Author: RogerP

SBA 7a Business Loans can be more Forgiving than SBA 504 Business Loans

Article by Roger Schlueter

SBA Loans can be very confusing but this may clear things up. The SBA 7a Program was the Original SBA Loan. The SBA 7a Loan is a Guarantee of a Loan Made by a Bank. The SBA Guarantees up to a certain percent of the loan balance as an incentive for the bank to make the loan. This Guarantee is currently 85% on loans of up to $150,000 and 75% of loans Over $150,000. Almost all SBA Loans (Excluding the SBA 504 Loan) are Subsets of the SBA 7a Loan. The SBA 7a Loan is for all types of Business Loans from Real Estate, to Equipment, to Inventory, to Working Capital. The 7a Loan is also a Higher Cost Loan than a Conventional Bank Loan or a SBA 504 Loan. The Main Reason the Loan has a higher cost is the Guarantee fee which is 2% of loans up to $150,000 and 3% or More for loans above $150,000. The 7a Loan also has a 0.05% Fee that the bank has to pay on an ongoing basis.
The SBA 7a Loan was created so that banks could fund loans to small business were there might be a problem area. The Problem Areas are Collateral – not enough, Equity – SBA will allow as little as 10% and can also give credit to Equity already in business, Credit – Banks want excellent Credit but SBA will allow imperfect credit as long as the problems are not Habitual, Industry or Business – Banks are more careful when lending to businesses that have a History of Problems like Restaurants and Leisure Activities.
The SBA 504 Loan was created so that Growing Businesses could assess Long Term Fixed Rate Capital to fund their Growing Business. The SBA 504 Loan can only be used for Fixed Assets like Real Estate or Equipment that has a Useful Life of 10 years or More. The 504 has a minimum Requirement of 10% Cash Equity, (Construction of a Building can use the land as the 10% Equity). Approval Process for the 504 is two fold, they must be approved by a Local CDC (Certified Development Company) which is usually made up of Bankers and then seek the SBA Approval. The SBA 7a on the other hand must only be approved by SBA. Both Loans must be submitted by a Bank or Financial Institution.
All in All the SBA 7a Program is more forgiving than any other SBA Program in Lending to Small Business. The 7a Loan can also be used for Refinancing, Inventory, Vehicles, Any Equipment, Working Capital and Good Will, and of course Real Estate. The Credit Criteria seems to have a lower bar than the SBA 504 Program and the Equity requirement is more Flexible. Small Business Loans that can qualify for the SBA 504 Program sometimes will have an easier time qualifying for the SBA 7a Loan for all the Reasons given above.
Please go through the Blog for Questions or you can asses me directly at roger@rogerschlueter.com
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Real Estate Appraisal for Property and Improvement

Article by Roger Schlueter

Borrowers that are buying an Existing Building and making improvements to that building must make sure that the Bank orders the Right Kind of Appraisal. The Right Kind of Appraisal when you have an Existing Building with Improvements to be made to the Building is An “AS IS and AS COMPLETED” Appraisal. This Appraisal will look at the Existing Building you are buying and Value It as it sits. The Appraisal then Adds the Improvements and Values the Building with those improvements Added. An Appraisal that only has a Value of the Building with Improvement makes it Impossible to see if you are paying too much for the Building or Making Improvements that are not Adding to the Value of the Real Estate. 
All Appraisals Value Real Estate three ways. The First Way is as if the building was built from the ground up, The Second Way is the Market Value when compared to like properties that have sold in the most resent past. The Third Way is the Income Approach, and looks at the Value when the property is Rented Out and valued by the Income that is generated on a Future Value of those Dollars. These Three Methods  are always used but given different Weights depending on the importance of the Method. 
Example: You have an Existing Building that is Ten years old or more. This is not equal to a Newly Built Building so the Built from the Ground Up is not Appropriate and is not used. The Best Value is what like properties have sold for in the most resent past. The Market Approach is Appropriate and is used. The Income Approach is also Appropriate and is also used. The Value will be somewhere in between these two values. 
Most Banks will ask for an Appraisal that is “AS IS and AS COMPLETE”, but sometimes they do not and the values are lumped together. This lumping the Existing Building and The Improvements makes it impossible to tell if the the building or improvements are overvalued in an Appraisal that is Higher than the Borrower is willing to pay or the Bank is willing to lend. This type of an Appraisal helps the Borrower know if it is worth pursuing the Real Estate or if the improvements need to be reconfigured or reduced.
Please comment or send questions thru Blog or directly at roger@rogerschlueter.com

