June 6, 2016
Know How

The SBA is a lifeline to small business

Business needs the life-sustaining force of capital circulating within it to prosper, just like the human body needs oxygen. There is no substitute for capital.

The 27.9 million small businesses across the country face the daily dilemma of figuring out where to procure this capital. For most, banks are the starting point on the capital journey because they offer the best interest rates and are well capitalized to lend. However, banks will often not extend credit to a small business that may have encountered challenges, unless they have an incentive to do so.

The U.S. Small Business Administration (SBA) provides an economic incentive for banks to lend to small business. The SBA is a government-guarantee program, not a lender. Most major banks participate in this program because of the guarantee, which can be as much as 85 percent on loans up to $150,000 and 75 percent on loans greater than $150,000. The guarantee reduces the lender's risk

The SBA's flagship product is the 7(a) program. At the end of the 2015 fiscal year, 63,000 loans were made using the 7(a) program, with a value totaling $23.6 billion. This was a 22-percent increase in the number of loans, and a 23-percent jump in total dollars over the previous year.

Lenders examine a number of factors during the underwriting process to establish the creditworthiness of the business, such as years in business, the owner's credit report, the industry, management of the company, personal and business tax returns, and collateral to secure the loan. Ultimately, the lenders want to see a history of profitability.

Cash flow is critical because it demonstrates the business can afford to pay back the loan. A business should have a positive cash flow, meaning the business is generating sufficient cash from operations to service the debt on the loan, which is the key metric lenders will evaluate.

Business owners can do a number of things to increase their chance of receiving a SBA loan. First, the business should have up-to-date financials, including an income statement (often called a P&L), a balance sheet, accounts receivable and payable reports. The business should also provide copies of the most recent three years of business and personal tax returns.

Also, the business should develop a clear plan of how the capital will be used, along with cash flow projections for a minimum of two years demonstrating success. Although a business plan is not required, a project overview and financial projections are.

The best time to get a loan is when the business doesn't need it. This might sound counterintuitive, but the logic is sound. When all is going well for the business, it is in a position of strength to seek capital.

In the end, make sure you get your economic house in order before you apply for a loan. It takes time to go through the entire loan process. To be safe, apply 60 days before you need your capital lifeline. To get started, visit the SBA at www.sba.gov to find a participating lender.

Anthony Price is the CEO of LootScout, which counsels small businesses how to raise capital. You can reach him at Anthony@LootScout.com.

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