All prospective buyers of small to midsized businesses need to become familiar with SBA loans and the loan application. Most of these business purchases are funded by (a) the buyer\u2019s cash equity, (b) SBA loans and (c) seller held notes and other forms of financing provider by the seller.<\/p>\n
Sunbelt knows how to get you pre-qualified for an SBA loan. We understand the challenges and responsibilities that come with business ownership. Our services are at no cost to the buyer and are paid for by the lender after you successfully attain the loan. We help buyers find the financing needed to close deals.<\/p>\n
As a starting point, we will help familiarize you with the 5 C\u2019S of SBA loan eligibility.<\/p>\n
Having a large enough down payment is a crucial piece of being approved for an SBA loan. This down payment is also known as your \u2018equity injection\u2019 or the amount of capital you\u2019re able to invest in the business. Having enough capital on-hand is important because banks aren\u2019t willing to cover 100 percent of the purchase price of the business. They\u2019re reassured by knowing that you have a large personal stake in the success of the business. How much you\u2019ll be required to put down varies by both your type of SBA funding and your business. For SBA 7(a) loans, banks often prefer to see 20 percent down for existing businesses and franchises (with a 10 percent minimum).\u00a0 Only the strongest of buyers and businesses qualify for the 10 minimum buyer injection.<\/p>\n
Just as it does when you apply for any kind of financing, your credit score and credit history play a role in whether you\u2019re approved for SBA lending. Most banks will look at both your personal and business FICO score (if applicable). A 690 personal score and 160 business score are typically the minimum requirements for loan approval. Credit events such as recent bankruptcy can have a significant, negative impact on your attractiveness as a borrower.<\/p>\n
The target business\u2019 projected capacity to generate cash flow to repay the borrowed debt.\u00a0 This formula is commonly referred to as a debt service coverage ratio (DSCR), or the operating cash flow divided by debt service.\u00a0 Banks and other lenders use this tool to determine if a business entity is a good candidate for a loan.\u00a0 On one side of this ratio is the cash that you, the new business owner, has available to pay back a loan in a year. On the other side is the amount of money you\u2019re borrowing per year, plus interest.\u00a0 Banks will review the three (3) most recent Business Tax Returns, the three (3) most recent Profit & Loss Statements, Balance Sheets, and YTD interim P & L\u2019s and Balance Sheets to determine DSCR.\u00a0 Most SBA Preferred Lenders are looking for a minimum DSCR of 1.25 and greater.<\/p>\n
Lenders use another tool, called a debt-to-income ratio (DTI) to determine your personal-suitability for a loan. To determine DTI, total your monthly personal debt payments, including car loans, credit card payments and other debts you might have. Also include your housing expenses, like mortgage payments, property taxes and homeowner\u2019s insurance.\u00a0 Divide your total monthly debt payments by your monthly gross income and then multiply that number (which should be a decimal) by 100 to get a percentage. Most traditional lending institutions look for DTIs no higher than 36 percent.\u00a0 If when calculating your DTI, you find that your income far exceeds your debts, you can expect lenders to add some of this excess income to the available cash of your business. This could be a good thing for businesses whose debt service coverage ratio\u2019s need a boost.<\/p>\n
Lenders look at both your personal and business character when evaluating your strength as a borrower. Most importantly, your business experience \u2014 especially in the industry of the business you\u2019re hoping to fund \u2014 will play a factor in the lender\u2019s determination to make the loan. However, you\u2019re also required to provide information about events in your personal history, which speak to your personal character such as details about child support payments, criminal convictions and recent arrests.<\/p>\n
Your personal property may be used as collateral to secure your loan. For example, the bank may take a lien against your primary residence to use as security if the loan goes into default. However, unlike the other eligibility requirements, if you meet the other relevant loan criteria, it\u2019s possible you may not be denied a loan if you don\u2019t have enough collateral to secure it.<\/p>\n