Business Banking – Putting all Your Eggs in One Basket

Article by Roger Schlueter, MBA

All Banks want you, the Business, to move all your Accounts to your New Bank. They can actually “Tie” the Bank Accounts to your Business Loan. Meaning they can make you move your Business Banking Accounts to any bank that gives your a Loan and make the Loan Contingent on those Business Accounts being put into the New Bank. The bank cannot make you use a certain Insurance Company but they can Tie the Business Loan Accounts to any New Loan that they will make and it is completely legal. 
Having all your Business Dollars in one Bank can be beneficial if the business is doing well and you do not ever have any problems with Sales or Earnings and do not anticipate any problems in the future. If your business is having problems then its a different story. Most Banks will Curtail all lending and may even Cut Lines of Credit or Not Renew Loans to any Business that is having problems with Sales or Earnings, or any Business Condition that is considered to be a Risk for the Bank. Your Loan Officer is Paid by the Bank and will support any such moves by the Bank because he or she works for the Bank, they do not work for You, the Business. 
Some Businesses decide to have several Banking Relationships, Usually Two, which they can count on in a pinch. Most Banks will differ in their tolerance of Risk and they will differ in their Lending Criteria and their Loan Policies. This is why many businesses decide to have more than one Banking Relationship, even if it is just a Banking Account at another banking institution. Even if a Bank tells you that you need to move all of your Business Banking to their bank as a Condition of Your Loan Approval, you can usually tell they you will move your accounts after the loan is made. After the loan is made most banks forget about the conditions and they have more pressing projects to work on. The Bank will usually catch the condition of moving all your Business Banking when the loan is renewed. Whether they take it seriously will depend on the Competition at that time and the financial condition of your company. If your company is doing well and you can easily move to another bank then they will not make you move all your accounts, but if you are doing OK or are slowing down then they will tell you that in order to renew your loan you need to move all your accounts to their bank.
Having all your Eggs in One Basket can be beneficial or it can be a nightmare depending on how well your business is doing and how well the economy is doing. Do not trust any financial institution to do what is Good for Your Company, The bank will do what is Good for The Bank. Forget this one Statement at Your Peril. 
Please contact me with any questions or comments though this blog or email me at roger@rogerschlueter.com    

