How to secure an SBA loan.

• Author: McGrew, Bill
• Position: Small Business Administration

Many small business people owe much of their success to loans granted by the Small Business Administration (SBA) for the purchase, creation or expansion of a business. To increase the chances of getting an SBA loan, you must think like a banker.

Bankers know the business climate is in a constant state of flux. Recognize this. Is the new business structured to weather inevitable storms? A business with strong equity can operate in recessionary periods because other company capital can be drawn on to meet cash flow problems that may arise from falling revenues or increased expenses.

As a result, businesses with strong equity positions have a much easier time adjusting to economic conditions than those with owners who believe in pulling profits out of the business.

New business owners should also be prepared to answer three important questions about an acquisition: "How much is the purchase price?" "How much will be invested in the form of cash or the equivalent?" And finally, "How will the business be capitalized in terms of cash?"

As a rule of thumb, bankers like to see at least 25 percent of the purchase price coming from the borrower's pocket. The more money a buyer is willing to commit toward the purchase of the new business venture, the more favorably a banker considers the credit.

The key to running a successful small business is to get it paid for. Capitalize a business as much as possible in the beginning. Then, when profits are made, apply them toward reduction of the debt obligation and pay cash for expansion.

The more capitalization, the more benefit. A business owner is in a better position to meet operating expenses, and as a result, the chances of the business surviving during its most crucial period -- the first three years -- increases. Once a business is well capitalized and profit margins are good, the owner can begin drawing from equity.

Bankers look for borrowers who have the same philosophy in running their small businesses as the bankers do their banks: well capitalized and not run on a shoestring.

After considering these topics, a potential buyer should begin collecting the following information -- depending upon the purpose of the loan -- and turn it into a written proposal.

Purchasing An Existing Business

When a buyer purchases an existing business, the banker requires a current personal financial statement; a resume; two to three years of personal tax...