Wenatchee Office located at 238 Olds Station Road, Wenatchee. By appointment call 509-888-7252 or email jim.fletcher@wsbdc.org

Thursday, October 31, 2013

SBA updates Rules for SBA 7(A) Loans

The U.S. Small Administration ("SBA"), updates to become effective on January 1, 2014, provides lenders with additional requirements for underwriting analysis when considering a 7(a) loan. Cash flow remains the key factor as the primary source of repayment for the proposed loan.  If an applicant "lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of cash."  This statement reflects current practice by many lenders and SBA has added several new standards and requirements to verify adequate analysis.   

Analyzing the repayment ability of an applicant will be based on historical financial statements and tax returns (if an existing business) and detailed projections.  Analysis must support the following assumptions: 

  1. Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan;
  2. Define operating cash flow as "EBITDA" earnings before interest, taxes, depreciation and amortization;
  3. Analysis must document additions and subtractions to cash flow;
  4. Debt service is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds.  The applicant's debt service coverage ratio must be 1.15 to 1 or greater on a historical and/or projected basis;
  5. Spread of pro-forma Business Balance Sheet (current business balance sheet + changes in assets and liabilities as a result of the loan, other debt, any required equity injection, and use of proceeds);
  6. Ratio calculations for:  Current Ration, Debt/Tangible Net Worth, Debt Service Coverage, and other ratios the lender considers significant for the business/industry (e.g. inventory turnover, receivables turnover, and payables turnovers, etc.);
  7. Analysis of working capital adequacy to support projected sales growth in the next 12 months

Monday, October 28, 2013


SBA business 7(a) loan programs are initiated by a lender who is considering a business loan that otherwise would not meet their minimum lending requirements. SBA does not make loans but
agrees to guaranty a portion of the loan that meets minimum SBA requirements.
·         The applicant must be: An operating business, organized for-profit, located in the United States.
·         Loans are for capital purchase, working capital, cannot be used for investment or to payback owner’s investment;
·         The applicant must show that  funds are not available from alternative sources, including personal resources of the principals;
Lenders must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. On SBA-guaranteed loans, the applicants’ cash flow is the primary source of repayment, not the liquidation of collateral. Thus, if the applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available.

Tuesday, October 15, 2013

Statement of Cash Flows

A very useful but often overlooked financial statement is called the Statement of Cash Flows. Its purpose is to reconcile the income statement with the balance sheet thus revealing where your cash is hiding. A basic statement of cash flows has three sections: Cash from operating activities, cash from investing, and cash from financing.

The table below is an example of a statement of cash flows. Let’s discuss what it is telling us about this business, and how you can use the same report to monitor your financial status.

Cash from Operations

Starting with the cash from operations we determine the net income for the month was $15,000. During the month we expended depreciation of $1,000 so we add that amount back.See Note 1

On the current asset side of the balance sheet we recorded the following activities: A $5,000 increase in accounts receivable, a $7,500 increase to inventory. See Note 2

On the current liabilities side of the balance sheet we recorded a $5,000 increase in accounts payable; and, an increase in accrued expenses by $1,200. See Note 3.

Making the above adjustment to Net Income shows our actual cash from operations is actually $9,700 not $15,000 we thought we had.

Cash from Investing

During the month we purchased new equipment for $20,000 a negative number representing money out. We also cashed in a $5,000 certificate of deposit, positive number for money in. The net of these transactions is $15,000 cash out.

Cash from Financing

That new equipment was purchased with a loan, so long term debt increased by $15,000, money in. As owners we took $2,500 dividend, cash out. Net change from financing was an increase in cash by $12,500.
Summing all the business activities during the month our true net increase in cash was only $4,800. Adding our beginning balance of $6,000 indicates we should have an ending cash balance of $10,800.

Cash Flow from Operations

Net Income                                                          $15,000
Depreciation/Amortization add back                          1,000
Accounts Receivable decrease ( increase)                (5,000)
Inventory decreases ( increases)                               (7,500)
Accounts Payable increases (decreases)                     5,000
Accrued Expenses increases( decreases)                    1,200
Net Cash from Operations                                        $9,700

Cash Flow from Investing

Net Cash from purchase/sale of fixed assets

  • Equipment                                                 ($20,000)
  • Property

Net Cash from securities, CD’s                                  5,000   
Net Cash from Investing                                        ($15,000)

Cash Flow from Financing

Notes payable increase (decrease)                                  0
Long term debt increase (decrease)                        15,000
Cash dividends (paid out)                                        (2,500)
Net cash from Financing increase (decrease)         $12,500

CASH Flow Increase (Decrease)
Beginning Cash                                                      $6,000
Net Increase (decrease) Cash                                  4,800
Ending Cash                                                        $10,800


1. Depreciation/amortization is tax a deduction, no cash was actually was spent so we add back the amount of depreciation/amortization.

2. When assets accounts decreases it represents more cash in from collections of A/R or sales of inventory so we add the amount of the decrease. On the other hand when asset accounts increase then more sales were on account or more inventories were purchased than sold and the amount of the increase is subtracted.

3. Liability accounts are recorded the opposite of asset accounts. When payables and accruals increase then cash was not going out and is added. As payables and accruals decrease then bills were paid, cash is gone and the amount of decrease is subtracted.