SBA Does Not Give Any Local Control to District Offices

Article by Roger Schlueter

I have worked with SBA for my whole career and have seen changes that I do not feel very good about. The changes that I talk about are the change of control from local to national in the evaluation of loans and in the interpretation of loan policy. 
SBA in the Eighties, Nineties, was controlled by the local SBA office and loans were approved and serviced by this office. The employees were accessible and accountable for their actions and could help a business by looking at the whole picture in the evaluation of a Loan. The employees because they were approving loans seemed to know the loan policies and rules and regulations much more than they do currently. I do not blame the employees, they do not run into the same problems they had, when they were approving and interpreting loan policy. The Staff is a marketing arm now and as such will many times sugarcoat their discussion of loan products with borrows. They are Salesmen now and tend to look at the bright side in selling to Banks and Borrowers. 
Currently the SBA has offices in California that approve all loans and interpret policy and rules and regulations. The communications are done though Nameless Email and you never know who is working on you loan. The SBA 504 Loans have been operated this way for three years or more and the SBA 7a or Guaranteed Loans are moving in that same direction. It’s kind of like there are no real people anymore, just a faceless SBA, kind of like in OZ – the Great and Powerful OZ that hid behind the curtain and projected his created Image on the screen. They evaluate the Local Banks and Certified Development Companies and shy away from the tougher projects that most of us small local people seem to have. The Banks seem to do the easy projects and leave the tougher and harder to finance project, to do with a SBA Guarantee. 
SBA is also moving toward using the Personal Credit Report and Credit Score as the determining Factor. This is just like the big banks and will result in the same result – most small difficult projects will be passed by for the “Low Hanging Fruit”, the easier deal, that should probably be done by the local bank without SBA assistance. The SBA also has a bent toward the larger deals and give awards to the entities that do Large Dollar Amounts of loans rather than the Larger Number of loans. The larger number of deals seem to help more businesses and help businesses that really need the help. These are the deals that neither the bank or the SBA wants to do. The Key here is Marketing Ability. What kinds of projects create the largest amount of Dollars and the most jobs regardless of whether they really need the Government Help or not. These Numbers of Dollars of loans and Numbers of Jobs Created are what the Government Wants to Generate so it can use this information to Justify It’s Own Existence and Laud over the Number of Jobs and Investment the SBA has Created. 
What I would like to see in the future is a Local Office that could influence the National Office on at lease some projects in their area. What I would like to see if SBA Local Personnel that have actually Package a Loan or Two so they will see what is encountered at the national level. I would like to see a SBA Office that likes to Help the Small Business and doesn’t care as much about how large the project is or how many jobs are created by the financing. One Small Company creating One Job is usually the equivalent of a Larger Small Business creating 100 Jobs but the large Small Business usually does not create that many jobs. The SBA need to be focused on Helping Small Business instead of evaluating and marketing with a faceless Organization.
Please respond to this Blog or directly at roger@rogerschlueter.com   

Banks Make Loans to All Business

Article by Roger Schlueter

Remember that Banks make loans to all businesses. Sometimes we forget about the Conventional Bank Loan when we are bombarded with Small Business Administration Loan Programs and FHA Loan Programs. Banks still provide 90% or more of All Financing for Business Loans to Small, Medium and Large Business. 
Your local Bank is the place to start but when looking for a Business Loan, look at at least three to four Banks to make sure you get your message across. Every Bank has it’s Favorite Types of Loans and Quirks in the Lending Process. I worked for the most conservative Bank in the St. Louis Market but we were not allowed to tell people that we did not do loans to Restaurants, Churches, Recreation Type Business, and Startups. The management would prefer that we took the application and turned the loan down. That was the hardest part of that job because everyone in Lending wants to Lend. To just turn the loan down, because of the type of business, is just pure stupidity.
Most Banks look at two main ways to repay the loan. The First is the Cash Flow Available to Repay the Loan. The Second Way Out is Selling the Collateral and Paying the Loan Off. This sounds simple enough but the Bank wants to obtain the most advantage that it can. This will start with the Down Payment. The Bank wants as large a Down Payment as it can get. At least 20% but this can be increased if the Bank thinks you have the Cash or if the loan is considered a riskier loan. The Terms of the loan can then be adjusted to increase the advantage to the Bank. This will start with a higher and/or Floating Interest Rate but can be a Shorter Loan Term. The Collateral is the Next Condition to Increase the Banks Comfort Level. They want as much Collateral as they can get and (No Matter What They Say) will never release any of the Collateral until the loan is paid off.
You as a Borrower should always look at a Conventional Bank Loan First and if the Bank needs any additional security by means of a Loan Guarantee or a Public Program of some sort, he or she will tell you. They may try to turn the loan down first, so at the end of every Bank Loan Presentation, Always tell the Banker, if he needs to go through the SBA or some other sort of Public Loan Program, you are O.K. with it.
Please refer any questions or comments to the Blog or to roger@rogerschlueter.com   

SBA Loan Decline – May Be Worth Resubmission

Article by Roger Schlueter, MBA

*** This Article was amended on 6/29/2013***

Sometimes even the Best of Us Must Eat Our Words! This article was written when I had a Project that was Turned Down by SBA. You only get One Turn Down and Two Resubmissions. The Project had been Turned Down and Resubmission #1 had been Turned Down. I really thought that SBA did not want to change their mind, even though I felt they misunderstood the project and it’s cash Flow. 

