Unsecured SBA Loans: Myth or Reality?
The Small Business Administration (SBA) does permit unsecured SBA loans in very specific situations. These business acquisition SBA loans are typically secured loans. In the case of a business opportunity be acquired, the business assets provide the collateral for the loan. The lender may require additional collateral such as the borrower’s personal residence or investment real estate.
For some, the idea of risking their personal collateral is unappealing particularly when the borrower is paying for the SBA guarantee as part of their loan costs. Where a borrower declines collateralizing the loan with their personal real estate, they may face a higher interest rate or more restrictive terms and conditions on their SBA loan if the lender does not flat out refuse to lend.
Unsecured SBA Loan
An SBA applicant may be able to avoid collateralizing their SBA loan beyond the business asset of the business being acquired. To get this type of unsecured SBA loan, the applicant must present with a very strong profile of both the target business and the applicant’s financial and business profile.
Strong Business Cash Flow
More than any other factor, an SBA lender is looking for strong cash flow from the targeted business. Strong cash flow provides the lender the assurance that the loan will in all likelihood be repaid and the risk of default is minimized.
When the targeted business financial records show the business consistently posting strong net profits, year-over-year, then the lender may be willing to avoid requiring the applicant from posting additional collateral to securing financing.
Lenders will ask for tax returns from the business for the past 3-5 years and the most recent Profit & Loss (P&L) statements. The will look to see what the revenue and business profit trend lines show. If the trend lines trend upwards showing a strong level of cash flow, particularly with a long-term business, then the lender may very well be persuaded to lend just on the business flow alone.
Strong Debt Service Coverage Ratio
A profitable business that has a strong “Debt Service Coverage Ratio” (DSCR) which is a formula to assure that there is plenty of cash flow from the business to service the SBA loan debt. The DSCR is what lenders will likely use to decide whether you should get the loan or not.
The common minimum acceptable DSCR is 1.20. If you’re below this value, your SBA loan application will likely be rejected. If, on the other hand, the DSCR is much higher, you might very well not only secure loan approval but also avoid further collateralizing the loan.
This following DSCR calculator measures whether the business’ incoming cash flow adequately permits loan debt payment. It is commonly used by commercial lenders to determine if the borrower will be able to generate an adequate return on investment to service the debt.
Debt Service Coverage Ratio Calculator (DSCR)
Excellent Credit History
Assuming a good cash flowing business, the applicant must also show a strong personal credit FICO score, clear personal credit history, relevant experience and managerial skills. To obtain an unsecured SBA loan, the applicant should not have any bankruptcies or loan defaults. A personal FICO score of 640-680 is typical. The higher the better to put the borrower in a stronger negotiating posture.
A personal guarantee is required by most lenders for unsecured SBA loans. The personal guarantee is just that a guarantee that the borrower makes indicating that they will repay the unsecured SBA loan no matter what. All applicants must sign the personal guarantee.
The personal guarantee is often used because when applicants for SBA loans request the loans on behalf of a business entity that they represent if an entity is seeking financing. For example, ABC, Inc. is the buyer and borrower. What the lender requires by way of the personal guarantee is that the individuals signing are also personally responsible for the loan over and above their role in their business capacity. This is not necessary when there is no business entity such as a sole proprietor.
The challenge with personal guarantees for unsecured SBA loans is that the borrower is completely liable for the repayment. This creates added risk for the borrower, but prudent borrowers know that this can be a good option to secure the financing they need without jeopardizing personal assets.
How Mission Peak Brokers Can Help
While we can’t guarantee an unsecured SBA loan for everyone, under the right circumstances, particularly a strong cash flowing business, excellent applicant’s financial profile and several personal guarantees, there is a strong possibility.