In my last blog, we identified the three kinds of loans currently offered by the Small Business Administration (SBA). Now that you have decided which loan best suits your company's financial needs, its time to start the arduous process of completing the SBA loan application. The SBA application breaks down into many different component sections and each section has to be thoroughly completed. Here are the various categories that need to be addressed as part of the loan application process:
1. Personal Background. Here is where it gets personal, so to speak. The SBA is preoccupied with knowing about you. They want all of your personal information including prior residences, other names, criminal record, if applicable, and your educational background.
2. Resumes. This is part and parcel of the personal background information requirements. A solid resume portrays your business as one that is prepared, organized and well managed. If you don't have a professional resume and wish to get funding from the SBA, I would seriously consider having this professionally done in order to make the right impact. The resume should be as crisp and comprehensive as it would be if you were applying for an employment position.
3. Business Plan. This is essential to getting the moolah. Your plan must include financial projections such as cash flow, income and specific goals of your company. What are the specific plans for your company? How long will you need to reach them? And perhaps, most importantly, how does the money from the SBA fit within your specific plan? The bottom line in this section is to demonstrate to the SBA that you are worth the investment. For the business plan to be successful, I would recommend providing an executive summary, market analysis, description of your business, information about your company's management team, marketing, and sales strategy and financial projections and statements. Remember, the more money you are requesting from the SBA the more the SBA will dive deep into all of the components of your application.
4. Use of Loan. How does getting this money fit into your overall business plan? In this section, you need to demonstrate facts that otherwise demonstrate that the funds are to be used for what the SBA refers to as a "sound business purpose." Depending on the specific loan you are seeking, the SBA will decide if you are eligible as to how the money will be used in the context of the loan applied for.
5. Personal credit report. Your credit score or lack of credit score as is the case could be the lynchpin of the entire application process. Even though the loan is for the business, the SBA wants personal credit information particularly in circumstances where the credit track record of the business does not exist or is very limited. What the personal credit score reveals to the SBA or any lender, for that matter, is how you have handled your own personal finances and whether such information will be a good guide as to how you will handle SBA money. A stellar report will give the SBA the confidence that you know how to manage money even if that has been your own money up to that point. If your score does not meet their requirements, the application process is likely to end there. The SBA, like all lenders, is going to take a hard look at your score and will utilize the three major reporting bureaus for credit score information.
6. Business credit report. If your business has been in business for some time, the SBA will want to review and evaluate this specific report. As with the personal credit report, the SBA will use the three major credit reporting agencies to get scores. The SBA will also utilize Dun and Bradstreet as a resource to measure your company's creditworthiness.
7. Personal and Business Tax Returns. Like with credit scores, this remains an integral part of the credit reviewing process. It might be best that you review your returns with your accountant particularly if you have any ongoing audits with the IRS. Any such information of this type is required disclosure material to the SBA.
8. Financial Statements. Balance sheets, profit, and loss statements and business debt schedules will all be required reading for the SBA. A strong balance sheet, profit and loss and contained and managed debt schedule will collectively work to inspire confidence in the SBA that you will manage their loan with the same degree of success. Again, I would highly suggest that you interact with your accountant on these documents prior to completing and filing any loan applications with the SBA.
9. Collateral. You will need to put up collateral as part of any loan by the SBA in the event of loan default. The higher the risk on the loan the more collateral that is going to be required. Collateral meaning house, boats, other real property or even equipment and inventory.
10. Legal Documents. You might see a request for a business license and registration, articles of incorporation, contracts with third parties, franchise agreements or any existing leases for commercial real estate or existing leases or purchases for business equipment.
The best advice I can give you is that when it comes to fulfilling these various requirements you should always think like a lender. Put another way, you should prepare your loan application as if someone were coming to you for money. Your application should be complete, comprehensive and organized. The better prepared you are in the application process will necessarily result in a faster determination by the SBA as to whether your loan request has been approved. Above and beyond everything else, make sure you deal with a banker who specializes in SBA-backed loans.
Given the importance of having your loan approved do not become penny wise and pound foolish by not retaining an accountant and or business planner to assist you in the application process. If you have any questions about the SBA loan process or need a referral to one of our many outside professional partners, please call the Katz Law Group at 508-480-8202.