Author: RogerP
Small Business Shysters
Article by Roger Schlueter, MBA
Small Business Shysters are everywhere but very prevalent in the Small Business Lending Field. A Financial Loan Adviser or Loan Packager should be able to tell you, the Small Business, exactly what they can do for you. Very, Very, Few can guarantee that they can obtain financing for you. When approached by a Loan Person who says they can guarantee anything, then get it in writing and do not ever pay the full amount up front. It is customary for an adviser to get an amount up front because they will be, hopefully, Expending Time on putting together a Proposal or Financial Package for you. This is often done because if the borrower decides not to do the project then the Financial Professional could be, “out the time spent on this project”. I usually get a Payment of one half of the project fee up front and then the receive the remainder of the Fee when the project is complete or a milestone is achieved.
I hear of a Small Business being taken by a Small Business Loan Shyster at least once each year. Usually the Small Business wants to get a loan for his or her business and is turned down by their bank. The Small Business then contacts a Small Business Consultant who says they can obtain financing for the Small Business. This Shyster Consultant gets most if not all of the money paid up front and says they can Assure or Guarantee that the Small Business will obtain financing for their project. This financing does not occur. Then the Small Business goes to a Public Entity Funding Source at a City or County and inquires about the Public Entity getting the financing. Most Public Financing Sources will let a Small Business apply but do not write Business Plans or Bank Proposals. They do not have the Personnel or the Time to do this work and will definitely not Guarantee that the project will be approved. The Small Business being scammed, once already, will not engage any paid consultant for fear that the same results will occur as the first time.
They usually end up leaving the Public Entity because they cannot get their financial work done for Free. Very few Financial Consultants will work for Free and if they do there is always the question of the quality of the work being done for Free. A consultant that helps a Small Business obtain Financing should be Educated with at least some sort of Financial Degree but a MBA is the Best. I have seen some Accountants and Attorneys that are good but the real test is how many clients have they worked with and been successful in obtaining financing.
Please address any comments or questions to roger@rogerschlueter.com
SBA 7a Forms New as of 2014
Article by Roger Schlueter, MBA
Updated on September 20, 2015
The New Forms are: SBA Form 1919 and 1920. The Form 1919 and Form 1920 are on the Website and are in fill-able form.
SBA Form 1919 is to be Completed by the Borrower or an Agent of the Borrower. The Form is then sent to the Bank, who is actually lending to the Borrower. This form is sometimes filled out by the Bank and signed by the borrower.
– The Form 1919 asks for the general information from the borrower like, Name of Business, Your Name, Your SSN, Date of Birth, Place of Birth. Then it asks information of Veteran, Race and Gender information, (of Course this info is just used for Program Reporting Purposes Only).
– A Series of 22 questions is then asked about everything from, if you have been arrested?, Are you a Citizen?, Is the Business a Franchise?, Do you own Affiliated Businesses?, Number of Jobs to be Created?, Have You Used a Packager or Broker?, Is Construction involved?, and Several Conflict of Interest Questions.
– The Form then lists all of the Federal Laws etc. on two pages and then on the last page is where the Borrower signs and dates the Form.
SBA Form 1920 is to be Completed by the Bank that is making the loan. This is called the: Lender’s Application for Guaranty for All 7(a) Programs. This Form is 13 pages but covers the Borrower General Information, the Loan Amount, The Term and Interest Rate, Again Race, Gender, Ethnicity, and Veteran Information. The form covers the Use of Proceeds (what the money will be spent on), Info on Change of Ownership of the Business, and then nine pages of Eligibility Questions and finally a Signature Page for the Banker to sign.
Other Borrower Information: The borrower will still have to have the financial and cost information that will be attached to this Application. This info is: Personal Financial Statement of Borrower, Tax Return for at least one year from Borrower, Business Financial Statement for three years. Sales and Earnings Projections, Cost Documents for Assets being purchased and any other information the SBA deems necessary.
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Form 1919 and Form 1920 are Fill-able Forms.
