What Documents Do You Need to Pull Together To Prepare for an SBA Loan?

When putting together a loan request package, particularly for the first time, it must be done with great attention to detail. Although your aim is to get a Small Business Administration loan, you have to go through a conventional lender. The Small Business Administration, however, has put together an excellent quick and easy training program to help you with the loan package.

Begin your loan package with a cover letter or an executive summary that clearly details who you are, your business background, the nature of your business, the amount and purpose of the loan, your terms for repayment, how the funds will benefit the business, how you will repay the loan. Simple and direct is the key.

Create a written "picture" of your business because he or she is looking at scores of businesses in your area constantly and cannot be an expert in all of them. Never assume your banker is familiar with your industry. Always spell it out for them. If there are industry-specific words, define them, perhaps in a small glossary.

The description of your business must include the type of organization it is, the date the information is being put together, its location, product or services offered, brief history of the operation, your competition, your customers and your suppliers and vendors.

In this current economic climate, you may be asked for other information as well, so be prepared to furnish it. You may be asked for items such as business leases; franchise agreements, purchase agreements, articles of incorporation, plans, copies of licenses, letter of reference, letters of intent, contracts, partnership agreements.

What is your experience in running this business. Detail it for the bankers.

Once again, before you go into your bank, be prepared to answer the following questions: what is the specific purpose of the loan; what is the loan amount; when and for how long will you need the funds; how will the loan be repaid; what collateral will you put on the table; will you make a personal guaranty to repay the loan. At the heart of all this, you lender wants to know two things about you: will you pay back the money he has lent you and will you pay it back on time?

Here are more details on each section of the loan package:

  • Detail the purpose of the loan. Lenders typically want to lend you money in two areas. They want to advance you working capital or growth capital. An example of working capital would be a farmer going in for a loan to buy seeds and fertilizer. Once he plants, tends, harvests and sells crop, he will pay the bank back. The typical working capital loan is for one year. The growth capital loan is different. Let’s take that farmer again. This time, he wants to buy adjoining land to his farm, maybe more farming equipment so that he can expand the entire business. This type of loan will typically be allowed seven years to repay.
  • How much money do you need? When you visit the bank, you will be asked how much money do you need? Your response should never be "How much can I get?" That makes bankers nervous. Have a firm idea of how much you need and be ready to detail why you need that amount. Bankers always want you to have skin in the game. Entrepreneurs have on occasion been fond of using 100% OPM (other people’s money) to finance the business.
  • For how long do you need the loan? The lender will want to know how long you need the money and as mentioned above the working capital loans are short-term loans and the growth capital loans are longer. Sometimes loans will be tied to the life of an asset.
  • Can you handle the debt service and repayment? How the loan will be repaid is a critical issue for the lender. He will want to look closely at what you are doing, what you are planning to ensure that you can handle both the debt service for the loan as well as the loan repayment.
  • Where is the collateral? What collateral will you use for the loan? This is a sticky point, particularly given the make up of many businesses today. For the farmer mentioned above, if he is expanding his farm and wants to buy more land and equipment, he can put those two items up as collateral...or his whole farm. If he doesn’t pay the bank, the bank keeps the land and equipment and then sells it at an auction. But what about the company, and we have seen many, that consists of one person, a laptop and a fabulous idea? What can they put up for collateral? Their first born, perhaps? (Naturally, there are other types of lenders and investors for this type of business such as angle investors, but right now we are focused on that banker.)
  • Will you give a personal guaranty to repay the money?Even if you are incorporated in business, the lender will want a personal guaranty from you. So in addition to furnishing the bank with financial statements for the business, you will need to reveal personal financial information as well. One small business person we recently interviewed compared getting a loan today in terms of getting a particularly intrusive physical exam!
  • Loan Presentation Package

    When you put together your loan presentation package, you need to include that statement of purpose mentioned above, excerpts from your business plan, your business’ financial statements for the past three years, which needs to include a cash flow statement, income statements, balance sheet and, as mentioned, personal financial statement. (The small business person we mentioned above, because his most recent financial statement was less than stellar, also included a statement about his time in business and the amount of money he has deposited in the bank each year of the past 20 years. It is just a little reminder to the bank.)

    In the statement about the purpose of the loan, you need to go into as much detail as possible. Not only that, you need to be able to expand verbally on what you have written to go into greater detail and really pain a positive picture of what you are doing. Besides this narrative of what the loan will do for the business, you need to include a lot of detail about your own investment in the business. Play up the sweat equity angle as well. Sometimes it is totally ignored, sometimes not. In any case, it is never a negative.

    We cannot emphasize enough the importance of a business plan and this can be a problem. At a meeting we attended, we were once told the definition of an entrepreneur. It is the man or women who when their kid gets a model airplane on Christmas will begin to put it together and only read the directions when they get stuck. Many entrepreneurs operate their businesses the same way. All of their ideas are in their heads and they really do make "gut" decisions. Unfortunately the banker, who would probably carefully study the airplane assembly directions for several days before attempting to put it together, he or she wants the facts and that requires a real business plan spelled out on paper.

    The business plan excerpts that you need to show the banker include:

    • Business description and vision.
    • Market definition, analysis and sales.
    • Products and services.
    • Organization and management.

    The financial statements section of the presentation needs to include cash flow statement, income statement, balance sheet and personal financial statement. The cash flow statement is a monthly statement of cash on hand, incoming cash and expenses. This is used by the lender to determine projected working capital availability and shortages.

    The income statement is basically Revenue-Expenses = Profit/Loss. This measures how the business has performed over a specific period of time.

    The balance sheet is Assets-Liability = Net Worth. This measures the value of the business at a point in time.

    The personal financial statement is similar to the business’ balance sheet but it is Personal Assets-Debts=Net Worth. Once again, it is a snapshot of your finances as a specific point in time.

    When you meet with the banker to go over the loan package, make sure you understand it well so that you can talk about any section in great depth that he or she wishes to discuss without fumbling through a lot of papers looking for your notes. Be careful to proof read the material carefully. Even though yours is not a writing and editing business, the bankers will pick up a sense of how you handle quality at your firm. If the package is sloppy with misspellings, it will be a big negative. The lender you are meeting with will go before a loan committee. He or she needs to be excited or at least well informed about what you do and how you will pay back the money so you must "tell a story" and you must “weave a great theme.” Whether you get the loan or not, always evaluate how you did to improve next time.

    As mentioned above, the lender really wants to know two things about you: are you the type of person who will pay back the money and pay it back on time? For that reason, they will look at your character, capacity to repay and the collateral or skin you put into the deal.

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