Author: RogerP

Article by Roger Schlueter, MBA

Article by Roger Schlueter, MBA

The business needs to remember these reasons for when they are applying for a Business Loan so they can remind the bank of the SBA Guaranteed Loan that can be used under many of these circumstances. Many banks do not think of the SBA before turning down a loan but if reminded may use the program. Unfortunately there are still some banks that will not use the SBA which is a shame.
 
For Contact and other information please go to my website at www.schlueterfinancial.com or Email me at roger@rogerschlueter.com    

Article by Roger Schlueter, MBA

Article by Roger Schlueter, MBA
Sections of this article were taken from the SBA SOP (Standard Operating Procedure)

” A business valuation assists the buyer in making a determination that the sellers asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.” (SBA SOP)

A Business Valuation is a requirement for the financing of Good Will or Intangible Assets in a Change of Ownership when purchasing a business when using the SBA 7a Loan Program for financing. The Bank can do the Valuation if the Good Will and Intangible Assets are valued at no more than $250,000.
 
An Independent Valuation from a Qualified Source is needed if the amount of the Good Will and Intangible Assets are valued at more than $250,000 or if there is a close relationship between buyer and seller. This would be the situation if they were family members or partners.
    A Qualified Source is an individual who regularly receives compensation for Business Valuation and is either: 1) A licensed CPA that performs the business valuation is accordance with the ” Statement on Standards for Valuation Services”, published by the American Institute of Certified Public Accountants (AICPA) or        2) Is Accredited by one of the following recognized organizations:
                    a) Accredited Senior Appraiser (ASA), Accredited through the American Society of Appraisers.
                    b) Certified Business Appraiser (CBA) Accredited though the Institute of Business Appraisers.
                    c) Accredited in Business Valuation (ABV) Accredited though the American Institute of Certified
                        Public Accountants.
                    d) Certified Valuation Analyst (CVA) Accredited through the National Association of Certified
                         Valuation Analysts.
                    e) Accredited Valuation Analyst (AVA) Accredited though the National Association of Certified
                         Valuation Analysts.

The Business Valuation must be requested by and Prepared for the Lender. The Valuation must include the  ” Opinion of Value”, and the Qualifications of the individual and their signature. This cost may be passed on to the borrower and included in the Loan. The Scope of Work must be included and identify whether the transaction is an Asset Purchase or a Stock Purchase and be specific enough to state what is included in the sale including any assumed debt.

The lender may use a going concern appraisal to meet these requirements if:
        1) The loan proceeds will be used to purchase a special use property;
        2) The Appraisal is performed by an Appraiser experienced in the particular industry and who is either
             a “Qualified Source” as identified above or has successfully conpleted the Appraisal Institute
             course “Fundamentals of Separating Real and Personal Property from Intangible Assets”, and
        3) The Appraisal allocates separate values to the individual components of the transaction including
             land, building, equipment, and intangible assets.

If the application will be submitted to the LGPC (Loan Guarantee Processing Center), the business valuation must be submitted as part of the loan application.

If the application will be submitted under delegated authority, the business valuation may be obtained and reviewed after the issuance of a SBA Loan Number and prior to closing.

Any amount in excess of the business valuation may not be financed with the SBA guaranteed loan.

The lender must obtain a copy of the Financial Information relied upon by the individual who performed the business valuation and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information.

This information was taken, some of which word by word, from the SBA’s SOP and any misinterpretation or misunderstanding is regrettable but not to be held liable by the author. An Attorney should always be consulted in any business purchase transaction.

Please see my website, www.schlueterfinancial.com for any contact information or additional information.

Article by Roger Schlueter, MBA

Segments of these Rules were taken directly from the SBA SOP (Standard Operating Procedure).

This article is about financing Good Will or Intangible Assets, with the 7a Loan Program, when financing the buyout of a company with a change of ownership.

Historically, financing the purchase of a business that has Good Will or Intangible Assets to be acquired with the business has been very difficult under Bank financing. The SBA in the past had a formula that told you how much Good Will or Intangible Assets could be financed with a SBA Loan.

