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Understanding the Key Components of a Bankable Feasibility Study: SBA Loans 504 and 7(a)

Updated: Jan 12

What is a Bankable Feasibility Study?

SBA 504 and 7(a) Loan Lenders often request a bankable feasibility study during the underwriting process. After review of the borrower's credit, assets, and business plan, when an underwriter asked for a bankable SBA feasibility study, they look to because they need a detailed market analysis that supports the financial pro forma.

Market Feasibility Research and Analysis

The pro forma is not just guesswork. It has to be supported by the market indications. A bankable feasibility study must indicate the following items:

  1. What is the market demand for the product or service?

  2. Is there unmet demand for the product or service?

  3. What is the penetration rate and market share of the competitors?

  4. Are there new competitors in the pipeline, meaning in planning or under construction?

  5. What are the revenues of the competitors and revenue per unit of value such as per square foot and per capita?

  6. What are the trends in the industry?

  7. Is the market declining, increasing or stable?

  8. What substitutes are in the market for the product or service?

  9. What are the product or service price points?

  10. work to provide these answers.

  11. What is the economy in the area meaning what industries are the primary economic drivers? This means for instance, if the project is located in an area of hospitals and physicians is the planned business enterprise product or service compatible with the market? Such as a hotel to be constructed near a hospital, what is the activity at the hospital? Over night stays or outpatient? Overnight stays would likely be a good demand driver for a new hotel because family members might need a place to stay while their loved ones are being cared for.

  12. What are the market indicated financial ratios of the competitors? What is their Gross Profit ratio? What is their operating expense ratio? What is their EBITDA ratio? How do your projections compare?

These are only examples of the leg work that a feasibility study consultant must examine to provide a market feasibility analysis. There are many more questions to answer by a feasibility study consultant depending on the business type, yet the above examples can provide you with an understanding or the level of detail a genuine feasibility study must answer.

Market Feasibility Analysis -
Market Feasibility Analysis -

Economic Feasibility Analysis

In this part of a bankable feasibility study, the US economic trends, State and Local economic trends are presented. Then the local area is described. Maps and location analysis is completed. Some questions are as follows:

Where is the business to be located?

What is the access to the business?

What is the visibility?

Is the location served by public transportation?

What is the walkability of the site?

Is the site in the right zoning designation for its planned use?

Are utilities at the capacity needed available?

Is the location a place where like businesses cluster?

What are the threats of available land or space whereas new competitors might enter the market?

What are the future plans according to the master plan for the area?

Traffic counts - if your business is dependent on traffic such as a gas station, or other retail store, is there enough traffic to support it?

Are the other tenants in the area complimentary to your business?

What is the availability of trained or trainable labor and what are labor costs?

Is the site the shape, size and topography for your plans for new construction?

If you are leasing space, what are the rental rates in the area and how does your lease compare?

Many more questions to answer in this Economic Feasibility part of the study. The pros at know exactly what to ask depending on the enterprise type proposed.

Financial Feasibility Determinations

Well, we never had a call from a client who said "My project won't work but I want to spend time and money for a bankable feasibility study."

But, we do get a lot of financial projections that are not well supported and only based on assumptions of the borrower. Borrowers might be correct because they have studied their business or have the right experience. But their business plan is lacking in support for their assumptions.

The feasibility study consultant works to understand the borrower's ideas and explores the industry financial ratios, and then couples that with the findings of the Economic and Market Feasibility sections to find the correct pro forma inputs.

, we estimate real estate taxes based on the formulas provided by the county assessor for determinations of taxable value, then consult the county treasure for the tax rates and then compare the real estate taxes paid by competitors to estimate this item.

Other pro forma variables include labor costs and the trends in unemployment levels and are your wage costs reasonable? Also, we make certain all wage costs are included. Often overlooked figures include FICA and benefits.

All variables in the pro forma must be supported by industry ratios, and localized operating costs. RV Park Financial Ratios RV Park Financial Ratios

Useful guides are used to provide the SBA 504 and 7(a)loan underwriters with support for your pro forma statement.

Then there is seasonality. Many business such as RV Parks have seasonal business. The feasibility study consultant at must research to understand which months are low, shoulder and peak for the proposed RV park or other business. Hotels in Orlando, Florida for instance are 4 months off, 8 months on, and the shoulder months are at the end of the off and peak months. A hotel might have 100% occupancy in March but only 70% in June and 40% in July and 35% in August, then picking back up in December.

The monthly pro forma is developed to illustrate these periods and to estimate the overall annual occupancies for the 10-year annual pro forma statement. Again, these factors must be market driven and the feasibility study consultant will research several sources to arrive at an appropriate range to apply. Sources of data aggregate statistics differently and so the most prudent feasibility study consultant will look at many sources and then place reliance on the most suitable source. purchases secondary source data to be used for these purposes. SBA Loan underwriters do not want an opinion. A feasibility study that cites "Based on my experience, the ratio should be....". Sorry, that is not a source. Your opinion is not support. The feasibility study consultant must cite appropriate sources.

If you read a feasibility study and words such as "Opinion, my Experience, or I believe" are used, it is not a bankable feasibility study. A bankable feasibility study cites credible sources - not opinions.

What factors are considered in the financial feasibility?

SBA Feasibility Study Financial Analysis:

  • Pro forma (10 years)

  • Discounted Cash Flow Analysis (DCF)

  • Debt Service Coverage Ratio (DSCR)

  • Structure of the Assets and Liabilities   

  • Net Assets (Net Worth)   

  • Financial Sustainability Analysis      

  • Key ratios of the company's financial sustainability      

  • Working capital analysis   

  • Liquidity Analysis Financial Performance   

  • Overview of the Financial Results   

  • Profitability Ratios   

  • Analysis of the Business Activity (Turnover Ratios)   

  • Labor productivity

  • Key Ratios Summary   

  • Rating of the Financial Position and Financial Performance  

  • Sensitivity Analysis

  • Bankruptcy Test  

  • Calculation of the Final Rating of the Financial Condition

As you can see, this is some serious stuff. A certified feasibility study consultant is experienced and trained in Economic, Market and Financial Analysis. All of these parts of the bankable feasibility study are equally important and are tied together.

What is a bankable feasibility study?
What is a bankable feasibility study?

Bankable Feasibility Study Conclusion

As you can see, the certified feasibility study consultant must have the experience in your industry. Local experience is helpful, but because of today's technology is less important. A local advisor might have set opinions which may have been true a year ago, but markets change. And its best to have less bias.

A bankable feasibility study is not cheap and fast or a check the box item. It is a serious undertaking. SBA Loan Underwriters place reliance on the feasibility study that is well supported. If the feasibility study does not provide credible research and support - your loan approval is at risk.

Feel free to call us directly at 1-800-498-6850, or book a meeting for more info.

Publisher Details: SBA Feasibility Study Consultants: USDA Feasibility Study Consultants: Feasibility-Study.com

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