As a CPG founder, managing to profitability is a top priority. Once you reach that milestone and file a corporate tax return showing profitability, you may be eligible for a SBA 7a loan.

What is an SBA Loan and What are the Different Types?

CPG Brands have a few options for SBA loans depending on their circumstances and how they plan to use the money.

SBA 7a

• 7a loans are term loans that can be taken for either 10 or 25 years, depending on the purpose of the loan. The 25-year term is for real estate purchases, construction and improvements, while the 10-year term can be used for working capital, inventory, equipment, refinancing debt, or business acquisitions.
• The loans are provided by banks and non-bank lenders, with non-bank lenders being more liberal with their willingness to do loans. 
• The 7a program provides up to $5 million (per guarantor), and sometimes higher amounts for real estate loans. 
• For CPG Brands this money can be used to finance your working capital and operating expenses, refinancing more expensive debt, or smaller real estate projects like purchasing and building out a manufacturing facility.

SBA 504

• The 504 program is for larger real estate projects

ITL Loans

• ITL loans (International Trade Loans) are for companies that export more than 5% of total revenue or plan to within a year. Banks like ITL loans because they provide a higher guarantee to the lender. 

Community Advantage Loan

• The Community Advantage loan is up to $350K and is targeted for community-based, mission-focused lenders, particularly in underserved markets.

Bolt Loan

• The Bolt Loan provides up to $150K for high-credit borrowers (700+) independent of profitability.  This is a particularly good option if you are earlier stage and not yet profitable.

Key Features of SBA Loans

One of the most important features of SBA loans is that they are not provided by the SBA themselves, but by banks and non-bank lenders. These lenders use their own underwriting criteria, but the SBA guarantees the loan, which encourages lenders to make the loans.

SBA lenders are also permitted to subordinate their loans to other lenders, although not all of them do. This is critical to have in order to allow for other lenders, such as those providing working capital (e.g. those financing Accounts Receivable and Inventory).

The process can take an average of 90-120 days, but it is worth it if you can qualify. All SBA loans require personal guarantees, which can be challenging for some to accept, but SBA loans are underwritten based upon what you can safely afford.

What Do Underwriters Look At When Analyzing a Loan?

The most important criterion for underwriters is your ability to afford a loan. SBA lenders have a minimum debt service coverage ratio (DSCR) of 1.15. For example, if your loan requires you to make $100,000 in payment during the year, you’d need to show $115,000 in EBITDA on your last filed tax return (assuming you have no other debt).

Given today’s climate, underwriters are also focusing on your business and personal liquidity, which essentially means cash on hand. If your company has healthy liquidity, it can increase your chances of getting approved.  If you have very low liquidity, other areas of the application will have to be quite strong. 

If business collateral does not fully collateralize the loan, the SBA requires the lender to take a lien on personal collateral if it is available. For their purposes, personal collateral will always be residential or investment real estate.  Note:  this is not required for the SBA Bolt program.

It’s important to show increasing gross revenue year over year, and a deal can still get done if you have a personal bankruptcy, as long as the rest of the file is very strong. Start-ups can also be funded in exceptional circumstances, such as when they are fully collateralized by real estate and the borrower is highly experienced. Minimum personal credit scores are usually 650-680, but this can vary widely by lender.

Other items that require thorough explanations include open lawsuits, one-time extraordinary events, and COVID-era issues.

Wrap Up

Other than commercial bank term loans and lines of credit, and (often) higher Amazon loan amounts (over $1 million), SBA loans represent one of the lowest cost of capital products that CPG founders will be able to obtain. If you are managing to profitability, these loans should be on your radar screen.

In conclusion, SBA loans can be a valuable tool for CPG founders who are striving to manage their businesses to profitability. These loans can provide low-cost capital that can be used for a variety of purposes, and they are provided by banks and non-bank lenders who use their own underwriting criteria.

If you’re considering an SBA Loan, I highly recommend talking with Keith Kohler, he’s our most introduced Foodbevy partner because he is truly dedicated to helping founders. Schedule a time with Keith to discuss your specific financing needs and create a 3-year financing plan that can include SBA Loans, alternative financing, and equity.

Book a schedule now.