With Special Thanks to Jay Bloom
Small Business Administration (SBA) loans have steadily increased in recent years, and it's easy to understand why. With funding available from as little as $500 to as much as $5.5 million, an SBA loan can be just what you need to launch a startup or take a growing business to the next level.
Could you get an SBA loan? Do you even need one? To find out, consult a bookkeeper.
Time for a Credit Check
The SBA doesn't make loans — it merely guarantees them (up to 85%). That gives the lender more flexibility with its credit requirements, which makes SBA-backed loans ideal for early-stage companies that don't have sufficient collateral or profitability track record for a traditional bank loan.
Still, you'll need credit for an SBA loan. A bookkeeper can help you explore the five C's of your small business' credit: capacity, capital, condition of the business, character and collateral. Of these, capacity is probably the most important. That's how the lender determines if the business has the ability to repay the loan, or even the interest.
Red Tape Can Reveal Red Flags
SBA loans generally require more paperwork than traditional loans. It helps to think of the loan application process not as a burden but as a comprehensive financial checkup. Any lending institution will require you to provide reliable financial statements: an income statement, a balance sheet and a cash flow statement. If you can't produce those statements — and a lot of companies can't — that's a red flag from an underwriting standpoint. It's a sign that the company isn't mature enough yet or doesn't have all its ducks in a row.
Generally, the lender also likes to look at a business’s working capital, which includes accounts receivables, inventory and accounts payables. They want to see how healthy your invoicing is and how old your receivables are. If everything is 30 to 45 days or less, that's a good sign. If you have a lot of receivables that are 90+ days, that's a sign that your clients aren't paying you for your product or service. That's another red flag. They will also want to look at your inventory: how much you are carrying and how quickly it turns.
With regard to accounts payable, the lender will want to be sure you're meeting your obligations. If you owe $10,000 in bills and $9,000 of that is in the 90+ day bucket, that is a huge red flag from the bank's standpoint. If they see you're not paying your bills on time, why would they think you would make your loan repayments on time?
You Might Be in Better Shape than You Thought
The good news for some small businesses is that many of these issues are simple maintenance problems. The owner gets so focused on sales that he or she falls behind on invoicing or collections, for instance.