Supporting Documentation for Cost Structure: What It Is and Why It Matters

Business partners discussing cost structure for their SBA loan

If you’re considering funding options such as an SBA 7(a) or SBA 504 loan, you’ll need to provide verifiable and tangible supporting documentation for the cost structure of the loan. This is essentially a breakdown of the anticipated project costs that will be funded by the loan and by you.

Knowing what to expect for supporting documentation for cost structure will make your loan closing go as smooth as possible. You’ll want to learn all about what cost structure is, acceptable documentation, and other tips that will streamline the closing process.

Providing your lender with a comprehensive and well-researched project cost structure with supporting documentation can benefit you during the application process. It shows them you’re aware of your business’s needs and able to manage a significant undertaking to grow your business.

What is supporting documentation for cost structure?

“Cost structure” refers to the breakdown (or itemization) of the costs of the proposed project that you’re looking to finance. “Supporting documentation,” is the term for the documents that provide verifiable and tangible evidence of these costs such as receipts and quotes from vendors.

Here’s an example:

Sources and Uses:  
   
Uses of Funds:  
Purchase Real Estate $200,000
Renovations $50,000
Construction Contingency $5,000
Equipment $50,000
Furniture and Fixtures $10,000
Soft Costs $15,000
Total $330,000
   
Sources of Funds:  
Pursuit Loan $297,000
Borrower’s Equity $33,000
Total $330,000

In the above example, the borrower is applying for an SBA 7(a) loan to purchase and renovate a building, buy equipment for the space, and purchase furnishings and décor. Each of these tangible costs are itemized and you’ll need to have written quotes from all applicable vendors.

However, if a vendor is providing multiple goods and services they can all be on one vendor document. For example, an electrician who will be re-wiring the building as well as providing updated lighting fixtures.

Why is supporting documentation for cost structure required for SBA loans?

Providing supporting documentation for cost structure serves several important functions:

  1. It ensures that you’ve done your due diligence as a project is developed, and you have a clear plan for how much funding is required and how it will be spent.
  2. It reduces the chances of a project being underfunded, causing it to be delayed or abandoned. In turn, helping better the odds that the business loan will be successful both in terms of funding and being repaid.
  3. It also helps to ensure that a project isn’t overfunded, with a borrower potentially getting more funding than necessary and having outsized debt from the project.
  4. Cash-flow analysis is critical for all lenders and the SBA. An accurate cost structure early in the process helps ensure that the lender’s review for approval is as accurate as possible.

While it’s acceptable for you to ballpark costs when you first meet with your lender, it’s important for you to know that ultimately:

  • The supporting documentation must be provided in hard copy form. Ideally, on the vendor’s or contractor’s letterhead. Or, when necessary, printed directly from the vendors’ websites.
  • When a general contractor (GC) is used, the GC is responsible for overseeing any construction and renovations and will provide a bid once they’ve reviewed the size and scope of the project. This will likely take several months to finalize, so it’s important for you to research reputable GCs and solicit a few bids before selecting one.
  • The SBA won’t accept estimates of costs produced by you. This information must be on vendor letterhead or printed directly from vendor websites. However, a self-prepared list of items and/or services can be a useful starting point to help you get the information organized and serve as a working checklist during the process.

 

Who is responsible for getting written estimates and other documents?

While lenders can support the process, it’s up to you as the business owner to secure the necessary supporting documentation. Before approaching lenders, you should complete some initial research to create a project-cost outline. If you have this information ready prior to meeting with lenders you’ll find the loan-application process will be more efficient overall, because lenders can use this information to prepare an initial cost structure.

Before meeting with a lender, you should:

  • Become familiar with industry-reputable vendors who are responsive and reliable. If you need to obtain a quote from a vendor’s website, make sure to print out the quote showing the items, quantities, and costs. Links to individual product pages aren’t considered acceptable documentation.
  • Research reputable GCs in the geographic area or industry and begin discussions, so that the GC can begin drafting contract costs for construction and renovations. Be sure to request bids from multiple GCs for comparison, unless you have an existing previous relationship with a GC.

While the financing structure will need to be finalized before any funds are disbursed, there will likely be some fluidity to the costs and an expectation that they may change prior to closing. That’s okay! Your loan officer can reallocate costs and work with the SBA to update the cost structure as needed.

What other project items require supporting documents?

There are some additional circumstances in which supporting documentation for cost structure will be required. These include:

  • Do-it-Yourself construction (DIY): If you’re certified and capable of performing needed construction and renovations and your lender has determined that it’s acceptable, then the SBA does permit DIY work. However, you must get two competing bids in addition to a self-prepared estimate to justify the cost structure and ensure that you don’t retain any profit.
  • Commercial real estate: The SBA has specific appraisal guidelines. These specify what your property must be appraised for relative to the cost of buying it. In a nutshell, the SBA doesn’t permit the purchase price (as verified by an appraisal) to exceed these guidelines.
  • Franchises: There are many SBA-approved franchises that have been reviewed and approved by the SBA as eligible to obtain SBA financing. When you open a franchise you can often obtain cost estimates from the franchisor, which will likely be an acceptable starting place for cost-structure documentation.
  • Business acquisition: With business acquisitions, there are often intangible costs that will need to be verified. An example is the purchase price of acquiring an existing business. This will be verified by a third-party valuation if there’s a close relationship between buyer and seller, if the purchase price of the business is greater than $250,000, or if the lender’s credit policy requires it for similarly sized non-SBA loans.

At what point in the application process are the supporting documents required?

Your lender must receive completed supporting documentation prior to final approval and loan closing; however, it’s recommended that you send your supporting documents as part of the loan-application package for underwriting purposes. This helps the lender ensure the approval document is as accurate as possible.

Frequently asked questions: Other key points for borrowers

  • What happens if the costs change? If cost-structure changes are documented by updated vendor quotes and/or contractor estimates and your lender approves the increased project costs, then they will update the cost structure with the SBA.
  • If I intend to pay for certain costs with my equity injection, do I still need to support the allocation in the cost structure? This ensures that appropriate due diligence has been done and both you and your lender have presented the SBA with an accurate cost structure that captures all the work and items necessary to complete the project.
  • I think my cost structure could vary by XX%. Can I include a contingency? The SBA doesn’t allow total-project contingencies; however, a construction/renovation contingency is allowed (typically 10%). This means that your lender will typically factor a contingency of 10% for the construction/renovation costs in the project’s cost structure.

When you’re ready for small business funding, Pursuit can help

If you’re already working with Pursuit, then you know about our wide variety of loan options. If you’re not yet a Pursuit client, we have more than 15 loan options for small businesses, including many that can help with project-related costs covered in this article. Every day, we help business owners like you get the funding needed to grow and succeed. Take a look at our loan options, then contact us to get started.

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