This is a learning Experience that almost anyone who gets a Loan Approval from someone else can learn from. Looking back on my Application I feel that I did not do a good job in explaining the Project and it’s Cash Flows which had changed from when the Borrower had originally written his Business Plan. I had included the Original Business Plan because I used some of the Sales Projections in my own Sales Projections. The Business Plan should have been rewritten to comply with the New Information and New Loan Structure. I admit that I took the easy way out and copied the Original Business Plan and put it in the package. 

Any Higher Authority that has to Approve a Loan Package only goes by the Information Given and has a hard time deciphering what the current information is and what the previous information was. They, do not and should not, be changing or interpreting your project. The Information in the Package should be precise and accurate enough to lead the Authority to one Loan Proposal that is understood by all who look at the information. Any information that is no longer valid should not be included in the loan proposal.

This was a Project that we thought was a Good Loan, we were very adamant about the loan being approved by SBA. After the SBA had all the information and was not confused by misleading information they Approved the Loan. Loans that are changed in the process of Applying can cause problems for any Packager or Loan Officer who has not gone through and changed all the Package to comply with the New Loan Proposal.  
The Small Business Administration usually tries hard to approve loans that banks bring to them. The SBA will sometimes decline a loan and will give reasons for the decline. These declines can be resubmitted to SBA for a Second Look but the Decline is rarely approved on a Second or Third Try. 
The SBA will state on it’s decline that the loan has been declined on a First Consideration. The SBA will give the Bank three considerations. It’s kind of like the ole, “Three Strikes and You are Out”, saying. Rarely are these declines approved on a reconsideration. The Decline I just had with a bank listed several reasons for the Decline and the Bank took great pains to overcome those objections. The SBA Loan Officer used New Objections on the Second Decline which we thought was unfair. They seem to be unwavering in their Considerations after a First Decline. I really do not think they will change their mind for any additional information or any additional conditions. They have made up their mind and any attempts at Approval are futile.
In the Old Days, the bank could go to the local SBA Office and they would go to bat for the borrower and the Bank but those days are gone. The Centralized Processing means Centralized Approval. The Local SBA Office is a Marketing Arm of the SBA and does not seem to have any real influence on the Loans Approval or the Approval Process.
Sometimes, things do not get better. Things are definitely better for the SBA and their Approval Process but not the Borrower or the Banks. I sometimes wonder if the SBA really knows, who is their customer. I would think their customer is the Bank and the Borrower but alas, the Real Customer is the Legislature and the Government Bureaucracy.
Please address any questions or comments to this blog or to roger@rogerschlueter.com  

Documents Provided to The Bank for a Business Loan

Article by Roger Schlueter

There are many Documents that the bank will want to see when you apply for a Business Loan. This article covers most but, He who has the money will dictate the dance.
I Guarantee you will have all your info if you follow this list for getting a Commercial Business Bank Loan!
1) History of Company or Discussion of the Who, What, Where, Why, and How of the New Company.
2) Money needed and for what purposes. Estimates and Bids from providers of Future Purchases.
3) Resumes of All Owners.
4) Personal Financial Statement for all Owners with their Credit Score Listed.
5) Personal Tax Returns for three years.
6) Company Financial Statements for three years and/or  Projected Company Financial Statements.
7) Existing Company – Company Tax Returns for three years.
8) Cash Flow Statement for First year on a monthly basis.
9) Cash Flow Statement for Three Years on a yearly basis.
10) Financial Analysis of all Past Financial Statements and Projected Financial Statements.
11) Listing and Discussion of Collateral that you are pledging for this loan.
12) Summary of Your Project that restates the reasons you need the loan and the benefit to your business. 
*** Remember to Sign and Date all Financial Documents, especially the Personal Financial Statement and the Financial Statements and Tax Returns.
*** The Bank will run Credit on all potential borrowers.
This is a Good List but No One can tell you exactly what the bank will ask for because the Documents that are provided may lead to more information that the banker wants to see. 
Please address any questions thru this blog or Email roger@rogerschlueter.com  

