Now that we are six months post-Covid outbreak in the U.S., trends are starting to emerge regarding SBA lending. Here are our observations after seeing hundreds of potential loan requests over the year:
Avoiding Covid-impacted businesses – SBA lenders in general are avoiding any business that has been dramatically impacted by Covid. And no industries have been more impacted by Covid than hotels and restaurants. Hotels and restaurants were top of the top industries for SBA loans prior to Covid. Now, many SBA lenders are avoiding these industries like the plague. While most are avoiding NAICS Code 72 (“Accommodation and Food Services”) businesses, some will look at franchised, quick casual restaurants that have maintained profitability during the pandemic. We know of a few SBA bankers who will look at hotel deals too, but they are only lending 75% of the value of the hotel. Also, the hotel must be “flagged” (aka franchised) and occupancy levels and profitability levels restored.
Prove it to me – SBA bankers are wanting to see businesses restored to pre-Covid levels before making loans. Alternatively, they will lend against post-Covid cash flow levels, which in many cases results in much lower loan capacity. Borrowers obviously want to normalize earnings back to what they were pre-Covid arguing that Covid is a short-term phenomenon, but SBA banks are not having it. As a result, bankers are focusing more on interim and projected financial statements than past years’ results.
Bottom line is if your business has suffered tremendously due to Covid and you are looking for an SBA loan to weather the storm until your business bounces bank, unfortunately that may be wishful thinking in the current climate. Many borrowers simply gloss over 2020 and point bankers to prior year results.
How do you improve your chances of getting an SBA loan?
- Wait to apply until profitability bounces back if possible
- Consider taking on outside investors to increase the equity and lower the loan amount
- Provide current year financial statements by month along with well thought out projections for the rest of 2020, 2021, and 2022.