SBA changed this aspect of it’s financing with the changes to the SBA SOP in October of 2010, and continued the rules in the October 2011 SOP. The change was monumental when it came to financing Good Will and Intangible Assets. The rules will be outlined below but if the Good Will or Intangible Assets are $500,000 or less then they are able to be financed fairly easily. There are special rules if the Good Will or Intangible Assets are Over $500,000. The Rules Are As Follows for all financing of Good Will or Intangible Assets using the SBA 7a Guarantee Program.

The SBA Guarantee Loan may be used to finance a change of ownership of a business. 
    1) The Applicant must be purchasing 100% of the ownership interest, either by an asset or stock
         purchase.
    2) The Seller can only remain with the business as a consultant for a short period of time – 12 months
         or less.
    3) The Business must be the borrower.
    4)  For a Complete change of ownership, the lender must verify the the sellers business tax returns or a
         sole proprietors schedule C.
     5) If Real Estate is part of the change in ownership, the real estate cannot be financed separately unless
          the SBA gets a shared lien position (this does not apply if used with a SBA 504 Loan). 
    6) These changes of ownership are not eligible:
            a) A non-owner purchasing a portion of the ownership of the business from a selling owner.
            b) Existing owner who is purchasing the ownership from an existing owner that will not result in 100%
                ownership by the purchaser.
    7) The SBA considers a change in ownership to be a “NEW” business because of unproven
         ownership/management and increased debt unrelated to the business operation.
            a) The lenders loan documentation includes:
                1) A Business Valuation 
                    – if the amount being financed minus the appraised value of Real Estate &/or  equipment being
                      financed is $250,000 or less , the lender may perform its own valuation of the business being
                     sold.
                    – If the amount is greater than $250,000 or if a close relationship between the buyer and seller
                      exists, (like family or business partners), then the lender must obtain an Independent Business
                      Valuation from a Qualified Source.
                2) A site visit of the assets acquired. Lender must document in their loan file date & comments.
                3) A Real Estate Appraisal that meets SBA Guidelines.
                4) An Analysis of how the change in ownership will benefit the business.
            b) Intangible Assets: The SBA Guaranteed Loan may be used to financed Intangible Assets in a
                 change of Ownership.
                1) The Intangible Assets are $500,000 or less, (Including but not limited to: Goodwill, Client /
                    Customer Lists, Patents, Copyrights, Trademarks, and agreements not to compete).
                2) If the purchase price of Intangible Assets are greater than $500,000 then the borrower and seller
                    must provide an injection of at least 25% of the purchase price of the business for the applicant
                    to be processed under delegated authority, (seller equity is defined as seller takeback financing
                    that is on full standby, (principal and Interest) for 2 years or more).
                3) If the Tangible Assets are in excess of $500,000 and the equity contribution from the borrower
                     and seller combined is less than 25% , the application cannot be processed using delegated
                     authority and must be sent to Sacramento under the regular SBA 7a consideration.
                4) Real Estate may not be may not be removed from the transaction and financed separately to
                     avoid the 25% equity injection requirement for PLP processing.
                5) The value of the Intangible Assets is determined by the book value of the Balance Sheet,
                     a separate appraisal, or valued by the business valuation minus the sum of Working Capital
           &n
bsp;         Assets and the Fixed Assets being purchased.
                6) Amount of any Intangible Assets being financed must be identified in the Uses of Proceeds
                    section of the Application and the Authorization.
                7) The Lender must obtain a current business valuation in accordance with SBA Guidelines. This
                     topic will be covered under a separate article entitled “The Business Valuation Requirement in a
                     Change of Ownership”. 

This seems like a lot of Gobbledygook but considering the fact that the SBA did not want to finance Intangible Assets even in a Change of Ownership in the past, this is a breath of fresh air.

Please see my Webpage at www.schlueterfinancial.com for contact info or additional info on Financing.

