December 14, 2019
Going through the process of applying for a business loan is like struggling through all the roadblocks while running through a maze; just that in financing it’s like running through that maze to the closing table. What you experience through the process is months of balancing between perseverance, patience, frustration, and chaos while wondering if you will ever see the closing table.And when you make it to the closing table, after “signing your life away,” subconsciously you’ll probably hope of never having to go through all that ever again. Fair enough!
Keep in mind, people don’t seem to understand that banks have to measure many types of risks to determine loan approvals, and when the conventional door shuts on them, just like the dead-end in a maze, they have to figure another route, the alternative financing route — one of which is the Small Business Administration. Additionally, people should learn from the past and figure how to become bankable for the future.
So now what? When a loan is closed, that road has ended; where does the business go from here? Should they go back to not showing profits and saving on taxes, since now they have obtained the loan? Should they go on a spending spree and not worry about tomorrow?
Is anyone watching over their shoulder making sure that the business owners have a positive vision, responsibility, and accountability to keep the business financially sound? This is where the management shouldn’t get complacent. The business cannot turn to old habits of not controlling operating expenses and showing negative cash flow.
As a Certified SBA Consultant, we discuss some of the problems business owners can run into after that SBA loan is closed. But before that, allow me to give you an illustration of what I mean.
Imagine that you have been preparing to learn how to paraglide. The day arrives and you go to the edge of the cliff, where you are given all of the equipment and gear to wear. You know you are going to take the plunge and glide into the beauty of high altitudes above mountains and oceans after all the preparation of reading and practicing an artificial stimulation.
Do you have the right attitude? Do you have all that you need to make sure you don’t crash-land? This is what lending is about.
Below are some of the issues that one needs to bear in mind:
Are sales going up? Get a good sales team. Hire the right people to learn the value of your product or service. Once you have the right team, set monitoring systems and have end-of-week meetings to assess how they are doing and if they need help or improvement. Make sure prospecting is happening because only when that is up can you close deals or make a transaction. Do not set goals that are too high for your short term because that will bring morale down.
Difference between cost of goods sold & operating costs: Many people get this confused. There is always a cost for the owner to even be in business, which is very different from the operational expenses they have to incur to maintain the running of the business. For example, in a restaurant one cannot do without a chef, but the owner can be the host to control an additional employee cost. The chef becomes the cost of being in business, therefore Cost of Goods Sold. In a school, basic teachers and perhaps the ongoing service maintenance cost of the software can be classified as cost of goods sold, while security and janitorial can be classified as an operating expense. One more, in a hotel, room cleaning might be a cost of being in business while the number of people at the front desk can be a controllable operating expense.
What debt-to-income means: If you have $100 in expenses, most lenders would like to see you have $125 in income, with $25 as a buffer. Some banks may require a higher buffer depending on how risky that industry is, the type of bank/lender, or even the economy. My interpretation of this on a simpler level is that one day if you have $10 left in your pocket and need to buy dinner, plus $2 to take a bus home, you can only buy something for $8. So if a pizza costs $10, you don’t have the ability to buy that pizza, so you may have to settle for an $8 meal, leaving a buffer of $2 to get home. The financing side’s perspective is that if you don’t have enough cash flow on business returns, you will not be able to make the loan payments.
The lender is looking over your business every month until you pay them off: Do not think now that the loan is closed, the party is over. On the contrary, now the business is all the more accountable because it has somebody else’s money. Keep in mind that the bank will ask for financials every 12 months to make sure your business is healthy and you demonstrate the ability to sustain the debt at all times. That means the business is maintaining a balance between increasing sales and controlled expenses. If the bank feels that the balance is off, it can result in an increase of internal risk ratings, which can also lead to an unfortunate loan recall. You don’t want to be there.
Get the right team to invest in the business: It’s about time to “departmentalize,” which means hire more but hire smart when you are thinking of expanding. It is a known challenge in the professional world to find good people, but that’s a good problem to have, and it’s equally important to have that vision to go after it. It’s a milestone of your business that you will remember once the business is successful. Remember: you yourself cannot do it all, you need a qualified team to share responsibilities.
Whatever happens, make payments on time before the 10th of the month: You may have been through a lot to get the loan, which is a privilege, not a right. Use that privilege well. Make sure you are always making payments on time. SBA allows a very thin window for missed payments, and once you miss two payments in a row, it’s time for an audit by the SBA.
When that happens, the bank is bound to bring you in for answers. SBA loans are federal loan programs, so keep in mind that you cannot take it lightly. Enjoy the privilege, pay on time, and be bankable!