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This is a Big Change but the information is the same, just a different form. The SBA used the same forms for decades but now it seems to change forms every year. Many bankers and business owners are confused by the constant change of rules and documents, but remember, the Fiddler calls the Tune. Please address any questions or comments to this Blog or email me at roger@rogerschlueter.com
SBA Form 4, Application for Business Loan (SBA 7a Loan)
Article by Roger Schlueter, MBA
THIS FORM HAS BEEN REPLACED BY THE NEW FORM THAT HAS NOW BEEN APPROVED.
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SEE BLOG, “SBA 7a Forms New as of 2014”, FOR THE NEW FORMS TO BE USED ON ALL SBA 7a LOANS.
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The SBA Form 4 is the Application for Loan that is used mainly for the SBA 7a Program. This loan program guarantees the bank to reimburse a percentage of the loan in case of default by the borrower. This form is not hard to fill out but you want to fill out every blank space and if the item is not applicable to your application then write in N/A. You can download a copy of the form from SBA at www.sba.gov/sites/default/files/tools_sbf_formssb4.pdf This application form has changed very little over the years. The application is only the first four pages. The last three pages cover what the SBA calls the Statements Required By Law and Executive Order and is just the Laws and Acts that the Government wants you to follow, like: the Freedom of Information Act, the Privacy Act, etc.
The first page of the Application has it’s Expiration Date in the Right Top Corner. You want to make sure you have a current edition. The first page starts with general information like Individual Name and Address, the Business Name and Full Street Address, the Type of Business and Date Established. To the Right Top is the Federal Tax I.D. Number or Social Security Number (depending if you file your tax returns as a Corporation or Sole Proprietorship), Telephone Number, and Number of Employees (including other companies you own), at Time of Application and if the Loan is Approved, and From Subsidiaries or Affiliates. There is a box below the General Info for your Bank Name and Address.
The next section is a description of your loan request. This Use of Loan Proceeds just states what you are borrowing money to buy or payoff. Remember the SBA 7a Program has a Guarantee Fee that can be included into the loan under All Other. There is also a space for the Term of the Loan. SBA does allow you to do a Weighted Average on the Term which can dramatically increase the number of years of your loan and reduce the payments accordingly.
The lower section has the Government Debt disclosure. This section must be filled out if you have ever had any government debt even if it was only Student Loans. The section is pretty self explanatory with ample room for information.
There is a small section at the bottom Titled Assistance. This section is checked Yes if you have paid or will pay anyone for assistance of any kind on this loan. The usual help is the Packaging or if the bank paid someone a referral fee of any kind. You fill out a Form 159 for each party that was paid or will be paid.
Page two has at the top of the page the Business Indebtedness Section. This section is for all debts that are paid by your business. Mark an Asterisk (*) next to any loans that will be paid with this loan.
The Page two middle section is the Management Section and wants information on anyone who has an ownership in the company. The Veteran Status and Race information is voluntary and is used for Statistical Purposes. This information on race has no bearing on the loan but the Veteran Information may be a plus for any application that is submitted.
The bottom of page two is a listing of what additional information should be included with this application and what to Label the Exhibits.
Page three has questions from Number 9 thru number 20 to answer. This page is also signed and dated where indicated at the bottom right.
Page four has The Business Name at the top and then places for signatures of any owners or guarantors to sign and date. They say not to sign more that once but they mean as an entity. If you sign as President of a corporation and you are also a Guarantor you will sign twice. If in doubt – sign again.
This has been a brief overview of the Application for Business Loan. You may have to fill it out but some of the banks fill it out for you. You may need to use a Packager to fill out the package and it usually is money well spent. Be sure the packager does not charge an absorbent fee. To check this you can run the fee by the bank and the SBA to see that the fee is not too awful high.
Feel free to check out my Website at www.schlueterfinancial.com to get contact info or to obtain further information.
