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One of the most important SBA criteria is the company's debt to worth (leverage) after
the loan is made. The Widget Store's beginning debt is $400,000 as of the current
financial statement date. The Smiths (owners) have made loans to the company
totaling $100,000, and these shareholder notes can be considered as equity if the Smiths
subordinate this debt to the SBA loan. As a result of this subordination,
shareholder notes are "deducted" from debt and "added" to
equity. The new SBA loan ($500,000) is added to the company's proforma debt, and
proforma debt is calculated.
|
| Beginning
Total Debt (as of the current F/S date) |
$400,000 |
| Plus: New Money
(SBA loan) |
500,000 |
|
Other |
0 |
| Less: Note Payable -
Shareholder (subordinated) |
(100,000) |
|
Other |
0 |
| Proforma Debt |
$800,000
|
The company's beginning equity is $175,000. The shareholder notes of $100,000 are
"added" to equity as detailed above. When the Smiths bought another
company several years ago, a portion of that transaction included the purchase of $50,000
in goodwill. Since goodwill is an intangible asset, it is "deducted" from
tangible equity. In addition, the Smiths have officer advances totaling $65,000
borrowed from the company. These are also "deducted" from equity.
Lastly, the seller of the land is carrying a a second lien note in the amount of $40,000
which will be subordinated to the SBA loan. Since this debt will be subordinated, it
can also be treated as equity. The following table shows calculation of The Widget
Store's proforma equity.
|
| Beginning
Equity (as of the current F/S date) |
$175,000
|
| Plus: Note
Payable - Shareholder (subordinated) |
100,000 |
|
Note Payable -
Seller (subordinated) |
40,000 |
| Less: Intangibles
(goodwill) |
(50,000) |
|
Accounts
Receivable (officers) |
(65,000) |
| Proforma Equity |
$200,000
|
If we divide the company's proforma debt by the company's proforma equity, the debt to
worth ratio is 4.00 to 1.00. SBA
guidelines call for the debt to worth ratio to be 3.00 to 1.00 or lower. This loan
structure is higher than this guideline. However, in the case of a real estate loan,
such as this one, leverage could be 4.00 or perhaps higher. Proforma debt to worth
is only one of many factors in the loan approval process. Please consult a Centinel
loan officer for your own customized preliminary evaluation.
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