Another “SBA Loans Professor” Update, April, 2015
George B. Heaslip
Call (561) 329-1315 for a free consultation
on loan needs from $400,000 to $5,000,000
If a loan applicant has a suitable credit score, management
experience, and a sufficient down payment, this is great, but personal
liquidity can kill a loan application. Liquidity is frequently needed for
post-closing working capital.
Banks and non-bank lenders are now hoping for a credit score of 740
Depending on the business type, real estate component (if any) and
loan amount, a required down payment can be from 10% to 25%.
Fortunately, via the SBA program, a seller “standby loan” is allowed.
This means that if the applicant does not have the full down payment
amount, or wants to keep a “chunk” for working capital, the seller
can hold a private note, usually for 2 years. For example, if 25%
down is needed, the buyer with 15% and the seller with 10% can, in
most cases, work. The seller collects, at the end on the “standby
period,” a fine return, usually at a 6% interest rate.
Importance of Personal Liquidity
Each bank or non-bank SBA lender has a personal liquidity rule.
Banks need to know what, after the loan closing, cash reserve the
applicant has, in case of a “business bump.” Liquidity is also needed
for working capital, which generally means new business cards,
signs, computers, web site, etc., etc.
Liquidity means how fast the loan recipent can convert his or her
assets into cash in case of a business emergency.
Liquidity is an emergency cash fund. Cash equivalent assets that
comprise liquidity include:
> Money market funds
> Bank savings
> Checking accounts
> Home equity line of credit
> Treasury Bills
> Listed Stocks
> US Savings Bonds
> Short-term Bonds
> Coins, gold and silver
> Accounts Receivable (if a business is owned)
> Notes receivable
> Life Insurance
Real estate and many types of collectibles generally have poor
liquidity. This includes artwork, and raw land, because it takes too
much time to sell (“unload”) them. Financial experts have long held
that liquid assets that equal to two to six months of usual living
expenses is an adequate amount for most people. Now, lenders want
to see 6 to 12 months.
What Is The Liquidity Ratio That Banks Use?
The Basic Liquidity Ratio is: Liquid Assets/Monthly Expenses.
Another ratio is Liquid Assets + Other Financial Assets/Monthly
Expenses. Most lenders now are looking for at least a six-month
period. (12 months by “smarter” banks).
Example: If the applicant shows $12,000 in cash equivalent assets, and
monthly expenses of $4,000, the liquidity ratio is 3.0.
Believe it or not, there are banks out there now that want to see a
liquidity ratio of 12, or enough to cash in to maintain a similar life
style for 12 months. National and regional lenders look for this.
Summary: To capture a loan, the applicant hopefully has a credit
score of 740 or higher, relative management experience, a rock-solid
business plan and cash flow projections with assumptions. (That is
where George helps for a minor fee).
Lenders must see a satisfactory liquidity ratio.
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