Explanation of First Step Review Scores
The purpose of the First Step Review program
is to provide you with screening information so that you can
- prepare effectively for your visit to your
- determine if you are sufficiently prepared
to succeed with a loan application.
Placing information on the forms that will
make your business look more attractive to a lender will defeat the purpose
of the program. A lender will want independent proof of information that you
present on these forms.
A score of 70 or above suggests that if the
information was filled out accurately from the lender's point of view, you
have a reasonable chance of gaining an SBA guaranteed loan on the merits of
the application. However, your lender may not be willing to make a loan of
the size you want or make a loan to the size or type of business you have.
A good score on First Step Review does not guarantee an SBA guaranteed loan;
it is only a screening tool to help you prepare your application.
Various SBA Loan programs were initiated because
lending institutions have been slow to make loans to the smallest businesses
and the self-employed. Such businesses have two problems:
Management Experience (Worth
- Their loans are much smaller than those
of larger businesses, yet cost just as much (or more) to process. The profit
per loan is therefore much smaller.
- Whereas companies with several million dollars
in business per year will have their own accountants, attorneys, and consultants
to help them prepare a business plan and financial statements; the self-employed
and very small businesses present much less expertise and preparation. The
effort per loan is therefore more for the lender, and the success rate is
Management experience is often an essential
qualification for gaining a loan from a lender, especially if your business
requires strong management leadership in order to succeed. If your lender
will not approve the loan, it does not matter if the SBA will.
- Have you had any management training? Worth
Temporary work qualifies in this answer.
However, if you are an attorney wanting to expand your practice, and your
management training was during high school for a fast food outlet, then
you may be better off leaving the information out. The training should be
relevant to the business.
- Do you have any management experience? Worth
Again, the experience should be relevant
to the business.
- How many years of management experience
do you have in the type of business the loan will benefit? Worth up to 8
This is the key question within the
management qualification. The management experience should be specific to
the business. For example, if you are needing a loan for a commercial construction
business, a lender may not accept experience in running a residential construction
business as sufficient management experience.
You may be able to add specific management
experience to your business by hiring staff with such experience.
- Do you have an experienced, successful management
force assisting you? Worth up to 8 points.
The ideal management experience, from
a lender's view, may be in the form of a national team from a highly successful
national franchise. If your business does not require significant management
of staff, then this may not be an essential qualification.
- If you are going to manage the business,
will you do it as a full-time venture? Worth no points.
This question is here because you will
probably need to know the answer to the question before you see the lender.
Some businesses require full-time effort and some do not.
Credit History (Worth 10 Points)
Repayment Ability (Worth 30
- Have you defaulted on a loan? Worth
- Have you previously filed for bankruptcy?
Worth 12 points.
An unresolved, recent bankruptcy can subtract 12 points from your First
Step Review score. Bankruptcy is not necessarily a fatal flaw, as long as
it happened long ago and/or it was resolved well. Walking away from debts
in a bankruptcy can be pretty serious, but making good on the debts minimizes
If yes to No. 2, was the bankruptcy more than 7 years ago? Worth 6 points.
If yes to No. 2, was the bankruptcy paid back in full? Worth 5 points.
- Have you ever been a cosigner for someone's
loan? Worth 1 point.
- Do you have a record of on-time payments
for the last three years? Worth 1point.
- How many loans were repaid on-time in the
last three years? Worth 1 point
- Do you have a good working relationship
with your bank? Worth 2 points.
- Has your bank responded well to other personal
or business ventures? Worth 1 point.
Equity (Worth 20 Points)
- Now compare your monthly payment with your
projected net profit.
- Will your future profits provide for the
repayment? Worth 5 points.
- Do you have a well-written developed business
plan? Worth 6 points.
If yes, has someone knowledgeable about business reviewed and commented
about your plan? Worth 2 points.
If suggestions for improving the plan were made, did you adopt any of the
suggestions? Worth 2 points.
A well-written business plan can demonstrate repayability in the future
if current repayment ability is limited. If your score on repayment is poor,
developing a good business plan would be the best way to compensate.
- Is there enough profit for you to live on?
Worth 10 points.
If no, can you make additional money from other means to survive until the
business can provide a livable existence?
If your Equity (Assets-Debt) is twice your
debt, you will get the full 20 points. Computing the amount of equity
needed (compared to debt) in order to gain 20 points requires subtracting assets
from debts, then making a ratio between that number and the debt, and then generating
a percentage. First Step Review provides the calculations for you.
Intuitively, it seems like the simple ratio between assets and debt
should provide the percent of equity needed. For instance, it seems like for
$100,000 of debt, the borrower only needs $40,000 in assets in order to have
equity of 40 percent of debt. This, of course, is incorrect. Hopefully, the
equity calculations in First Step Review will be very helpful for you in determining
the amount of equity you need for a successful loan application.
Collateral (Worth 20 Points)
Lending institutions rarely give full credit
for listed assets. They give from 65 to 80 percent credit. If you default,
they must convert the collateral to cash and the value of the collateral is
rarely worth the value that the person offering it believes it is worth. First
Step Review gives you 80 percent credit for listed assets, which could be
more than your lender will allow.
"To secure the loan, the borrower must pledge available business and personally
owned assets. Loans are not declined when inadequate collateral is the only
unfavorable factor. Personal guaranties of the principals are required." --Small
If you own your home, would you be willing to put your home up as collateral?
This question is here because the lender will probably want to know the answer.
It is wise to know the answer before meeting with the lender. The SBA will
not refuse to guarantee the loan because of inadequate collateral, but the
Collateral must be worth more than 40 percent of the loan in order to gain
points in First Step Review. Eighty percent yields 16 points and 100 percent
yields the full credit of 20 points.
The First Step Review program was developed
through a process of consultation with representatives of the U.S. Small Business
Administration and several key national lenders. Although they were kind enough
to share their opinions and feedback, such assistance does not constitute
endorsement. Neither the U.S. Small Business Administration nor any of the
participating lending agencies are responsible for this program or any problems
that may arise from using this program.
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