For the past year, Ivanhoe Capital Advisors (ICA) has been pre-qualifying businesses for SBA loans. It has come to our attention that there is a huge problem with a lot of banks and lenders who are pre-qualifying businesses for SBA loans and putting out term sheets but not fully underwriting the file.
At times we even wonder whether they have even looked at the file at all. What good is a term sheet that will just get picked apart in underwriting because it either wasn’t thorough enough or was just too generic?
It seems like some of these banks and lenders are promising businesses things up-front that they won’t be able to deliver on down the road. How does this benefit anyone? This can be a real issue for a potential business buyer who thinks this SBA pre-qualification is legitimate and moves forward only to be disappointed.
Bank Business Loan Pre-Qualifications = Empty Promises
Just to shed some more light on this subject for business buyers, we’ve even seen some SBA loan pre-quals where the bank is very non-specific. They will say things like “up to 90% financing for this business.”
What if this particular business, at this sales price, doesn’t qualify for 90% financing? How does this benefit anyone?
Are banks just doing this because they want to appease the business broker so they keep sending over deals? It just does not make sense and is not the way Ivanhoe Capital Advisors want to do business. We believe it is very deceiving and almost a form of bait and switch.
Ivanhoe SBA Loan Pre-Qualifications = Funded
At Ivanhoe Capital Advisors, we take a deep dive right away into the business and make sure there is proper cash flow or DSCR (Debt Service Coverage Ratio) for the SBA loan. We also verify that all the seller’s discretionary earnings are legitimate and make sure we can use these in our final underwriting. If we foresee any issues that might come up down the road during our pre-qualify process, we will tell you right away or ask for further information on it.
We want to be able to understand all aspects of the business before we issue anything. We put together SBA pre-qualifications like we are in the final underwriting of the file right away. The last thing we want to do is go into underwriting and find out that we missed something that could have been caught during the pre-qualify stage. That is why 95% of our business pre-qualifications actually get funded.
Now at times, we can be unpopular because we speak the truth and want to be honest from the beginning. When a business is over-priced because it does not service the debt properly, we will let you know. This at times can cause animosity to either a seller or a broker who felt they priced the business properly.
However, you have to understand that we have a job to do and that is to do the proper math to show that a business’s historic cash flow can sustain a loan of that size. If it does not, then we have to tweak something, and sometimes it is the sales price.
In conclusion, just beware of business lenders and banks who make bogus promises up-front and lead you down a rabbit hole to only end up not being able to cross the finish line with your client. That is something no one wants to endure. That’s why we do our business loan pre-qualifies correctly the first time around.