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Small Business | IN BOX

SBA Loan Requires Cash Flow

April 05, 2006|Karen E. Klein | Special to The Times

Question: I'm a restaurant and janitorial supply distributor who has been in business for two years with continual growth. I would like to acquire another, similar business to further that growth. I have found some companies for sale, but I need funding. Can I get a Small Business Administration loan for this purpose?

Answer: Lenders that specialize in SBA-guaranteed loans are known as "cash flow lenders." This means that they look at the cash flow of the business to see whether it will support the debt that must be serviced, said Mike Maiman, senior managing partner at Maiman, Keller & Lock, a Tarzana-based mergers and acquisitions consultancy.

In contrast, Maiman said, conventional lenders typically are "asset-based lenders," meaning that they usually will not lend money to someone acquiring a business unless the business is tied to real estate or some other type of hard collateral.

An SBA lender typically verifies a company's cash flow. If it will support the debt, the institution then looks to see whether the buyer of the business has industry experience. Depending on the type of business being acquired and its price, some SBA lenders will require only a 15% down payment from the buyer, Maiman said.

Because you already own a similar business, if your company generates sufficient cash flow for you to service the new loan, the chances are very good that your loan application will be approved, Maiman said, provided you have a reasonably good credit score.

"There are other methods of obtaining capital to purchase a business that don't involve an SBA lender or a bank loan," Maiman said. "The tried and true financing methods include refinancing your personal residence and taking cash out to be used as a down payment on the new business; obtaining a home equity line of credit; or borrowing from relatives and friends."

How Self-Employed Can Get Health Insurance

Q: I'm self-employed, and my wife and I both have preexisting medical conditions. Where can we find health insurance and what will it cost? Also, if we hire employees, will we be required to provide health insurance to them?

A: If you have at least one employee or a partner, you may be able to get a small group health insurance plan, said Karen Ackley, a medical insurance specialist with Bolton & Co. in Pasadena.

In 1992, California passed legislation that in part required insurance companies to "guarantee issue" health insurance to small employers (those with two to 50 employees), Ackley said.

If you don't qualify for a small group plan, you may apply for an individual/family plan, and depending on medical underwriting, you may be offered coverage at the standard premium cost or at a higher rate.

"However, if you have a significant medical condition and do not qualify for coverage, you may be eligible for coverage through California's sponsored Major Risk Medical Insurance Program, which is a state-subsidized program offered to qualified high-risk applicants," Ackley said.

Under the Health Insurance Portability and Accountability Act, individual health insurance companies must provide coverage to anyone who qualifies, regardless of their health. To qualify for such a plan, you must have elected and exhausted a minimum of 18 months of continuous health coverage in which the most recent coverage was under an employer-sponsored group health plan; have elected and exhausted continuation of coverage under COBRA or Cal-COBRA; have lost coverage within the last 63 consecutive days; and not be eligible for Medi-Cal, Medicare or any other group medical coverage.

If you do hire full-time employees, you will not be legally required to provide health insurance to them. If you already have a group health plan when you hire them, however, the coverage must be extended to all full-time employees.

Got a question about running or starting a small enterprise? E-mail it to karen.e.klein@ latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.

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