SBA Credit Scoring Small Business Loans
Article by Pat Osborn, MBA
SBA will now credit score all 7a Guaranteed Loans of $350,000 or less. Obviously they do not think much of the Borrowers that get the “Small Loans” of up to $350,000. SBA will do loans up to $5,000,000 that’s Five Million Dollars. The Loans of up to $350,000 seem to be a nucience since the SBA does not look at loans approved but the DOLLAR VOLUME and The JOBS CREATED. These are the things that they can use in there marketing to publishise there Mission. That Mission is to generate as many Large Loans as they can so they can use those High Numbers to Show How Great They Are. Anyone in the Real Business World knows that most of the Small Business Loans are less than $350,000 and the SBA is not helping the people that they say is there Mission – Small Business.
SBA said in a meeting on January 22, 2014 that they did not know how the SCORE was arrived at or what criteria was in the Score. They leave that up to FAIR ISSAC to determine. If that is the Case then how do they know they are doing loans that the banks cannot make on their own?
Obviously it is easier to Credit Score Loans similar to the BIG BANKS, and the large banks have long been criticized for using Credit Scoring to limit the number of Small Business Loans that they do. Some larger banks do not do loans under $250,000 and will tell borrowers to put it on a Credit Card.
I don’t know where the SBA People live but you would think they could just go outside and ask small business owners on the Street, What is a Small Business Loan to Them, and I bet They are going to Say That a Small Business Loan is anywhere from $50,000 to $500,000. It is a pretty big business that needs a loan of One Million Dollars or More. Don’t get me wrong, I think it is Great that SBA will do loans up to Five Million Dollars but I don’t see those large loans in my Neck of the Woods. I feel that SBA should do a Reality Check and go outside there offices in Sunny California and walk the streets of Midwest America and see what most small businesses are needing. I think they would be surprised.
Nonverbal Messages in Commercial Lender Meeting
Article by Roger Schlueter
Nonverbal Messages in Commercial Lender Meetings need to be Listened to with Keen Observation. A meeting with a Banker is a rare occasion and should be treated with the Preparation of a Final Exam. Most meetings start with the Banker asking you to describe your business and the need for the loan. This is always to see if you Know Your Stuff and to provide the Banker with enough information to see if he wants to waist his time in Analyzing the Loan Request. The Banker should be listening to you and should not be looking at your information or looking at his computer or doing anything except for listening to your loan request.
If you give him any information, which you should, give him a Summary of your Oral Presentation. This Summary can be looked at by you during the meeting as an Outline to make sure you are on track to discuss or talk about all your concerns. Do Not give him a 30 to 100 page Business Plan because he will be leafing through this booklet during the whole meeting and will not be listening to you. You can give him a Detailed Business Plan after the meeting has wound down and you feel confident that you have concluded your presentation.
The Banker should be: Number One – Listening Intently and Asking Questions Periodically. You should have his total Attention and again he should not be looking at anything, (other than your Summary), including his computer or gazing out any windows. Number Two, he should seem interested in your business and your Loan Presentation. Again asking questions to clarify any part of your presentation. Number Three, the Banker should ask you before he runs your credit but when the meeting is over and your have applied for credit he will run credit as soon as possible. Some bankers have ran credit on his computer when you are in his office but again he should ask you before he runs credit before you have concluded your presentation. Number Four, the Banker should ask you for any additional information that he needs at the end of this meeting. Some banks have a separate Application. This Application allows them to run credit and is usually proprietary to that bank. Some banks just use the Personal Financial Statement as your request for credit and run credit as soon as they have this document. Number Five, the Banker should at the end of the meeting move to the next step in the loan process and tell you what that Process is going to be like, including a timetable for a decision and a timetable for the funding of the Loan Request.
Now just because the Banker is interested in you doesn’t mean he is your best bud. He works for the bank and will do whatever the banks wishes are, whether those wishes are open or have a hidden agenda. The real thing to look for is a genuine interest and his attention during your loan meeting. Remember to be like a Boy Scout, “Be Prepared”. I would also visit at least three banks because there is a great deal of varying viewpoints as to what is considered a good loan.
