All lenders
have one goal in mind, a return of
their money with reasonable rent for
the usage (interest, fees,
penalties), given the risk.
All banks look
at 4 basic factors to determine if
the loan is worth the risk they will
take:
1)
Cash Flow -- Are the cash
flows of the borrower sufficient to
make the payments? When lending for
a business purchase, most banks want
to see cash flow 1.5 to 2 times the
amount needed for debt service
(after the owner takes a reasonable
living wage.)
2)
Credit Worthiness -- Your
credit history tells the bank about
your ability to manage debt and plan
wisely, while not all banks look
directly at the FICO score, nearly
all banks will pull your credit
report from one of the three major
credit bureaus.
Your Score
determines the amount of risk the
bank is likely to take in the other
3 areas described herein. If you
have a high score, you'll likely get
better rates and terms and may not
need as much of a down payment or
collateral to back the loan. The
following are some rough guidelines
on the way a bank looks at your
score:
720+
-- Excellent Credit --This
is considered an excellent score and
you should have little problem
getting a loan if the other areas
are reasonably covered.
680-720 -- Good Credit --
This is considered adequate and if
all other areas are reasonable
covered, you to should be able to
get a loan, although you may have to
answer more questions, and the bank
may require more money down and
higher collateral coverage.
650-680 -- Marginal Credit
-- Most banks struggle to make
business loans to individuals with
these scores. Every other area must
be strong and they may require
substantial down payments and
collateral coverage. Many will
require cosigners to back the loan.
Some marginal loans can be submitted
as Women owned or minority loans and
get some preferential treatment.
650
and below -- Poor Credit --
Most banks consider the risk to
great to be acceptable and the SBA
will not normally guarantee a
business loan to a lender with a
score below 650. While you can still
qualify for many home loans,
commercial banks are not likely to
be of assistance to you in
purchasing or financing a small
business purchase. You will need to
work to improve your credit score
and/or find a cosigner or partner
who has good credit.
You can find
out what your credit report looks
like by requesting a free report
from
www.freecreditreport.com. This a
service offered by Experian one of
the three largest credit bureaus and
can be very useful. However, this
will not tell you your Fair Isaac
Credit Score or "FICO" score. You
can obtain a complete credit report
and your FICO score from
www.myfico.com at last check for
about $15.00 to pull a single report
from one of the three major
reporting bureaus. In Utah we
recommend Experian. For around
$45.00 you can get 3 reports, one
from each major bureau. Requesting
the report as a consumer does not
affect your credit rating and is
recommend to anyone considering
borrowing.
3)
Collateral -- Every bank
wants to know how they will get
repaid IF you
default on the loan. This area
defines a banks "criteria" more than
any other. Generally, your smaller
home town banks want more
collateral, generally 100% coverage.
While some of your credit unions and
larger banks may be willing to rely
on the cash flow and accept lower
collateral coverage. Generally, if
the assets of the business are not
sufficient, they look at the borrows
balance sheet for additional assets
to cover the loan. When we speak of
"collateral coverage" this is a
measure what the bank will accept.
Below is a chart showing what some
major banks consider acceptable
coverage for various types of assets
|
Asset Type |
As collateral for business
purchase
|
Purchasing New |
|
Inventory |
20% |
80% |
|
Furniture, Fixtures and
Equipment |
50% |
80% |
| Home
Equity |
up to
80% |
Up to
100% |
|
Commercial Property
|
up to
80% |
Varies |
| Raw
Land |
50% |
up to
50% |
|
Accounts Receivable |
50-70% |
N/A |
For example,
if you have $100,000.00 dollars in
Furniture, Fixtures and Equipment,
the bank is likely to borrow
$50,000.00 against it in a business
purchase. If you have an existing
business with established cash
flows, and are purchasing new
equipment you may be able to borrow
80% or more.
4)
Related Business Experience
-- The bank wants to know you will
succeed and they know from
experience that your more likely to
succeed buying a business you know
something about. Also, buying a
franchise that offers training and a
proven business model can help
alleviate the banks fears.
REMEMBER -- Funding is a
multi-faceted decision, deficiencies
in one area can be overcome with
strengths in others. For example,
insufficient cash for the down
payment can be offset by solid cash
flows and collateral, or weaker
collateral may be offset by good
cash flows and solid business
experience (such as in-place
management buying out the company,
or strong managers in the industry,
buying a competitor). Weaknesses in
more than one area may need to
corrected before applying.
UNDERSTAND -- Put your self
in the banks position and present
you application in the best light
possible, emphasize the strengths
and address the weaknesses head on.
Small
Business Administration Loans (SBA)
The SBA is not
a "Lending" institution that makes
loans to the average business. The
SBA is primarily a "Guarantee"
agency that backs qualifying loans
made by other lending institutions.
The amount of the guarantee varies
with each program, but makes it
possible for normally very
conservative banks to make loans
that they would not normally accept.
Outlined below are the main SBA
programs and terms you should be
aware of.
1)
Preferred or Certified Lenders
- Preferred Lenders have special
turn around privileges and reduced
paperwork that can result in faster
SBA guarantee approval and quicker
loans. Certified Lenders have even
more authority to approve loans and
are give a 36 hour turn around
commitment on loans submitted to the
SBA. All other lenders are required
to submit the full required
documentation and may have to wait
longer for review and approval.
2)
Guarantee Programs - The
SBA has several guarantee programs
designed for different needs they
are:
A) 504
Loans - This program is
designed for loans to purchase major
assets such as land and buildings.
The SBA works through Certified
Development Agencies in each region,
who in turn, work with your local
banks. The maximum size of loan
under this program is 1.5 to 2.0
million depending on your industry
and number of employees. There is
special 4 million limit on certain
"Small Manufacturers" who meet
stringent criteria.
B)
Basic 7(a) - This is the
most common type of SBA guarantee
program you will see. The SBA will
guarantee qualified loans up to a
maximum of 2 million dollars of
which the SBA guarantees 75%. Each
owner of 20% or more is required to
personally guarantee the loan. Loans
can be for up to 25 years for
certain types of assets, but in
practice, small business loans tend
to be 5-10 years, depending on the
usefull life of the assets being
purchased. Interest rates may vary
from lender to lender but may not
exceed maximums set by the SBA for
each type of loan (number of years,
fixed rate, or variable rate). The
SBA guarantees up to 75-85% of these
loans, depending the size of the
loan.
C) SBA
Express Loans - These are
essentially, 7(a) loans for amounts
less than $150,000. The SBA requires
less paperwork and faster turn
around. As a result, they only
guarantee 50% of the loan. This
translates into more stringent rules
by the banks to insure there loan is
secured.
D)
Other Programs- There are a
few other specialized programs such
as the Export Working
Capital Loan Program,
which, as the name implies is for
companies who are engaged
specifically in export trade. Also,
7(m) Micro Loans
which are short term loans of up to
$35,000 for special circumstances
and Disaster Recovery Loans
that are offered from time to time
to individuals and businesses in
disaster areas.
Small Business Lines of Credit
(come back often as this is a work
in progress)
Small Business Grants