                               
    

Article by Roger Schlueter, MBA

You would think in this day and age that Prejudice and Racism would not exist. They are alive and well but not open and direct but hidden and subdued. Usually a borrower will encounter this attitude of Prejudice and Racism in smaller institutions. Most of the bank boards of smaller banks are made up of White Males and they meet in closed meetings. These are not public instituions and as such are not required to have any openness in their meetings. The attitudes they express may have some basis in their experiences in their past experience. These meetings are Loan Board Meetings and they can have varied personell depending on the bank and the amount of the loan. 

DISCLAMER – MOST BANKS, SMALL AND LARGE ARE MOTIVATED BY THE COLOR OF MONEY. THEY MAKE LOANS TO MAKE PROFITS AND COULD CARE LESS IF THE BORROWER WAS PURPLE OR ORANGE, ALIEN OR CREATURE. THEY ARE DRIVEN BY THE FIRST AND SECOND WAY TO GET PAID OUT ON A LOAN. THE FIRST WAY IS TO GET PAID OFF FROM TIMELY PAYMENTS OF PRINCIPLAL AND INTEREST AND THE SECOND WAY OUT IS TO SELL THE COLLATERAL AND PAY OFF THE LOAN. MOST BANKS AND FINANCIAL INSTITUTIONS ARE NUETRAL TO ANY DIFFERENCES IN THE TYPE OF BORROWER, THEY JUST WANT TO GET THEIR MONEY BACK WITH INTEREST IN A TIMELY MANOR.

I an going to give you two examples of Prejudice or Racism that I have incountered in my career working with several banks in the midwest area of the country. These examples are not neccessarily indicative of the ongoing decisions made by these banks but is an indication of thinking that should not be brought up, even in joking or good natured humor.

Example Number One:  IS HE CANADIAN ?

I was in a Loan Board Meeting and I had a Loan Proposal that was a Single Family Home that was being Bought for the Purpose of Renovating and Reselling. I was new to this bank and was nervous because I had only been with the bank a short time. This project was in the North County / North City area of the St. Louis Region. St. Louis has the mississippy river on the east side and the city ends its boundarys at that point. The core city is on the east side next to the river, so if you talk about areas of the city, you need only to look at the West, North, and South side of the city.  The West and South of the city are predoninately white and the north side of the city and county are predominately black.

I presented my loan for an individual that I did not know well. I knew his cousin and was going by that cousins recomendation. The home was a single family in the north side of St. Louis. The loan was not a “Slam Dunk” and I was literally talking the Loan Board into lending to the borrower.

One of the Board Members asked if he was Canadian. How the hell should I know, I knew he was a Citizen and I was sure he wasn’t a Canadian. I may be naive,  but I really did not know WHAT THE HELL THEY WERE TALKING ABOUT !!! I even started thinking about Hockey. They all knew what was going on but I did not. I must have looked horribly confused! Then one of them asked if he was from North St. Louis, You Know Canadian !!! 

I finally realized they were asking if he were black. I did not feel real comfortable and stated that he was and also stated other attributes, like I knew his cousin. We did finance the project and the project did have some problems but it had to do with the market in 2008 not the racial makup of the borrower. 

I actually went home and told people the story of the Canadian because I could not beleive a goup of men all successful in their fields would joke like that in a Board Loan Meeting. In retrospect I think it was not mean spirited but just a Mean Joke that can be funny but for all the wong reasons.
 

Example Number Two:  “THERE ARE ONLY TWO KINDS OF INDIANANS, WHICH ONE IS HE?”

This example comes from a loan meeting that I was presenting a Motel Loan for an Indian (India the country). The Senior Vice President that stated the statement is now the President of that bank. 

The Senior Vice President told me, ” There are only two kinds of indians, ones that don’t do the upkeep on their properties and sell them down the road after they have used them up and not done the upkeep – the properties are left worhtless and then we have the Indians that are good business men and work hard to keep up their properties – WHICH ONE IS HE ?”

Needless to say you could say that about anyone but you don’t. You only say it about Indians from India. This Senior V.P. had problems in the past with a customer who was Indian but if you are in the business for any length of time you could say that about any type of customer. This Senior V.P. had a real problem with Indians and was pretty blatent about that fact. It really would not bother me so much but this Senior V.P. is now the president of that institution. I’m sure that feeling is radianting out though the banks lenders and they will avoid any loans from Indians form India for many years to come.


