A few things to consider in planning for your SBA loan.

Assume that you have a small business that has been opened for several years, or you plan to open a new business in the ear future. You anticipate that you will need some money to help operate or to start-up your business. You might not need it now; perhaps some time in the near future. What can you do to prepare yourself for the lending process? Here are some key points that a banker will generally focus on with respect to evaluating your project to determine whether or not he/she will lend you the money. In effect, what does a banker look for in a loan package, and how can a prospective borrower prepare for the process in such a way as to increase his chances of getting a loan? The following are a few areas on which to place significant focus in advance of meeting with the banker.

Business Plan

The business plan is a road map that should help your enterprise navigate through economic uncertainty and reach critical milestones that eventually will lead to the attainment of business goals and success. This success is usually reflected in a certain level of profitability and positive cash flow from operations. Your business plan should be viable in that there is a strong probability that the goals will be reached. In effect, your plan is not all blue skies, but instead is reality based with solid financial assumptions underpinning the structure of the plan. Individuals seeking SBA loans can get help with their business plans from many sources. The Service Corps of Retired Executives (SCORE) and the Small Business Development Centers (SBDC) host workshops on business planning. The SBA's Business Information Center (BIC) can also help entrepreneurs with certain business planning functions. Other community-based entities, often working in partnership with the SBA, offer Entrepreneurial Training Programs (ETP). The ETP is a course of business study that usually runs 8 to 11 weeks (one night a week) and introduces the entrepreneur to the various business disciplines that support an efficiently run small business. By the time the ETP is completed the entrepreneur should have assembled the nucleus of a business plan that needs only a little fine-tuning to become a workable business model. Business Planning is such a powerful resource, that both start-up and existing businesses should take advantage of this business management tool. If maior corporations set aside the time to prepare business plans, does it not make sense for small business to do the same?

Good Character / Management

These two elements often go hand in glove in the eyes of the banker and are intertwined in the evaluation process by the bank. Good Character means that the prospective borrower has behaved responsibly in the past. This is reflected in his credit report by virtue of a strong FICO score. In effect, the individual has consistently paid as he agreed to when he originally incurred the debt. The banker can find some comfort in the fact that patterns of positive behavior related to consumer credit will most likely be repeated on the business side. Thus the SBA loan will most likely be repaid to the bank. Recognition of fiduciary responsibilities on the part of the entrepreneur is also a sound attribute of a strong business manager.

Good management also connotes that the business team possesses the technical know-how to successfully run the business that seeks the loan. The profiles of the team members should be shown in the "Management" section of the plan. If the object of the funding is to open a French restaurant and your chef is a Cordon Bleu graduate, spell this out in the plan. It adds credibility to your project. In short the bank wants to know that you have the horse power to achieve what you claim in the plan. If you do attain what was presented, then the goals will be reached and the bank will be repaid.

If you have several derogatory items on your credit report address them before you meet with a banker. Find out as much as possible about your credit profile well in advance of when you enter the capital access process. This will give you ample time to remedy some or all of your credit blemishes. If your deal is going to be a partnership, each prospective partner should undergo the same credit work-up and this should include contacting one or more of the various credit agencies and requesting copies of their reports. As for the derogatory credit items, there are entities that specialize in credit repair and are available to help, either pro bono or for a modest fee. The SBDC staff can offer assistance in contacting these credit agencies or in locating a credit repair facilitator. Equity / Investment

The bank will not assume all the risk for your deal. You will have to inject a certain amount of investment, usually a percent of the total value of the project. Start-up entrepreneurs will most likely have to put in approximately a third of the deal. For example, if the total funds needed for the project are $100,000, then the borrower will inject cash of $33,000 and the remaining $67,000 will be provided by the bank via the proceeds of an SBA loan. This injection by the borrower is normally in the form of cash and an account in a financial institution should be opened and funded accordingly. In this way the prospective banker can look at the latest monthly balance and easily see that the borrower has the injection already accounted for and set aside

Collateral

With respect to SBA loans, the bank has a fiduciary responsibility to its stake-holders to insure that the loan is fully collateralized in the event that something goes wrong with the business. Assume a loan of $50,000 to purchase new equipment for a bakery to operate more efficiently. Under normal circumstances a lien on $50,000 worth of equipment should be adequate collateral for a $50,000 loan. However, in a crisis situation in a poor economic climate, the liquidation of this same equipment might bring only a small portion of the purchased value--say 20 cents on the dollar. Thus, the bank, at the point of approving the loan, will seek additional assets of the borrower in an attempt to maximize collateral coverage. Accordingly, the borrower will be asked to pledge his home or condo in order to mitigate the bank's risk and allow the bank to fund the loan. If an individual does not own any real estate, the bank can still make the loan, provided that the remaining elements of the deal are strong and meet or exceed various lending criteria.

Repayment Ability

SBA loans are to be repaid from the proceeds of the business. When this fact is confirmed by an analysis of the financial statements that are an integral part of a loan package, it is said that the project "cash flows". In effect, the business will be able to generate a large enough revenue base to cover all fixed and variable expenses and to have ample profit left over to easily pay back the loan.

Other

There are other elements of a loan that the bank will require or the loan officer will touch on during the loan process. Some of these you might already have in your personal files and you will need only assemble and make copies for the loan package. When you decide to enter the loan process, please keep in mind that the speed of the processing often depends on how fast the borrower supplies the necessary information to the bank. Never assume that the bank will continue processing the loan when you have failed to provide requested information. Some lenders prefer to wait until the package is complete before commencing with their review and analysis.

To find out more about financing or how you can actually access the SBA loan program, please call one of the following Economic Development Specialists at the SBA Los Angeles District Office: Sandra Buck [phone], Barbara Madel (818) 552- 3314, Mary Guerrero [phone], Natalie Orta [phone] or Carina Lozano (818) 552- 3209.