SBA Loans - San Diego
Lightning Commercial Funding
SBA - Common Questions
by Harlan A. Friedman
Recently, a prospective client asked about financing an upcoming business acquisition. I immediately asked whether the business opportunity also came with real estate or if it was the purchase of a business consisting only of furniture, fixtures and equipment, a work-in-progress and the client list. He said that it was a business acquisition with two five-year lease options
1. Doesn’t the SBA take forever to close transactions?
A professionally prepared 7(a) loan-submission package often funds within 45 to 60 days from its submission to the underwriter. The reason for this closing time frame is likely the level of preparation that goes into packaging the loan. That leads into the next question.
2. What type of information will be required?
A properly prepared package should address the following inquiries:
■ Does the business in question have a positive cash flow that is supported by historical documentation? This can be answered by including the appropriate financial statements and tax returns.
■ Can the business support additional debt?
■ Are the borrowers qualified to run this business? This can be answered by including the current résumé and any additional supporting documentation.
■ Do the prospective purchasers have a marketing and business plan to demonstrate their business knowledge, as well as their plans for repayment and future growth?
■ What are the projected revenues for the new business?
■ What is the current financial situation of the borrowers?
A professionally prepared package that answers the above questions can make the approval — and ultimately the closing — go faster.
3. How much experience should a borrower have?
As a matter of practical application, most business-owners selling their business will offer a few months of training to their successors. They will often extend the training time on a continuing consulting basis if needed. An agreement for training, however, may not be enough to satisfy the lender’s requirements for business experience. If you were the lender, after all, would you lend your hard-earned money to an individual who has little or no experience running a business?
After many years of being an employee, many new clients are so excited about the idea of running their own business that they exaggerate their abilities. The borrowers must take a hard look at themselves, though, and be sure there is a true potential for success in running the new venture.
4. What kind of financial history is required?
Borrowers often wonder why their past financial condition should matter if they have a proper down payment. Again, put on the lender’s hat, and ask yourself: Would you lend money to an individual who has no experience making money in the past?
Lenders want to feel confident that the new owners will be successful. Their primary means of measuring that potential is to review borrowers’ financial history through financial statements, bank accounts and tax returns.
5. Will the assets of the business cover the collateral requirement?
Borrowers tend to believe that their business assets
should be valued for collateral purposes at fair-market value. Nothing is further from the truth. Lenders will treat all collateral as if it was liquidated at an auction and discount it. Typically, your clients will want to know what they must do if securing the business assets with a Uniform Commercial Code 1 filing statement
(which allows the bank to take immediate ownership of the business assets and liquidate them to recoup their investment in the event of default) is not enough security. Do they need to pledge their home? The answer is often yes. This is simply another precautionary step lenders take to ensure they are secured by more than just the assets of the business.
6. If the lender will require my home as collateral, why not just take a home equity line of credit (HELOC)? The SBA has better rates and terms and a longer amortization period than a traditional HELOC, which is a loan using the current equity of one’s home.But there is more to it than that. By going through the SBA process, borrowers will get some of the best due diligence available. Lenders and brokers working on behalf of their clients will delve into every aspect of the new business.