 1953 by President Eisenhower. Its function is to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns. Over the years they have developed a very good loan guarantee program. They usually work in co-operation with local and national banks and have a number of programs to help entrepreneur’s finance the acquisition or growth of their businesses. The main benefit for startup’s being that a bank will often lend at special (lower) interest rates and in some cases under slightly less stringent guidelines that their own charters may allow for. So when a loan is guaranteed under the SBA loan program this allows the lending bank to approve more loans.

I financed the purchase of my first (offline) business with the help of an SBA backed loan through our local bank and it served us very well. However banks and the SBA both view online businesses very differently so it’s important to understand how and why they do that so you can better understand if an SBA loan will be an option for your specific situation.

Another thing to bear in mind, is that while you may not be able to borrow ‘purchase money’ through the SBA programs because of their lending guidelines relative to goodwill, it is often much easier to borrow ‘working capital’ to help with growth and expansion plans once you do own a business.

So I have sold a number of online businesses with SBA financing in the past. However, in the current economy and general banking climate it’s increasingly difficult if not impossible, to obtain SBA financing for online businesses.

The SBA revised their guidelines (understand 'guidelines' is a bit misleading, they're not so much guidelines but more absolute RULES and they're banker-speak for 'Application Denied' if you don't meet all of them) back in March of 2009 in regard to financing Goodwill. As both the SBA and banks generally consider the value of many (if not most) web businesses to be almost entirely goodwill, this is quite a limiting factor. As far as I'm aware the policy on Goodwill has not changed as yet. 

SBA Guideline Change March 2009:

Effective March 1st the SBA has changed their policy regarding the financing of goodwill. Business acquisition loans that are processed using our (PLP) preferred lender status will be limited to financing up to $250,000 of goodwill. If we are financing a business acquisition with more than $250,000 of goodwill we will be required to process these requests through the SBA. We will not be able to use our PLP status to process these loans.

Once you further narrow the model down to meet your criteria of drop ship or content based businesses, then you’re almost undoubtedly looking at a model that the SBA and banks would view as entirely goodwill based, mostly because there are no physical assets for them to attach a lien to in order to protect their ability to recover debt should the business fail.

It’s also very important to understand that not only does the business have to qualify, but the buyer also has to qualify. If a buyer doesn’t have other tangible and most importantly, acceptable, security to collateralize a loan, that can prevent an otherwise acceptable business property from receiving the all important SBA loan nod.

On the bright side, there are lots of “Preferred SBA Lenders” nationwide, what that designation means to you and me – it allows those lenders to underwrite some applications in-house which saves time and lots of aggravation, so be sure to look for and work with a preferred lender if you can. The SBA Loan Program Matrix  (click the image below) to view in more detail - gives an overview of most SBA Loan programs and their guidelines.

SBA Loan Program Matrix - NextGenBizTools

When I'm working with sellers I look at it this way, if I believe a business will warrant SBA loan approval, I’ll typically put the time in up front and get the business “pre-approved” to help buyers quickly identify the business opportunity as a candidate for SBA Loans and obviously that opens up a much larger group of potential buyers, so will hopefully result in a much faster sale.

What Should You Do to Prepare Your Business for

SBA Loan (or Bank loan) approval?

Well, on the bright side you can save a bit of time here because they're pretty much the same things you should do to prepare a business for sale and most of which you should already be doing anyway.

It’s a great maxim to follow with everything, but begin with the end in mind – keep meticulous records, especially for financials that means recording ALL revenue and expenses.

But also be sure to look at the check list at the end of this post because that show's exactly what documentation the SBA requires in support of a loan application, so obviously you (or a buyer) would need all of those items too. 

• Prepare Profit & Loss Statements, Balance Sheets, Tax Returns and other documents to support the history of your business. Have P&L (profit & loss) statements by month for the most recent 2-3 years, if you have history prior to that annual figures will probably suffice at least to get you started.

• Gather Merchant Account statements and Vendor Invoices by month for the most recent 2-3 years to prove revenue and expenses.

