Q&A with Tricia Hoffman, an experienced SBA lending professional
- Briefly tell us a little bit about your lending institution.
Gulf Coast Small Business Lending (a division of Gulf Coast Bank & Trust Co.) is a nationwide SBA Preferred Lender that thinks logically and moves quickly. We provide great terms and competitive rates to borrowers across a wide range of industries on loans up to $10,000,000. We are actively lending nationwide and our “sweet spot” for SBA loans are the deals between $400,000 and $2,000,000. For more information about the various industries and uses of SBA loan proceeds that we offer, visit the SBA Loans section of our website.
- What are some of the key attributes you look for when assessing an SBA loan request?
For business acquisition transactions we have found that transferable and relevant management experience is absolutely critical. We also look at the buyer’s personal credit and the cash flow of the business (using standard addbacks). Of course, this isn’t everything that we analyze but experience, personal credit, and cash flow are typically the top 3 when assessing an SBA loan request.
- What are the most common reasons for an SBA loan to be declined?
SBA loans are denied for a whole host of reasons but the most common are: 1) the business and/or the buyer are not eligible for SBA financing; 2) buyers with insufficient management experience, poor personal credit histories; and/or 3) inability to demonstrate adequate cash flow (with standard addbacks) to service the SBA debt obligations of the business. I always try to work with borrowers to overcome any obstacles, if at all possible. For example, sometimes we can try to structure the request differently. This might mean additional down payment, adding a partner or guarantor, or supplementing the request with some or increased seller financing. It is very helpful to complete an assessment as early in the process as possible and to talk through details with an experienced SBA lender so that if there are issues to overcome, the borrower can get a head start. Knowing where you stand is very helpful in the buying and negotiating process! Sellers always like to hear that you are working with an experienced SBA lender.
- Would you rather finance a business with heavy hard assets, or a business that demonstrates proven strong cash flow but has significant “blue sky”?
First, I’ll define “blue sky” for those who might not be familiar with that term. Businesses with significant goodwill on the books (and, therefore, limited hard assets) are said to have significant “blue sky”. Hard assets include such things as equipment and real estate that can easily be appraised and used as collateral.
To answer the question, I have to say that both collateral & cash flow would be nice! However, if we had to pick one, Gulf Coast Small Business Lending definitely relies much more heavily on business cash flow. Unlike some lenders we are very comfortable considering transactions with large goodwill (“blue sky”) components. Question 6 (below) discusses our approach in more detail.
- What are some costs that are common with an SBA loan?
SBA loans include all of the standard costs associated with any commercial term loan (so collateral appraisals, business valuations, legal fees, recording fees, and the like). Although SBA loans are not assessed “points”, there is an SBA Guarantee Fee that is comparable to “points”. Borrowers should be provided with an estimate of closing costs during the underwriting and/or closing process. Note that in many cases the closing costs can be paid with loan funds which reduces the borrower up front, out-of-pocket costs. This is quite common with SBA loans.
- Some lenders refer to “cash flow lending” as “air ball lending” and tend to steer buyers away from businesses with lots of blue sky. What is Gulf Coast Small Business Lending’s policy regarding blue sky?
As previously noted, we commonly refer to the “blue sky” component of the deal as “goodwill”. Gulf Coast Small Business Lending is definitely a cash flow lender. When a transaction has good personal credit, post-closing liquidity, and relevant industry experience along with excellent business cash flow (with standard addbacks and an adjustment of appropriate owner draw) we put no limit on the amount of goodwill that we will consider financing with an SBA loan. We would rather rely on excellent cash flow (which, let’s be frank, is what really repays loans) than collateral. It is our greatest hope that the excellent cash flow continues, the borrower pays the loan as agreed, and we never need to depend on the business assets to pay off our loan! There are many great businesses out there that don’t have lots of hard assets, yet they generate healthy cash flow.
- You have mentioned “standard addbacks” several times. What exactly are “standard addbacks”?
Standard addbacks in a business acquisition transaction would include such items as: interest payments, depreciation, amortization, seller’s compensation, and other expenses that will not continue under new ownership. Of course, we need to factor in appropriate compensation for the buyer since we’re sure you want to be paid for all your hard work! That’s one reason we look at the buyer’s personal financial situation – we need to determine how much compensation they will need to earn from the business they are buying.
This has been a quick Q&A covering some of the most frequently asked questions about SBA loans and business acquisition transactions. Of course, it is impossible to fit all relevant information into one short article so we definitely encourage you to reach out and discuss any other questions you might have with our experienced team of SBA lending professionals. Their contact information can be found here: Our People. In addition, many other frequently asked questions are addressed on our website here: https://gulfcoastsba.com/faqs/.
Note: Portions of this Q&A were previously published in The Firm’s Deal Review Magazine.
Products and services offered by Gulf Coast Small Business Lending, a division of Gulf Coast Bank & Trust Co. Nothing herein shall be construed as a commitment to lend. All loans are subject to credit and collateral approval. Additional terms, restrictions and limitations may apply. Loans are only available to U.S. citizens and residents. Member FDIC – Equal Housing Lender.