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Laurie Owen: Loan Lesson

SBA-backed loans let you keep working capital in reserve for cash flow, says Laurie Owen.

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COMPLETE THIS PHRASE: “I’m from the government and I’ve come to…”

If you finished it with “lend you money,” you’d be in the minority, but you’d be right on the money. I’ve been singing the praises of Small Business Administration-backed loans for a while now because they offer owners the ability to buy and develop their own locations and equipment with little down and the payments spread out over a much longer period.

This means you get to keep valuable working capital in the bank in reserve for cash-flow needs while keeping your monthly payments low.

Let me give you an example of an actual deal involving the purchase and remodel of an existing property. In this example, the borrower put down 10 percent of the project costs, but based on the borrower’s business plan, recouped that down payment through the funding of working capital at the completion of the construction process. This sample in the “Money Math” chart below is courtesy of Paul Jokerst, a loan officer with CIT Small Business Lending.

The loan was amortized for 23 years, with three months of no payments during construction (the interest accrued during those three months was rolled into loan proceeds). As noted, upon the completion of the project, the borrower actually had $3,900 more in cash than when the project started.

Compare this scenario with a traditional loan that might require as much as 25 percent down with a shorter term of 10 years. In that case, the borrower would have been required to provide a down payment of almost $400,000 towards the project and then subsequently be locked into higher monthly payments.

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To qualify for an SBA-backed loan like this, you’ll need to:

  • Show on-site management of an owner with at least 20 percent ownership.
  • Provide a full guaranty of all owners with 20 percent or more ownership.
  • Have good credit history.
  • Show a business plan focused on a new location.
  • Provide a one-year month-by-month cash-flow projection.
  • Show a debt service coverage of at least 1.25 times the new debt payments. In other words, if your new debt payments will be $7,500 per month, you’ll need to show that you have at least $9,375 in cash flow to pay the principal and interest each month.
  • Provide at least three years of federal tax returns, year-to-date statements and current accounts payable and receivable statements.

Don’t borrow for the sake of borrowing and don’t expand because everyone else is doing it. But if you’ve done your homework and found the right site, take a look at these loans, especially if you’d like to keep a hold of your working capital. CIT is a nationally lending source, meaning they can lend to any qualified business in the United States. You might also find a local bank that specializes in SBA-backed loans.

This story is from the April 2008 edition of INSTORE.

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