Personal Guarantees on Business Loans

Article by Roger Schlueter

Personal Guarantees on Business Loans are as certain as Death and Taxes! I have talked about this before but many business people just don’t understand. Just because they have their company set up as a LLC or Corporation, the bank will still want their Personal Guarantee and their Spouses Guarantee. 
Most Banks will get Guarantees from the Owners of the business and any other Businesses that the owners own. The Bank will also want the spouse to guarantee the loan unless the Borrower Applies as Personal Credit and Only Shows their Assets and Income to Pay Off the Loan. Usually the Bank will still want the Spouse and will insist on a Marital Waiver if the spouse is not on the loan. The Marital Waiver excludes the spouse from claiming a stake in the Value of the Business in case of a Divorce. 
Banks do not care what level of ownership the individual owns, they usually want a Secured or Unsecured Unlimited Personal Guarantee. That said, sometimes banks will let a Minority Owner of less than 20% sign a Limited Personal Guarantee. This Limited Personal Guarantee is just that, limited to an amount of money. It can be a percent or an absolute dollar amount. 
The U. S. Small Business Administration or SBA will always want a Personal Guarantee from the borrower and their spouse. They sometimes must be reminded of Regulation B (Federal Law which applies to the Federal Government as well as all of us) which states that they cannot arbitrarily demand a Personal Guarantee from a spouse. The Individual can apply for Credit on their Own Behalf but cannot put the spouse on their Personal Financial Statement. This Usually is a problem when the Spouses own Joint Assets like Real Estate. The Joint Asset, that is owned Jointly, will give the Bank or SBA the right to ask for a Spouse Guarantee.  I have seen people use only their assets and income to apply and not have a spousal guarantee but this is usually when they have segregated assets. 
Alternatives for Credit when you do not want the spouses personal guarantee are Unsecured Loans or Lines of Credit usually in the form of a Credit Card. They, of coarse will carry a higher interest rate of 14% to 24% rather than a Bank Interest Rate of 6% to 8% (this is the rate as of 5/24/2013). Usually unsecured debt will not be as structured as debt that is secured against assets.
I have seen companies try to get around this issue by having let’s say Ten or more owners that each have 10% or less ownership. The rule is 20% for a personal guarantee with SBA but SBA will ask for all under the above ownership situation. Under the above situation the Bank or SBA may give Limited Guarantees that may be limited to the borrowers ownership in the business. The Key Words here are MAY GIVE. 
This has been an overview of the Business Loan Personal Guarantee that is obtained by Banks and SBA on Business Loans. Please respond though the blog with questions or comments. My Email is roger@rogerschlueter.com  