WHAT CAN YOU LEARN FROM THESE TWO EXAMPLES. THE FIRST LESSON IS THAT MANY BANKS STILL HAVE PREJUDICES OF SOME SORT OR ANOTHER. IF I WAS NOT A WHITE MALE, I WOULD LOOK AT SEVERAL BANKS NOT JUST ONE. I WOULD ALSO LOOK AT LARGE AND SMALL BANKS OR FINANCIAL INSTITUTIONS WHEN SHOPPING FOR A COMMMERCIAL BUSINESS LOAN. I WOULD ALSO ASK THE LOAN OFFICERS AND OTHER PEOPLE AT THE BANK WHAT THE BANK FEELS OF CERTAIN CHARACTORISTICS OF BORROWERS. YOU WILL BE SUPPRISED WHAT GOOD, REGULAR PEOPLE WILL TELL YOU IN A ” OFF THE RECORD” CONVERSATION. IF YOU ARE TALKING TO A COMMUNITY BANK, ASK PEOPLE IN THE COMMUNITY ABOUT WHAT THEY THINK OF THE BANK. USUALLY THESE THINGS TEND TO BECOME PART OF THE BANKS HISTORY.

Please also see my website at www.schlueterfinancial.com for contact information or further information.  

     The SBA’s SOP is their Standard Operating Procedure, hence the initials SOP. This used to be their Bible of all the SBA’s lending programs. I say, used to be, because SBA has taken liberties with their interpretation of the SOP and sometimes will change the their own rules. Nevertheless the SOP is a more reliable information base than any other medium. Effective January 1, 2014, the current SOP is SBA SOP 50 10 5 (f) and can be accessed through the SBA’s internet site, “www.sba.gov” .

The SOP covers most of the information on the SBA Lending Programs. The SUBPART A, Chapters 1 thru 3, covers information on lenders. SUBPART B includes all the information you would like to know about the 7a Program in all it’s different delivery methods and programs. You will find information from description and eligibility of the 7a Programs to loan terms and conditions, and of course the credit standards of the SBA’s 7a Program. The SBA 504 program is covered in SUBPART C and if very detailed on this program.

The SBA’s SOP is really the END ALL of the program and should be consulted if you have a question about any of the SBA’s lending programs. Unlike SBA Employees, Bank Employees, and Consultants, the SBA’s SOP will not be misunderstood or blatantly give you the wrong information. Believe it or not, I have talked to three different employees of SBA and gotten three different answers to my question. Don’t get me wrong – I love the SBA and it’s Directors, Employees, and Programs. I use the programs and the SOP whenever and wherever I can be of service to my clients, customers, and associates and I think you should too. Just double check all information if it is an important element of your financing package.

Please visit my Website at www.schlueterfinancial.com for more information and ideals or email me direct at roger@schlueterfinancial.com

Article by Roger Schlueter, MBA

The SBA 504 Program for Financing Fixed Assets, such as Real Estate and Machinery and Equipment, is a great program but the Total Cost of Financing with the Program may be a bit misleading. The marketing that is used by the Certified Development Companies, who are partners with the SBA, don’t use all the costs when deriving their Effective Rate that the borrower pays for financing their project. 

The Fees or Costs that the Borrower Pays but are not accounted for in the Effective Rate are:

1) The Costs that are Added to the Net Debenture or Note of the SBA in order to prepare and sell the Debenture to the Private Markets. Since these are one time costs and added to the Debenture or Note, they increase the Real Effective Rate on the financing. 

2)  There is a one-half point charge to the Bank for the Bank having a superior lien position to the SBA and is a one time charge also. This Fee is charged to the Borrower by the Bank.

3) The borrower is required to get an Attorney Opinion Letter stating that the borrowers, Borrowing entity has the right to borrow and that all the documents are executed and Correct. This Opinion Letter can cost anywhere from $500 to $2,500 depending on the Attorney and the Size of the project. 

