Published: November, 2018
Whether a business is approaching an SBA government-guaranteed lender for a startup business loan, or whether the business is already established and operating, most SBA lenders want to see basic income and expense projections from the business applying for the loan.
On rare occasions, when the business has steadily produced a growing cash flow, the SBA lender may not require financial projections. There also may be no need for financial projections if the three-year trend is consistently improving and sufficient for the proposed debt service. The loan request narrative will explain that the company plans to continue upon the same trajectory. In most cases, however, small business loan applicants are starting a new business or expanding an existing business with a limited, declining, or fluctuating pattern of income and cash flow. It’s essential to have cash flow projections prepared on a monthly basis for the next twelve months in these instances. For new businesses, the lender will want to see the second year financial projections prepared on an annual basis at the minimum.
What information does the SBA lender derive from the financial projections?
Hopefully, the supporting documentation provided with the financial projections will make them appear totally realistic to the lender. The lender will be convinced by research, data, and statistics that the small business will generate enough cash flow to repay the SBA loan. A good set of financial projections will include a listing of the assumptions used to prepare them. In the list of assumptions, the loan applicant will explain their research, and include facts and statistics that support their estimates for each significant line item of expenses and income. The manner in which this information is presented represents a window for the lender into the mind of the business owner who prepared the financial projections. It helps the lender to understand that those projections will be achieved, and he can rely upon the borrower to repay its loan based upon a reasonably close achievement of the business owner’s target. The assumptions should make it evident that the business owner is not guessing with his financial projections. Instead, he used valuable market and industry research to arrive at a reasonable estimate of the businesses income and expenses in the next twelve months.
Should the business owner use professional assistance to help prepare basic financial projections?
Yes, as long as that professional is guiding the format of the presentation, but relying upon input from the business owner himself. Nothing looks worse than a canned set of financial projections, which the business owner/loan applicant cannot explain. An experienced small business lender will not rely upon bogus financial projections, and most lenders can detect that in a minute! Make them authentic, and receive authentic feedback from your lender. When you get on the same page with the lender regarding the business’ ability to generate sufficient cash flow for loan payments, you are on your way to official loan approval!