Borrow only what you need, and make certain your business plan makes sense.

Three huge problems with SBA guaranteed loans, they are now guaranteed up to 90%. In a word, the bankers who are lending, very few, even with a 90% guaranty, cannot possibly lose any money and why aren’t they lending more under these guaranties? A rhetorical question, however those that are lending are motivated in two ways, both of which spell real trouble for the borrower.

1. They frequently lend you too much, upping your request, suggesting they could qualify you for more so why not take it, and who can say NO. So the happy new entrepreneur enriched by a loan larger than he needs and cannot pay back, happily goes into business, now more likely to fail because he borrowed too much and will eventually choke on debt service. A recipe for disaster, thank you Mr. Banker for your wisdom and greed. It will not be long before you are enjoying your guaranty and your borrower is worrying about how to save his house.

2. Then there is the other end of the spectrum, the banker who decides he will be conservative and counter differs the borrowers request offering him far less than he asked for, which of course the borrower reluctantly accepts and then defaults because it is not enough… brilliant.

3. The third common sin I see, is the ridiculous business plan that has no chance of success yet because of the 90% guaranty, the banker is willing to fund it, after all he has limited or no risk.

Since there is little likelihood that some bankers will overcome these bad practices, and since in the end it is the borrower who will pay the price with his personal guaranty, it is the borrower who must be aware of these issues and employ the following protective strategies.

a. Borrow only exactly what you really believe you will need, too much will cause too high a debt service and will erode your cash.

b. Walk away from a loan that is too little, underfunding is guaranteed failure as it will prevent you from implementing your strategies and will force you into failure.

c. A poorly constructed business plan that is unlikely to succeed is built in disaster. Have someone with business experience check it out, make you defend your assumptions and projections, make certain there is a chance for success. Of course make certain your cash flow pro-forma is realistic.

Your loan and the success of your business is your responsibility not the bankers. In fact the banker may have a different set of objectives to fulfill. He is renting you money with a 90% guaranty from the SBA. Be careful, his opinion may not be in your best interest. Do not sow the seeds for tomorrow’s workout.