If you're applying for an SBA loan to start or acquire a business, you may be asked to provide financial projections as part of the loan application process.
For an existing business, lenders can evaluate historical financial performance. A new business doesn't have that history.
Your projections therefore help tell the financial side of the story.
They show how you expect the business to generate revenue, what it may cost to operate, how much financing you need, how the money will be used, and whether projected cash flow may be sufficient to support the proposed debt.
You can pay a professional to prepare these projections, build them yourself in spreadsheets, or use software to automate much of the process.
Here's what you should understand before getting started.
Why Do SBA Lenders Ask for Financial Projections?
Financial projections give lenders a forward-looking view of the proposed business.
A lender may want to understand questions such as:
- How much revenue is the business expected to generate?
- What assumptions support those sales projections?
- What are the expected operating expenses?
- How much cash does the business need to launch?
- How will the loan proceeds be used?
- When is the business expected to become profitable?
- How much cash flow may be available to service debt?
- What happens during the early months while the business is ramping up?
Projections aren't a guarantee that the business will perform exactly as expected.
Instead, they provide a structured financial representation of your assumptions that lenders can evaluate alongside the rest of your application.
What Should SBA Loan Financial Projections Include?
Requirements can vary by lender, loan program, business, and transaction, so always follow the specific documentation requested by your lender.
However, several financial schedules and statements are commonly useful when preparing a financing package.
Projected Income Statement
Your projected income statement estimates future revenue, cost of goods sold when applicable, operating expenses, and profitability.
Your revenue assumptions should be explainable.
Instead of simply projecting $500,000 in first-year revenue, for example, show the assumptions that could produce that result, such as expected customers, transactions, units sold, pricing, or capacity.
Projected Cash Flow Statement
Cash flow is particularly important when borrowing money because loan payments require actual cash.
A company can show an accounting profit and still experience cash-flow pressure.
Your projections should help show whether the business is expected to generate sufficient cash to cover operating requirements and debt obligations.
Projected Balance Sheet
A projected balance sheet estimates the future assets, liabilities, and equity of the business.
It complements the projected income statement and cash flow statement and helps provide a more complete picture of the company's expected financial position.
Startup Cost Schedule
If you're starting a new business, identify what it will cost to get the business ready to operate.
Startup costs might include equipment, inventory, deposits, leasehold improvements, licenses, professional fees, technology, initial marketing, furniture, and working capital.
Be as complete as possible.
Missing major startup expenses can result in asking for too little financing and starting the business undercapitalized.
Sources and Uses of Funds
A sources and uses schedule shows where the money required for the project is coming from and how it will be spent.
Sources might include:
- SBA loan proceeds
- Owner equity
- Other financing
- Seller financing, when applicable
- Other available capital
Uses might include:
- Equipment
- Inventory
- Construction or improvements
- Business acquisition costs
- Professional fees
- Working capital
- Other startup expenses
The total sources and total uses should reconcile.
Debt Service Coverage Ratio
Debt Service Coverage Ratio, commonly called DSCR, is one measure lenders may use when evaluating repayment capacity.
In simplified terms, DSCR compares available cash flow with required debt payments.
A ratio above 1.0 indicates that projected cash flow exceeds the debt obligation, while a ratio below 1.0 indicates projected cash flow would not fully cover it.
The exact calculation and acceptable level can depend on the lender and transaction, so you should follow your lender's requirements rather than assuming a single threshold applies universally.
Break-Even Analysis
Break-even analysis estimates how much revenue the business needs to generate before revenue covers its costs.
This can be particularly useful for a startup because it helps show how projected sales compare with the level of activity required to support the business.
It can also expose unrealistic assumptions before you submit your projections.
Make Your Assumptions Easy to Understand
Strong financial projections aren't just a collection of numbers.
The assumptions behind those numbers matter.
If you project rapid revenue growth, be prepared to explain what drives it. If payroll increases, show when employees are expected to be hired. If expenses change significantly, understand why.
Your projections should tell a consistent financial story.
Changes to one part of the business should also flow logically through the rest of the financial plan.
Test Whether the Business Can Support the Proposed Loan
Before submitting your projections, examine them from the lender's perspective.
Does projected cash flow provide enough room to cover debt payments?
What happens if revenue ramps more slowly than expected?
Is there sufficient working capital?
How quickly does the business reach break-even?
Are the projected margins reasonable for the type of business you're planning?
Finding weaknesses yourself gives you an opportunity to reconsider your assumptions before a lender begins asking the same questions.
How Can You Create SBA Loan Financial Projections for Free?
You can build the projections yourself in a spreadsheet, but that requires creating and maintaining the underlying financial model and ensuring the projected financial statements remain connected.
StartSmart provides another option.
StartSmart guides you through questions about your business, startup costs, revenue assumptions, expenses, staffing, financing, and other planning inputs and automatically performs the financial modeling and calculations behind the plan.
It can help you create projected financial statements, startup cost schedules, sources and uses of funds, break-even analysis, DSCR analysis, and other supporting financial documentation.
And you can use StartSmart to prepare the financial plan for one business completely free.
Build Your SBA Loan Financial Projections for Free
Preparing projections for an SBA loan doesn't have to mean hiring someone to build an expensive financial model or spending hours trying to connect complicated spreadsheet formulas.
What matters is developing reasonable assumptions, understanding the financial story behind them, and organizing the information so you and your lender can evaluate the proposed business.
StartSmart helps automate that process while giving you the ability to adjust your assumptions and see how those changes affect the financial plan.
Create your SBA loan financial projections and supporting financial documentation for one business completely free with StartSmart.
