Here is a current article by Mike Clausen, Contributing Writer, at the Atlanta Business Chronicle. We discuss this in great detail in class and Mike makes some great points. Veterans must know what information lenders require for a traditional bank loan even when it is guaranteed by the SBA.
The key is doing your homework and being prepared.
Mike writes---Small business owners who are thinking of purchasing or renovating commercial real estate, or purchasing equipment to grow or expand their businesses, will likely consider the U.S. Small Business Administration’s (SBA) 504 Loan Program.
In 2014, my co-founder Billy Polson and I decided to expand our 9,000-square-foot fitness performance center, DIAKADI Fitness Performance Life, and add another 2,400 square feet on a new floor within our current building.
While we have a positive cash flow, we knew that extra funding would be needed.
After researching the interest rates for loans, as well as equipment leases, we decided that an SBA loan would be the most optimal loan type for our needs.
We had secured an SBA loan in 2003 when we first opened, so we thought it would be a very similar process. Much to our surprise, we soon realized things have changed dramatically since then.
Times have changed
In 2003, when we originally applied for our first SBA loan, the world of banking and loans was incredibly different, as was San Francisco. Back then, the more casual world of money made it much easier for us to acquire a loan.
Even with zero collateral and no business experience, the banks were willing to take a chance on us, as was one of our clients who co-signed the loan for us — with her home as our collateral. This would probably be rare now.
Even though DIAKADI is an established business that has been showing consistent income flow for the past 10 years, we still had some major hoops to jump through in order to secure a new SBA Loan.
Know what’s required before applying
The paperwork that we filled out was pretty straightforward and included a personal financial statement, along with a management resume for two owners. We were required to show three years of business taxes and have an appraisal of our homes (which needed to be above a certain value). We also needed hazard insurance for both the gym and our homes.
Instead of having a questionnaire based on information of our business, as we had to fill out in 2003, this time around we had to show the business license, sales tax form, personal trainer certifications and liability insurance. Most of the paperwork in 2015 was similar to forms from 2003, but there was much more scrutiny in the review process. The loan processor at our bank consistently requested more documentation and detail on our forms, which added on to the time it took to process the loan.
Don’t expect a quick turnaround
When you apply for an SBA Loan, make sure you are prepared for a lengthy process.
We started our application process in December 2014 and it wasn’t until the middle of April 2015 that we received our first payment.
Overall, the entire process took over four months. It started out simply and quickly, but we were eventually in contact with four different representatives from the bank (the VP of the lending division, the business development officer, our loan officer and a construction loan officer), all asking for different deliverables.
Being incredibly organized with all of your financials and business documentation will help you prepare for this, as you must show all cancelled checks, invoices and credit card statements for purchases. You are not allowed to use cash payments without sufficient evidence of what you bought. All of our equity injections had to fit within the categories of our request, which included: equipment, leasehold improvements, fixtures and working capital.
That level of organization doesn’t only extend to the date you begin the loan process — it’s important to be organized with all of the expenditures you make related to your loan and leading up to it. As in 2003, businesses must put in 25 percent of their requested amount as an owner equity injection. Luckily, we were able to go back as far as a year and show any purchases, upgrades and payments that were in some way linked to the expansion project. This was a huge help, as we were asking for a large sum, and the down payment would have wiped out any savings we had accrued.
This large team coordination led to multiple ball drops and lags in the process. As a renter, we needed several forms signed by our landlord. We needed forms sent back from contractors and permits signed off. It takes some intense project management on the applicant’s part to really stay on the bankers and properly coordinate every person involved.
Before starting the application process, I would recommend finding out from your bank exactly what is needed of you for the loan amount you’re requesting, so that you can submit everything as soon as it’s needed. It was a slow process from the initial acceptance of our loan to the first check, but as long as you’re willing to put the time in, the end result and good interest rate is highly beneficial.