Several of these costs can vary from project to project mainly depending on the Size of the Project and the Provider used. The Costs Added to the Debenture charge a CDC Closing Cost which is usually pegged at $2,500. This cost does not very, with the size, but can go up if the project is a very large project where the SBA Portion is over one million dollars. This is because the Title Insurance will go up and the borrower will pay any cost over the $2,500. 

The one-half point charge to the bank for a bank having a superior lien position to the SBA is a fixed charge at one-half point or 0.5% of the Banks Loan amount. At one time this fee was levied to the bank and could not be charged to the borrower but this has changed and now the Bank Charges this fee to the Borrower and the SBA is Fine with the Borrower Paying this Fee.

The Attorney Opinion Letter is a charge that the Cost varies on the Attorney Hired and the Size of the Project. The Attorney has Liability/Malpractice Insurance that covers him if he is mistaken in his legal opinion and on large projects the Liability/Malpractice Insurance is not enough to cover the Debenture Amount and that is why they Charge more for Large Projects.

The following Example is an Example and should be used as a Guide to the Fees Charged but not an Absolute Amount that you would be charged. Some are variable on the Size and some for other reasons referred to in the article previous to this Example. Look at this Example as a Guide to the Fees Charged but not an absolute on the amount charged. Also any approximations on the Effective Rate that these fees will increase the financing amount are Estimated and should not be used as your costs. You will have to perform a detailed examination of your costs to arrive at the true Effective Rate.
 
Example
SBA 504 with a Total Project Cost of $500,000
Bank Lending   50%                           $250,000
SBA Lending   40%                           $200,000
Borrower Equity* 10%                     $  50,000
*Existing Business

The Following are Up Front Fees that are added to the SBA Debenture or SBA Note but are not included on the Quoted Effective Rate by the Development Company Funding Corporation.

1) SBA Guarantee Fee  0.50%
2) Funding Fee              0.25%
3) CDC Fee*2               1.50%
4) Closing Costs*3        1.25%
5) Underwriter Fee*4    0.41%
Total Fees Added         3.91% 
*2 CDC is the local Certified Development Company
*3 This Fee is usually a flat $2,500 but can go up for large deals.
*4 This is an estimate of the actual Fee based on a Formula 

Other Fees Not Included in the Effective Rate

1) Third Party Lenders Fee passed on to the Borrower         0.50%
2) Borrower Attorney Fee for Issuing Opinion on Loan*5     0.50%
Total of Other Fees                                                                   1.00%
*5 This Fee can vary from $500 to $2,500 based on Attorney and Size of Deal.

Final Total of All Fees that are not included in the Effective Rate  4.912%

This increases the Effective Rate approximately 0.58% or a little over  1/2 of one Percent over the course of 20 years and can be larger if you do not keep the loan to its maturity. The June effective Rate given by the Program is 5.52% but as we see could be as high as 6.1%. 

The SBA 504 Program is still one of the best Loans for a Small Business borrowing for Real Estate and Equipment on a long term basis. That is what you are really getting with the program, a Fixed Rate for 20 Years on up to 40% of the Project Costs.

*** This example uses the increase of rates as of  October 2011. The effective rate will also increase an additional 0.1885% because of the Ongoing Guarantee Fee increase. This would have brought the rate to 6.2885%*** 
 
Please visit my website for contact information and other ideas at www.schlueterfinancial.com  
   

Article by Roger Schlueter, MBA

The Eligible Passive Company Rule of SBA can be used on the SBA Guaranteed Programs and the SBA 504 Program. “The Eligible Passive Company (EPC) Rule is an exception to SBA regulations which prohibit financing assets which are held for their passive income (like Investment Property). Because the EPC rule is an exception, it is interpreted strictly.” Straight from the SOP (Standard Operating Proceedure). Most of this post is taken from the SBA’s SOP covering the Eligible Passive Company Rule.

– The EPC can take any Legal Form for an ownership structure, like LLC, Corporation etc. 
– An EPC must use the Loan Proceeds to buy and/or improve assets that it leases to one or more (OC)
  operating companies.