Please direct any questions to this blog or to roger@rogerschlueter.com
New SBA Small Loan Application 2014
Article by Roger Schlueter, MBA
The SBA is having any SBA 7a Loan that is $350,000 or less to use a New Application to SBA. The New Application will be a Revised Version of SBA Form 1919 and 1920. The Problem is that the New Application is not Approved for Use as of January 1, 2014, the Start of the Program and as of this date, is still not Approved. The SBA Small Loan Application is not out yet but they say to use these Forms:
Borrower – Form 1919 Borrowers Application and SBA 912 (Personal History Statement)
Bank- Form 1920SX Part B and Part C.
– These Forms were created for the Express Program and thus were not created to do all SBA 7a Loans. There will be parts these forms that will tell you the loan is not eligible or will not conform to the New Rules – like the new SBA 912 Form.
– Best way to handle these Problems is to Asterisk the Problem Area and then to Explain Elsewhere in the application or as an Added Addendum to the Application.
I Will try to keep you informed of the New Application as soon as it comes out. Until then Feel Free to use the old Express Forms, that may not be suited for Your SBA 7a Loan Application, that you are sending in to SBA.
The First Commercial Loan Screen is Your Credit Report
Article by Roger Schlueter, MBA
Commercial Lenders are busy, (Playing Golf, Talking to Friends, Buying things on the Computer, Planning Vacations), and Oh Yea, Looking at Loans.
My First Commercial Lending Job, I had a Prospect that I didn’t think was a very good Commercial Loan and I wasn’t sure how to look at the Borrower. My Superior Lender told me to, “Just Run Credit and then Turn it Down”. Thus my first lesson in How to Turn Down a Loan, just Run The Credit and if it’s Bad, Turn it Down. This is really bad when the borrower took the time to write up a full blown Business Plan or Fill Out the Banks Application and bring in all the Items Requested by that Application.
Since, The First Commercial Loan Screen is Your Credit Report, Run Your Credit Before Applying for a Commercial Loan and See What it Says About Your Credit! If your score is relatively high, like over 700 then you have little to worry about. Their are several negative items that are not a real negative to banks and they are: Health Related Collection Items, Cell Phone Collection Items, any Small Collection or Owed Item that is a matter of Principal for the Borrower. Some people buy and sell real estate and have many Credit Report Hits on their Reports. These can be easily explained. The real problem is Habitual Credit Problems that don’t seem to ever be rectified. These are real Problems for Banks. Many Banks will even give a Commercial Loan to someone who has had a Bankruptcy if the Bankruptcy has been at least a couple of years ago and the borrower has had good credit ever since.
Bankers and Lenders are Real People Too and they will many times accept an explanation for a Negative Credit Reported Item or Report Itself. The banker will ask you about these Items and expects you to have a ready response. They do not want to see the “Deer in the Headlights Look”, when they ask you a question about your Credit Report. They expect you to give an insightful explanation as to what happened or the situation that existed which hurt your credit. I have had many times that the borrower said he or she had good credit when asked, but in reality had the worst credit imaginable. They had to Know, they had to have gotten calls from creditors. The banker would rather have an Explanation than be blindsided with an Absolutely Terrible Report.
What is Bad Credit? You Ask. Bad Credit historically has been a Score that is below 600. A Score of 600 to 650 is probably definitely below average but in some cases could be explained. A Score of 650 to 699 is Passable but not the Best and a Score of 700 Plus is considered Excellent. The Credit Reporting Agencies have raised the scores needed to qualify for what is considered Good. Pre 2008 a passable score was a Score of 620 or Higher. Now that Passable Score has been raised to closer to 670 and above. Most small banks and/or Community Banks have the ability to be discretionary when it comes to Credit Scores. The Large banks have a number that may move up or down but that number is an absolute. Have a Score blow the number and the loan will be declined, have a score above the number and the loan will be approved.
Summary: always check your Credit Report and be ready to quote the Score and also to answer questions about the individual Payment History of any of the Creditors Listed on the Report.
