What if I told you that your spouse may be the key to unlocking an approval for an SBA guaranteed loan? Could this be true?
Why yes it is true, let me explain…
When lenders analyze an applicant’s ability to repay a requested loan, their number one objective is to identify the primary and secondary sources of repayment. The best primary source of repayment is almost always net cash flow from business operating activities.
This simply means that the business is able to sufficiently repay the debt after all operating expenses plus existing debt have been paid from historical net cash flow. It’s a little more complicated than that but you get the point.
Next, banks also seek to identify a sufficient secondary source of repayment in the form of strong personal liquidity or collateral in the form of real estate equity, cash value of life insurance, marketable securities and so on.
Identifying a sufficient secondary source of repayment typically proves to be more challenging for lenders as many small business owners keep very little cash on hand outside of their business, and the excess cash flow they do generate, is used to fund retirement accounts which banks ignore due to government protections.
However, if a sufficient secondary source of repayment is identified, then a conventional loan is warranted.
There Is Still A Chance
If either the primary or secondary source of repayment is not sufficient, that’s where an SBA guaranteed loan might be able to mitigate the short fall. Because, generally speaking, banks can’t and won’t approve loans with insufficient or weak primary or secondary sources of repayment.
However, in the famous words of Lloyd from Dumb and Dumber, “You’re telling me there is still a chance…Yeah!”
Yes, there is still a chance to obtain the capital you need to purchase your office space, acquire a business or franchise and grow or start your business through an SBA guaranteed loan.
If the lender determines that the borrowing entity and their owners do not possess sufficient cash flow to repay the debt through either the primary or secondary source of repayment, they will most always rely on the personal tax return of the owners to determine whether outside income is available.
In my experience, unless the spouse works inside the business, there is usually earned outside income from a spouse that is able to mitigate a cash flow shortfall in the form W2 income, which is the best form of income for determining the capacity to repay a loan due it’s stable nature.
Other acceptable forms may be cash flow from passive activities in the form of real estate and/or other investments, if the income can demonstrate stability for the past 2-3 years.
The Fine Print
It’s important understand though, that when a bank includes outside income into the cash flow analysis equation, the person who is earning the income is also added as a guarantor which means they are “on the hook” to repay the debt in the case of default by any party to the loan.
For some, this is too much of a burden to bear but for most they are willing to support their spouse in their endeavor. This is a personal decision and one that should not be influenced by the lender.
So there you have it. Now you know that outside income from a spouse may be the key unlocking an SBA guaranteed loan.