One question I often get asked when talking to potential borrowers about SBA 7(a) working capital loans is, “How do banks decide to approve a loan?” There are a lot of factors that go into approval decisions:
- credit score
- use of proceeds
- industry type
These things are mitigating factors that can help a bank be more comfortable with lending a business money, but the main thing lenders look at when deciding to approve an SBA loan is your business financials to determine if your company makes more money than it costs to service your potential loan.
SBA lenders will look at your business tax returns and run a cash flow analysis on your most recent tax filings to determine if you make more money then the loan costs on an annual basis. To run a cashflow analysis, lenders calculate your EBITDA (earnings before interest, taxes, depreciation, and amortization) to get an accurate idea of how much cash you have available on an annual basis to service any potential new debt. If your EBITDA comes out 15%- 25% greater than the annual cost of the loan, the likelihood of approval is very high. Below is an example of a tax return that we’ll run a cash flow analysis on:
As you can see from this example, the company has a total annual revenue of $500,000 (line 1a) and after all expenses and deductions, shows a profit of $10,000 (line 21). The main deductions that lenders will add back into the net income are interest (line 13) and depreciation (line 14). Other deductions (line 19) will require an additional statement to be added to the tax returns to detail the specific deductions and if the statement shows any of that as amortization, that can be added back as well. If we assume that the “other deductions” doesn’t include any amortization, this company has an EBITDA of $16,000.
If your potential loan payments total up roughly $12,000- $14,000 annually, your loan would technically meet the cash flow requirements for most SBA lenders. Obviously, this isn’t the only basis lenders use to issue loans to businesses but if your most recent business tax filing shows a profitable EBITDA, an SBA loan is a great option worth exploring. If your business doesn’t have a positive EBITDA, there are plenty of other non-SBA funding options that use different underwriting tactics to get your business the capital you need. Give us a call and we can help you run a cash flow analysis to determine what funding options could be available to your business.