• Prepare a business and marketing plan together with 1 year & 3 year cash flow & sales projections. Your business and marketing plan should be as detailed as possible to provide realistic support and basis for your projections.

• If you’re able to, show the relationships that fuel the business– vendors, customers, employees or contractors, traffic history etc for your site again to support the business plan and projections.

Probably the most important thing you can do is start the loan application process as early as possible and arm yourself with a 'chill pill' when you do start. You will undoubtedly need patience and your happiest disposition, typically banks and the SBA work at the proverbial snail’s pace of a Dickens novel and are not nearly as entertaining (applies whether you like Dickens or not).

Expect the application and approval process to take at least 60 days and be sure you set expectations between both buyer and seller accordingly!

Think of the loan application process kind of like a 'legal trial' – you need to prepare your case meticulously, using every available exhibit to support your position and make your case to clearly and concisely demonstrate to them (the bank and the SBA) ‘beyond any reasonable doubt’ why they should back you and your company.

Cheers,

The following is a Check List of items needed to apply for an SBA loan, this is what a buyer or owner would need to have to hand should they seek SBA backed financing to buy a business or for a working capital loan.

A couple of things not specifically mentioned on the list (but I strongly recommend you include in your application package anyway) are detailed business and marketing plans, even though they don’t state those as requirements your application will almost certainly be rejected if they're not in there.

Although an application without those two essential elements shouldn't get past your local bank loan officer, you are you own best advocate and you don't want to submit an application just to have it rejected on such a basic omission – it'll only add to the overall time and frustration of the process. 

SBA Loan Application Check List:

1. SBA Loan Application

This form should be completed by you, the business owner.

Application for Business Loan – SBA Form 4

This form should be completed by your lending institution.

Lenders Application for Guaranty or Participation – SBA Form 4i

2. Personal Background

A personal background statement should be completed.

Statement of Personal History – SBA Form 912

3. Personal Financial Statement

A personal financial statement should be completed.

Personal Financial Statement – SBA Form 413

4. Business Financial Statements

A detailed, signed balance sheet and Profit and Loss (P&L) statement. Statements (current within 90 days of application) and the last three (3) fiscal years Supplementary Schedules are required on Current Financial Statements.

5. Projected Financial Statements

Detailed one (1) year projection of income and finances (attach a written explanation as to how you expect to achieve this projection).

6. Ownership and Affiliations

A list of names and addresses of any subsidiaries and affiliates, including concerns in which the applicant holds a controlling (but not necessarily a majority) interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with the applicant.

7. Business Certificate/License

A Certificate of Doing Business (If a corporation, stamp corporate seal on SBA Form 4 section 12).

8. Loan Application History

By law, the SBA may not guarantee certain types of loans if your business can obtain funds on reasonable terms from a bank or other private source. This means you must first seek private financing.

Your company must be independently owned and operated, not dominant in its field, and must meet certain standards of size in terms of employees or annual receipts. SBA loans cannot be made to speculative businesses, newspapers, or businesses engaged in gambling.

Applicants for loans must also agree to comply with the SBA regulation that there will be no discrimination in employment or services to the public based on race, color, religion, national origin, sex or marital status.

9. Business Income Tax Returns

Signed business federal income tax returns for previous three (3) years.

10. Personal Tax Returns

Signed personal federal income tax returns of principals for previous three (3) years.

11. Résumés

Personal résumés including the business experience of each principal.

12. Business Overview and History

Brief history of the business and its problems. Include an explanation of why the SBA loan is needed and how it will help the business.

13. Business Lease

Copy of business lease (or note from landlord) giving terms of proposed lease.

14. For purchasing an existing business:

The following information is needed for purchasing an existing business:

a. Current balance sheet and P&L statement of business to be purchased.

b. Previous two (2) years federal income tax returns of the business.

c. Proposed Bill of Sale including Terms of Sale.

d. Asking price with schedule of:

1. Inventory
2. Machinery and equipment
3. Furniture and fixtures

Tags: SBA Business Loans, SBA Loans, SBA Small Business Loans

Category: Business Finance, Business Loans, Online Business