Conditions That Apply to All Entities
1) The Operating Company (OC) must be an eligible small business
2) The Proposed Use of Proceeds must be an Eligible Use for the Operating Company (OC)
3) The Eligible Passive Company (EPC) and the Operating Company (OC) must be eligible under the size
     standand. *Trusts are exempt from this requirment*
4) The Eligible Passive Company (EPC) must lease the property directly to the Operating Company (OC).
        The Lease Must Be in Writing
        The Lease Must Be Subordinate to the SBA’s Interest
        The Lease Must Have a Term Equal to the Term of the Loan
        Assignment to SBA of All Rents Paid on this Lease
        Lease Payments Cannot Exceed the Note Payment plus Maintanence, Insurance and Property Taxes
        Operating Company must lease 100% of Space but may Sublease under SBA Rules
        Assignment to SBA of all Mineral Rights
        The Operating Company must be a Guarantor of the Loan
        Any holder of 20% or more must Guarantee the Loan and Comply with Personal Resources Rules.

Conditions that Apply to Trusts
1) The Trust does not have to be Small by SBA Size Standards
2) The Eligibility of the Trustor will determine Trust Eligibility
3) All donors to Trust must have Trustor Status for Eligibility
4) Trust will not be Revoked or Amended during loan without SBA Prior Wwritten Approval
5) The Trustor must Guarantee the Loan
6) The Trustor must Certify in Writting to SBA that:
        The Trustee has Authority to Act
        The Trust has Authority to Borrow, Pledge, and Lease Property to the Operating Company
        The Trustee has Provide Accurate Language and Agreement Confirming all of Above
        The Trustee has Provided and Will Continue to Provide SBA with True and Complete List of all Trustors
                 and Donors

Size Determinations under the Eligible Passive Company Rule
1) If the EPC and the OC are afiliated the companies are combined for determining size
2) If the EPC and the OC are not affiliated, each entity must be small
3) The exitence of a lease does not of itself create an affiliation
4) The EPC may engage in an activity other than leasing property to the OC

Multiple OC’s can be separately owned

Multiple EPC’s in one transaction are not permitted 

Please see my Website for contact information, www.schlueterfinancial.com   

Article by Roger Schlueter, MBA

The SBA 504 Loan Program will let you lease out part of the facility that you are financing. You are suppose to be a Owner Occupied facility and that means that the business occupies the space and you cannot rent out the facility as an Investment Property. You can lease out part of the facility. The rule is different for a New Facility and an Existing Facility.

New Facility – You can lease out 40% of the square feet of the building but you cannot use Project Proceeds to Finish Out the rented space, you can only Finish Out space you are using in your business. The rules say that you can lease out long term 20% and then another 20% for up to three years with all space being used by your company within 10 years. THERE ARE NO RENT POLICE AND AFTER THE PROJECT CLOSES, NO ONE IS GOING TO FOLLOW UP ON THESE POINTS AND THERE IS NOT MEANS OF RETRIBUTION IF YOU DO NOT ABSOLUTELY FOLLOW THE RULES.

Existing Facility – You can lease out 49% of the square feet of the building but again, you cannot use Project Proceeds to Finish Out Rented Space. Again there are no rent police but the new SOP does not say you have to occupy all the space in the future like the New Facility does.

The Borrower may take up to one year after closing to meet the Requirements listed above for reasons like the building has an existing lease that is not up for several months.

Residential Space can be part of the project (up to 49%) but the residential space must be an essential part of the business. If renting residential space to a third party the leased space must meet the Leased Space Requirements for New and Existing Facilities.

Change of Ownership Projects can be financed with the SBA 504 Loan for Long Term Fixed Assets. The Project must meet the Community Development or Public Policy Goals and the Jobs must be Shown to be Retained because of the Change of Ownership.

The Borrower can use Passive Ownership or what SBA calls an EPC (Eligible Passive Company) to own the property for Tax Purposes and lease back to the Operating Company. This is usually accomplished through a LLC owning the building and leasing it to the Operating Company. See my Blog covering the Eligible Passive Company Rule as it applies to SBA 504 and Guaranteed Loans.

For Contact information please visit my Webpage at www.schlueterfinancial.com