Bankruptcy – The Types of Personal Bankruptcy

Article by Roger Schlueter

Bankruptcy – The Types of Personal Bankruptcy
Why do I talk about personal bankruptcy ? Why do I, not, talk about company bankruptcy ? Well, the personal credit report is the most important. There is no, Business Credit Report. Well there is but it is not as used, or important, as the Personal Credit Report. The main things that are reported on the Business Credit Report are Tax Liens, Judgments and of Coarse Bankruptcy’s. The Personal Credit Report is constantly reported as to the current, timely payments made as well as the amount of debt in relation to the availability of credit. Most banks do not run a Credit Report on the Business, but always run a Credit Report on the Owners / Guarantors of the Business Loans.
The Bankruptcy Code has changed since 2005. The two chapters of Bankruptcy are a Chapter 7 and Chapter 13. The Chapter 7 is the fastest and simplest method to receiver relief and get your debts discharged. Under the Chapter 7 the Non-Exempt Assets are seized by the Court Appointed Trustee. The Trustee then sells the property and gives the proceeds to the debtor’s Creditors. Non-Exempt property is usually a Second Car, Stocks, a Second Home etc. The individual keeps his or her Exempt property which includes, a Home, a Car, Furniture, Health Aids and Clothing. 
Chapter 7 does not discharge debts in Student Loans, Alimony, Child Support, Criminal Fines, Divorce Property Settlements, and Recently Owed Property and Income Taxes. The Debtor still must make payments on the Exempt Obligations like your Mortgage and your Car Loan. 
Chapter 7 Bankruptcy remains on your Personal Credit Report for 10 years and will make it harder to get loans, especially in the early years. 
The Means Test – To qualify for Chapter 7 you must pass the Means Test. The Means Test compares your income to the Median Income of a similar size family in the state where you live. The court will look at disposable income that left over after paying for Exempt Necessities as Food and Housing. 
You must also take a Pre-Bankruptcy and Post-Bankruptcy Course that your attorney’s office will enroll you for these classes. These are usually offered by a not-for-profit Consumer Credit Management Company. 
Chapter 13 may be applied for if you do not qualify for Chapter 7 and is not as desirable as Chapter 7 because the court make you pay back some of the money with a payment every month for three to five years. You do not get your debts discharged until you have completed your payment plan. 
This is a quick overview of the Chapters available in Personal Bankruptcy and I stress Personal Bankruptcy because it has the most impact on a persons financial future. Banks have not gotten to the point of reporting all business loans to a centralized credit bureau. Most of the current Credit Bureau’s for Business do a good job for Tax Liens and Judgments but not the run of the mill Reporting of current and timely payments of bills. 
Please address any questions or comments to the blog or to roger@rogerschlueter.com or go to my website at schlueterfinancial.com.   
 

Collateral for the Business Loan

Article by Roger Schlueter

Collateral for the Business Loan has always been a touchy subject with borrowers. The Borrowers Collateral usually does not add up to the same amount as the banks collateral amount. The first way out of any loan for the Banker is the Cash Flow of the Business. The business pays down the loan with interest and the bank makes money. The second way out for the Bank is to Liquidate or Sell the Collateral and pay down or pay off the loan.
The Banks lost money on many loans in the years of 2009 thru 2011, and do not want to repeat the losses on loans made this year. They have made money on loans this year and are more careful on the Second Way Out of Business Loans. 
The Banks in years past and today will utilize the SBA Guarantee for shortfalls in many areas of a Business Loan. These Areas are Down Payment, Credit, Collateral. The banks must have Cash Flow on a Business Loan – the First Way Out. The Small Business Administration has been used to bolster the Collateral on many loans as well as the Credit of the Borrower and the Down Payment.
What I am seeing is that the bank is relying on a larger amount of Collateral even if they are using the SBA Guarantee Programs. The SBA will approve the use a Supplier of a Borrower as an appraiser of Machinery and Equipment. This is easy to get because the Supplier want to get more business in the future. Some Banks are using costly Equipment Appraisers even though they are going through the SBA Guarantee Programs. This Trend will lessen as the Economy Improves. 
Always bring up the SBA Guarantee Programs if the bank is uncomfortable with the Collateral Value on your business loan. Many banks do not consider the SBA and look for a Quick Turn Down. This has been an overview of Collateral. I have a more detailed Collateral Article in this blog that covers Amounts of Collateral for different Asset Classes. 
Please go thru the Blog for any Questions or Email roger@rogerschlueter.com or go to my website at schlueterfinancial.com