What is a Sources and Uses Table in Commercial Lending?
When you’re acquiring a business or purchasing commercial real estate, a sources and uses table is a helpful way of organizing all the cash inflows and cash outflows. Capturing all your cash flows in one table minimizes the risk that you end up with a cash shortage at the close.
All lenders, banks and nonbanks, will expect a borrower to produce this table and to understand what qualifies as a ‘source’ of funds by the lender’s standards. Having this information on hand demonstrates your financial sophistication & thoroughness.
In the case of a business or commercial real estate acquisition, the “uses” or cash outflows start with the acquisition price, but also include transaction costs such as additional working capital needs, closing costs, legal fees, appraisals and loan guarantee fees.
Sources or cash inflows include your own funds, gifts, funds from investors, seller financing, senior bank loans and subordinated/mezzanine debt.
The sample Sources & Uses Table below shows the sources and uses for a typical small business acquisition which includes the purchase of a business and its owner-occupied commercial real estate.
Let’s break down the elements of the sample Sources & Uses Table above.
Own Funds – Cash or other qualified assets that the borrower owns (money that is not borrowed).
Documented Gift – Cash from friends and/or family that is supported with a “gift letter” or other documentation that specifies that the money is not a loan.
Seller Note on Full Standby – Sometimes referred to as a seller carryback, this is a portion of the sale price that the seller essentially loans the buyer. To qualify as equity, the seller note cannot pay principal or interest while the SBA loan is outstanding. Other types of seller notes are acceptable as non-equity sources of funds. See our Equity Injections page for more discussion.
SBA Loan – Could be an SBA 7a or 504 loan or a combination of the two.
One the important purposes of the sources and uses table is to make sure you’ve factored in all the costs of the acquisition.
Paying the seller is an obvious cost or use of funds, but there are several other transaction costs to factor into the sources and uses analysis.
Business vs. Real Estate Acquisition Price – If the acquisition includes both the purchase of a business and real estate, make sure you know how much you’re paying for both. Lenders will want to understand these amounts because they help determine how much hard collateral is available and how much of the acquisition price is goodwill.
Working Capital – Sometimes it makes sense to borrow an additional amount through the 7a/504 loan or through a separate working capital line. A working capital line provides cash flow insurance and can help if the transition doesn’t go as well as expected.
SBA Guarantee Fee – The SBA charges a one-time fee for providing the lender with a guarantee. This fee is passed on to the borrower.
Closing Costs – These include lender packaging fees, attorney fees, appraisal reports.
Creating a comprehensive sources and uses table helps borrowers think through all the acquisition costs and ensures that those costs are matched with sources of funds.
Speritas Capital works with clients to develop these types of sources and uses tables, customized to a specific transaction. We’re here to help our clients think through their funding source options and connect you with the right SBA lender.
Need more information on SBA loans? Check out our SBA overview page.
According to SBA.gov, one of the SBA’s requirements for a proposed loan is to…
“Provide a pro-forma balance sheet reflecting sources and uses of both equity and borrowed funds.”
About the Author
Jeff Bardos, CEO, Speritas Capital Partners
Jeff has over 25 years of experience in the financial services industry. After graduating from the Columbia Business School, he joined the New York Federal Reserve Bank as a senior staff member in Bank Supervision, leading the Bank Analysis department. From the nation’s central bank, Jeff moved into the private sector, working at senior levels in commercial banking, retail banking and risk management. He has also played senior founding roles in several start-ups. Learn more about Jeff.
Speritas Capital Partners specializes in difficult credit, collateral and cash flow situations and we never take upfront fees.