How a lender looks at you

The short version

• A lender reviews you as closely as the business you want to buy.
• They look at your credit, your cash, your experience and whether you can run this kind of business.
• They also look at the business: whether its earnings can cover the loan payments with room to spare.
• Be ready with SBA Form 413, your personal financial statement, plus tax returns, a résumé and proof of your cash.
• Problems are easier to explain up front than to have discovered.

What lenders weigh

Lenders often describe their review in five parts.

Character. Your credit history, how you have handled past debts and your answers to background questions on the loan forms.

Capacity. Whether the business can make the loan payments. Lenders test this with debt service coverage, which compares what the business earns, after a reasonable salary for you, with what the loan will cost each year. For an SBA loan to a buyer new to the business, the business needs to earn at least $1.25 for every $1.00 of payments. Lesson 3.4 covers this.

Capital. How much of your own money goes in, and how much you have left after closing.

Collateral. What secures the loan: business assets and sometimes personal property, such as your home. Lesson 2.4 covers this.

Conditions. The business itself, its industry and the terms of the deal.

What they look at about you

• Credit reports and scores. Recent late payments, collections or high balances raise questions.
• Your cash. Where it is, how long you have had it and whether any of it is borrowed or a gift.
• Your experience. Running a business, managing people or working in the same industry. Lenders want to know you can run this business, not just own it.
• Your income history. Usually several years of personal tax returns.
• Your other debts, including your mortgage, car loans and personal guarantees on other loans.
• Eligibility. For an SBA loan, every owner of the buying company must be a U.S. citizen or U.S. national whose main home is in the United States. That applies to any partners too.

What to have ready

• SBA Form 413, the personal financial statement. See below.
• Personal tax returns, usually for three years.
• Bank and investment statements showing your cash.
• A résumé that highlights management and industry experience.
• A short plan for how you will run the business in the first year.

SBA Form 413: your personal financial statement

Every SBA lender will ask for it. SBA Form 413 is the SBA's standard personal financial statement. It gives the lender a snapshot of your personal finances, and it is one of the main documents the lender uses to judge whether you can repay and whether you have the cash you say you have.

Who completes it. Each owner of 20 percent or more of the buying company, along with anyone else the lender asks, such as a managing member or a guarantor. If you are buying with a partner who will own 20 percent or more, they complete their own. A spouse who does not own part of the business does not complete one.

What it asks for:

• Assets: cash, savings and checking accounts, retirement accounts, stocks and bonds, real estate, vehicles and other personal property.
• Liabilities: mortgages, car loans, credit cards, student loans and other debts, with balances and monthly payments.
• Income: salary, investment income, real estate income and other sources.
• Contingent liabilities: debts you could become responsible for, such as loans you have personally guaranteed for someone else.
• Schedules with the details behind the totals: each property, each loan, each account.

The form shows your net worth: what you own minus what you owe.

Why it matters. You sign it, certifying that it is true and complete. A knowingly false statement is a federal crime. Lenders check it against your bank statements, tax returns and credit reports, so every number needs to tie.

Tips:

• Download the current version from the SBA's website. Some lenders use their own equivalent form instead.
• Use current values, not what you paid. Lenders want what things are worth today.
• Split jointly owned assets and debts with your spouse as they actually are.
• Keep it current. It must be dated within 90 days of loan approval, so you may need to update it before closing.
• Lesson 3.7 covers getting your finances in order before you fill it out.

Be first with the hard parts

A past bankruptcy, a tax lien or a gap in your work history is not automatically a deal breaker. Lenders see these often. What hurts is a surprise. Tell your lender early, with a short written explanation.