How SBA Loans Really Work, And Why Your Tax Returns Matter More Than You Think
When most think about business loans, “getting an SBA loan” is at the top of mind. As a business consultant, a CFO, and an investment banker, one of the biggest misconceptions that I see from borrowers is the belief that the SBA lends money. It does not. The other misconnection is that as a citizen and a taxpayer, you are guaranteed to have your SBA loan approved. You are not. Understanding how SBA lending truly works can dramatically impact your ability to borrow money and maximize the value of your childcare business when it’s time to sell.
The SBA Doesn’t Lend. Banks Do.
In every SBA loan, a bank is actually the party that loans money. The SBA simply provides something similar to an insurance policy (a guarantee) to the bank that you, the borrower, will pay back the loan. Basically, when you have a SBA loan, Uncle Sam is your co-signer.
Why does this matter?
Uncle Sam doesn’t do anything the easy way. The SBA guarantee protects lenders against losses, but with strict rules that lenders, and you as a borrower, must follow. For lenders to get and maintain a SBA guarantee, they must follow the SBA’s Standard Operating Procedures (SOP). As a result, banks underwrite SBA business loans very differently, and far more conservatively, than most owners expect.
Underwriting Is Based on Tax Returns, Not Your P&L
One of the most common frustrations among childcare owners is that lenders rely heavily on the business’s Federal Tax Returns rather than the business’s internal profit and loss statements. This is not optional; it’s a core SBA requirement.
For SBA underwriting purposes, the business tax return is the only verifiable, audited, and standardized financial statement. This means whatever appears on your tax return, every dollar of income, every deduction, every adjustment, and every expense, is assumed to be real and necessary to run the childcare center. This is critical because it directly affects how lenders calculate the most important metric: the business’s ability to repay the loan.
What SBA Allows and Doesn’t Allow When Calculating Cash Flow
Many childcare owners and business brokers incorrectly believe that lenders can “add back” every dollar of cash tuition that somehow you forgot to tell your accountant, and every personal or discretionary expense that you paid through the business. SBA rules are specific, and far less flexible than most think.
Here’s what lenders can typically add back when determining cash flow:
- Depreciation
- Amortization
- Interest expense (in some cases)
- One-time, documented, non-recurring expenses
- Reasonable owner salary adjustments
But here is what lenders cannot add back under SBA guidelines:
- Income that was not reported
- Personal expenses run through the business
- Owner perks not clearly documented as non-essential
- Discretionary travel, dining, or vehicle expenses
- Family payroll that is not actually performing work
- Excessive “miscellaneous” categories that can’t be verified
If it’s on your tax return as an expense, and the business paid for it, SBA rules require it to be treated as a true operating expense, even if you consider it personal.
How This Affects Your Loan Amount or Your Ability to Sell
When you don’t report all your cash tuition income, or you have personal expenses that are mixed into the business, two things happen:
- Your taxable income goes down.
- Your reported cash flow also goes down.
For childcare center owners, this is where the consequences become costly.
Lower cash flow means:
- You qualify for less borrowing capacity.
- The business valuation is reduced when it becomes time to sell.
- You may not qualify for a loan.
You Can’t Have Your Cake and Eat It Too
Let’s face it, no one likes to pay taxes. While creative accounting may save money at tax time, it comes at a steep price when you want to: sell the business, borrow for expansion, finance the purchase of real estate, bring on new partners, or refinance existing debt.
The SBA requires lenders to rely on three years of business tax returns. If those returns do not show strong, clean cash flow, there is no workaround, no matter how compelling your story or internal books may look. In childcare, where industry multiples and loan sizes depend heavily on consistent profitability, this becomes even more critical. Buyers will not pay a premium for cash flow that doesn’t show on the tax returns, and lenders cannot stretch loan amounts based on assumptions, verbal explanations, or “handwritten add-backs.”
The Bottom Line for Childcare Owners
If you plan to sell your center, or borrow for growth, your tax returns must accurately reflect the true financial performance of your business. The SBA’s underwriting rules make it impossible to hide personal expenses inside the business while still expecting top valuations or maximum borrowing power.
Cleaning up your books now, before you apply for a loan or prepare for a sale, can be one of the most profitable decisions you will ever make as business owner.
After all, you simply cannot have your cake and eat it too.
