Hosted by The Capital Masters, Rich Russakoff and Bob Hernandez, our recent webinar in association with Sutton Land of Texas, How to Get an SBA Loan, was in high demand. If you weren’t able to get a seat in time, don’t worry you can watch the full session here:
Today’s post is taken from this webinar and covers what an SBA loan is and how to get one.
What Is An SBA Loan
Run by the Small Business Administration, an SBA loan is available to small businesses to help them access capital. The reason we’re looking at SBA loans today is because in the current environment, the SBA loan facilities are going to provide the most flexibility. SBA doesn’t loan money directly to small business owners, instead they set guidelines for loans and reduce the risk for lenders by guaranteeing up to 80% of the loan. So it makes it possible for banks to do deals that they otherwise would not be entirely comfortable with. SBA loans also focus mainly on cash flow, whereas conventional bank loans look at combined cash flow, guarantor cash flow, and generally have a shorter term.
If it’s a real estate loan, there’s no better way to go than an SBA. You can either apply for the traditional loan 7 or 8, or the 504. On the 504 loan, you get a blended rate because you’re dealing with a debenture as well as a bank. With a 7 or 8, it’s going to be one facility, but it’s going to encompass all of the fees and expenses. Keep in mind though that if you have a real estate deal, it’s extremely important to have a title insurance company that can address all of the potential risk with a sense of urgency. Make sure it’s a company who knows all of the legal regulations, and all the real estate processes.
What Will The Bank Look At When I’m Applying For An SBA Loan?
They will look at the historical trends of your business. Being that an SBA loan is a government guaranteed loan, tax returns or government documents are what they’re going to want to see. So that’s step one, you have to make sure you have your returns.
They will then run the proposed loan amount that you’re looking for against the cash flow from those tax returns. You may be familiar with the term EBITDA (earnings before interest, taxes, depreciation & amortization). They’ll take a simple ratio of your EBITDA to the proposed principal and interest payment and see if that meets bottom line metrics of what the bank is looking for, which is typically 125%.
They’ll then look at credit scores of any guarantors, as well as how much money the guarantors have in the bank. Do they have enough to make the down payment? Do they have enough reserves, which today in the COVID world is a big concern for a lot of banks. Some lenders across the US are looking at anywhere from 10-20% in additional reserves to the down payment.
How Do I Approach A Bank?
The first thing to check is that you’re speaking to the gatekeeper, aka the Business Development Loan Officer. You should then ask ‘does your back office (credit operations & underwriting team) have a sense of urgency? Once my deal gets past a term sheet and comes into the bank, will they perform at a high level to get my deal processed?’
Another important question is what is their closing department like? Can they get this deal done? Can they manage the appraisers, the lawyers, the insurance agents, if there’s construction, the GCs, can they handle all that? To have experienced back office operations is key – and not every bank does. Do your homework.
When approaching banks for clients we always look at at least 10 banks and begin with ‘Mr Hernandez, my name is Rich Russakoff, I work with The Capital Masters and we’re representing a client in your area. This is the industry the client is in. This is the revenue that they do. This is the money they’re bringing to the bottom of the line. We’re looking for an SBA loan of $X, would this be something your bank would be interested in considering?’ And then if it looks good, we’ll set up an appointment with them and say, ‘we’re going to need 1-2 hours of your time. We have a complete package to go through with you, you’ll meet the client and we’ll answer your questions.’
One of the main things we always say to clients when approaching a bank for a loan is you need to have your ducks in a row. Blue sky, pretty pictures and ideas don’t repay debt. Hard, verifiable data, is what you need to present to the bank to show that you’re going to be able to repay your loan.
For more information on how you can build a stand out loan package, check out our D.I.Y Loan Package bundle available here.