Please refer any questions to this blog or to roger@rogerschlueter.com
Commercial Loan Ramifications of Small Business Not Declaring Income
Article by Roger Schlueter
Commercial Loan Ramifications of Not Declaring Income in order to Reduce or Eliminate Taxes, is an Ongoing Issue with Small Business. This is especially true with the Sole Proprietorship. The Sole Proprietorship fills out a Profit and Loss Statement as part of the Individuals Personal Tax Return. This is very easily manipulated and often can have the Income Under-reported which in turn makes the Profit Under-reported. This Profit is what is reported on the Income Section of the Personal Tax Return. Under-reporting the Sales and thus the Profit on the Business can reduce Taxes by as much as 30% or more. This can also be done by Increasing Expenses but it is Usually better to not have the Income in the First Place.
Most Banks use a Debt to Income Ratio and a Debt Coverage Ratio as Key Analysis of the Loan Request of the Small Business.
-The Debt to Income Ratio is the amount of Monthly or yearly Debt Divided by the Monthly or Yearly Income. This Ratio is almost always less than 100%. but if the Income is Under-reported then it will rise to amounts that will disqualify the Small Business from getting a Commercial or Personal Loan.
– The Debt Coverage Ratio is measure of how much Profit or Net Income is available to cover the Monthly or Yearly Debt Service. This Ratio is obtained by taking the Monthly or Yearly Cash Flow and dividing it by the Monthly or Yearly Debt Service. This Ratio is almost always over 100% and is expressed as 1 to 1 Ratio. The desired number is approximately 1.25 or 1.30 to 1. The Higher the Better. This Ratio shows the Cash Flow Available to pay Debt Service which must be higher than 1 to 1 in order to pay the Debt over any Period of Time.
This Method of Increasing Profit by not reporting Sales or Increasing Expenses did not mean much to Bankers in the Old Days. The Bank looked at the Business for repayment of the loans and if the business always Paid its Debt and had Cash in the Bank then the Banker did not care (to a point) if the Small Business was Under-reporting or Not. The Point, is that the Business may get audited and Owe a Huge Amount of Taxes that could Jeopardize the Businesses Future Operations. Remember the IRS can just Take Assets and Always gets Paid First if this is an Issue.
The Real Rub is coming to a Head in 2014 because the Regulators are Making the Banks Meet Certain Standards in the Debt to Income Ratios in order to make the loans. If they make loans that do not meet the Standards then the Regulators will say the loan is an Exception to Loan Policy and will Cite the Bank for the Error in Judgement.
The Business that knows it will apply for a Business Loan should always report all income and make as much profit and pay as much taxes ( Taxes that are Owed) as Possible. This will give the bank the Necessary Reasoning to Approve the Loan within the Regulations of its Regulators.
Bank Business Loan Approval – Be Sure to Get Approval in Writing
Article by Roger Schlueter, MBA
Congratulations! You have a Bank Approval for your Business Loan. Your Banker has told you verbally that your business loan was approved. They are just waiting on the Underwriter to Finish Up the Approval or Process.
I Hate to Break It To You but “Your Loan Has Not Been Approved”. Your Loan is Not Approved Until You Sign Your Loan Documents! You should always get the approval in writing. Even if the approval is in writing, it is usually written with so many ways out for the banker and many Written Loan Approval Confirmations have a disclaimer at the end of the Letter that will say that this approval can be denied for several reasons.
Statements in the Approval Letter:
1) Approval Contingent on the Building or Business or Equipment Appraising at the agreed upon Amount and be acceptable to the bank.
2) The amount of agreed upon Equity will be put into the project.
3) All Hazard and other Insurance will be acceptable to the bank.
4) “These Conditions are only general terms on which the loan will be extended and is not an exhaustive statement of terms and conditions of the loan.”
The Catchall of coarse is number 4, where the bank says there may be additional terms and conditions that are not included in this letter.
The Written Approval Letter will give you some security but most will not hold up for you in Court. The letter is better than a verbal approval which for some banks is the only approval you will get. You can of course have your Lawyer call their Lawyer and pay an enormous amount of money to get an absolute approval, but this could jinx the Deal, or Slow the Approval or Loan Process Down to a Snails Pace.
Just Remember: THE LOAN IS NOT APPROVED UNTIL YOU SIGN THE LOAN DOCUMENTS!!!
Please address any questions or comments though the blog or email me directly at roger@rogerschlueter.com