Cash Flow, Credit, and Collateral – Oh My! How Each Influences your SBA Loan Approval

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Applying for an SBA loan requires some planning. Assembling all your paperwork, writing your business plan, and other key steps.

But the planning process also extends beyond information gathering. It’s vital that you understand the key success factors that go into a winning loan application and what you can do to prepare for and help boost these, often well in advance of meeting with a lender. Specifically improving cash flow, building your creditworthiness, and understanding the role played by collateral. Here’s what you need to know:

Cash Flow is King

Cash flow is key to any successful business. Having sufficient cash on hand, however profitable you are, ensures you can pay your employees and bills on time, while leaving sufficient cash to inject back into your business.

But cash flow is also one of the key financial barometers that any SBA lender will review – in detail. That’s because cash flow or lack thereof, is a key indicator of risk. Even though SBA loan programs are backed by a guarantee from the government (meaning the government will repay a portion of the loan to your lender, should you default on payments), you must be able to demonstrate a solid plan and cash foundation for on-time repayments. In fact, cash flow is a primary consideration in the SBA loan decision process.

As such, any SBA loan application must be supported by a cash flow forecast for the next 12 months. In some cases, you may also need to provide cash flow statements (which track when cash entered and exited your business in the past) for one to two years. This helps lenders see how you’ve managed cash in the past, and informs the accuracy of your predictions for the future.

Don’t stop there. Use your business plan (another critical part of your loan application) to explain your plans for loan repayment, whether it be from increased revenues, profits, or as a result of debt refinancing, and so on.

Credit is Critical

Another factor that can put you in low-risk borrower territory and increase your chances of SBA loan approval is your personal and business creditworthiness. All SBA loan applications up to and including $350,000 are screened for a credit score.

To do this, SBA uses the FICO® Small Business Scoring Service, which draws on multiple personal and business credit data sources, to expedite credit decisions. The minimum score to pass this screening process is currently in the 140-160 range. And while your score may not preclude you from loan approval, the stronger your score the greater your chances of securing attractive low interest rates and other favorable terms offered under SBA’s loan programs.

To improve your chances of getting an SBA loan, review and work to improve both your personal credit score and work on establishing and building your business credit file. This can take some time and involves building good credit history with suppliers and vendors, as well as other factors. Read more about How to Boost and Manage your Credit Score.

Collateral Still Matters

Collateral is the additional security that lenders traditionally look for to assure them of a second source of repayment, should you default on your loan. Collateral can include business as well as personal assets such as property, accounts receivable, and even inventory – all of which can be sold to the lender as cash.

So how does collateral come into play with an SBA loan? Aren’t SBA loans collateral-free?

Not always. SBA loan requirements generally state that adequate collateral is required as security on an SBA loan. And putting up collateral can increase your chances of getting a loan. However, insufficient collateral can be offset by other factors such as strong financials (cash flow, credit score, balance sheet, and profits). In the words of the SBA, “the SBA won’t decline a loan when inadequacy of collateral is the only unfavorable factor”.

Regardless of collateral requirements, all owners with a 20% or more stake in the business or hold a key management position must also provide personal guarantees.

Learn More

To understand where your business stand in terms of cash flow, credit and collateral requirements, consult your accountant and your First Bank SBA expert. Both can help you assess and prepare your business for the loan application process and long-term fiscal health.

Link to: 5 Attributes of a Winning SBA Loan Application