Category: Costs

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

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.

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   

Cash Flow – The Key to Obtaining Your Business Loan

Audio for Cash FlowArticle by Roger Schlueter

Cash Flow, I must have mentioned those two words many times in the bowels of this blog. All Lenders are is essence Cash Flow Lenders. The Bankers want the Cash from the business to pay the Debt Service on the project and have Cash left over to Cushion the Deal. This is the First Way Out for the Bank. The Second Way Out is the Liquidation of Assets including collection of Guarantees. 
Cash Flow is the Cash Generated by the business. This is not money that the business is owed nor is it money that is invested in Inventory or Other Assets that the business owns. Cash is Cash. Cash is King, and the company with the most cash Wins!
A typical Profit and Loss Statement, (Earnings Statement or Income Statement), will show Sales and then subtract the Cost of Goods Sold, (COGS is the Cost of Goods that are Resold as in Retail Stores). The Statement then subtracts all other expenses that may be included in the Selling, General & Administrative Expense or SG&A. Most of these Costs are Paid in Cash but Depreciation and Amortization are cost that are levied on a business Assets that are not paid in Cash but used to subtract potential Obsolescence. Most assets do not last forever, like a Machine or a Vehicle. The Statements will sometimes Segregate other Items like Rent (Especially when paid to the Business Owner), Interest that is paid on loans the business has already incurred and Owners Salaries (Especially when salaries seem especially large).    
Cash Flow will be The Earnings or Net Income added to the Depreciation and Amortization. Other absolute Additions will be Interest but there are a few Additions that will be Subjective in Nature and these are Rent and Officers Salaries. The Rent that is paid to the Owners is Cash Available to Pay Debt Service. Officers Salaries that are particularly large or that the new owners will not need may be Added Back to Cash Flow. 
Once Cash Flow has been established then the Banker will want to look at how much Cash Flow there is to cover the Debt Service. The More Cash Flow there is the better the project looks to the Banker. What the Banker is looking for is a Ratio of Cash Flow to Debt Service. The higher this ratio the better. One to One, would be One Dollar of Cash Flow for every One Dollar of Debt Service. This is One to One, but what the banker wants to see is One to One and a Quarter, or One to One and a Half. The sky is the limit as far as this ratio goes. This Ratio is called the Cash Flow Coverage Ratio but may go by other names.
Example:
CASH FLOW
Net Income $500
Interest $100
Depreciation $100
Rent $200
Total $900 
Debt Service $600
All Loans
Debt Coverage Ratio = $900 (Cash Flow) / 600 (Debt Service) =  1.5 to 1
Means there is 1.5 Dollars of Cash Flow for Every 1 Dollar of Debt Service. 
Good is usually 1.30 and higher.
Almost All Lenders are Cash Flow Lenders – At Least All Bank Lenders are Cash Flow Lenders.
Please address any questions or comments to this blog or to roger@rogerschlueter.com or to my Website at schlueterfinancial.com

Rules on Prepayment of a SBA 7a Loan

Article by Roger Schlueter

The rules on prepayment of a SBA 7a Loan are fairly simple. For loans with maturities less than 15 years there is No Prepayment on a SBA 7a Loan. For Loans with maturities of 15 years or longer the Prepayment is due when the Borrower Prepays the Loan 25% or more in any one year, in years one, two, or three of the loan.
The Fee is 5% of the Prepayment Amount during the first year, 3% the second year, and 1% in the third year. This is only if the prepayment is considered Voluntary. The SBA will determine whether the Prepayment is Voluntary or Not Voluntary.
That is it! very simple! Oh, the Prepayment is not called a Prepayment Fee. The Fee is called a Subsidy Recoupment Fee. Go Figure!
Questions can be emailed to roger@rogerschlueter.com or made thru the Blog. More contact info is available at schlueterfinancial.com  

The Environmental Approval of a Real Estate Purchase

Article by Roger Schlueter, MBA

The Environmental status of Real Estate does not seem to be the major Problem that it was in the past. Many Banks do not care as much about doing their Do Diligence as they once did. Some small community banks do not do Environmental Checks on their Commercial Property and many very large banks only care if the total project size is over one million dollars. 
SBA (Small Business Administration), on the other hand, seems hell bent on giving more work to the Environmental Companies even when the Environmental Engineer or Geologist says the property is clean. You might as well figure that the SBA will want at least an Environmental Records Search, (checking with the Feds to see if the property has been deemed a Hazardous Site), and a Risk Assessment of the property. This will cost approximately $1,000 and the Environmental Person will also write a Reliance Letter ( SBA can rely on the information) and Evidence of Insurance Coverage by the Environmental Person or Company of at least $1,000,000. 
The Environmental Person or Company will then decide whether a Phase I, needs to be done. This will cost approximately $1,000 to $2,000, and will look at the property to see if a Phase II needs to be done which will include Core Drillings and Analysis of the Samples dug up.
Usually SBA will want the initial Records Search and Risk Assessment if the property is not considered to be an Environmentally Sensitive Industry (this list is included in the current SBA SOP 50 10 5(E) as an Appendix and labeled as Appendix 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES (Includes instruction for use). 
If The Property is an Environmentally Sensitive Industry then the Property needs a Phase I to start with and there are No Real Exceptions to this rule. The SBA Environmental People are considered to be inflexible on this issue.
Example of a Real Life Deal done in the Fall of 2012. The property was being sold to our borrower and he was in an industry that was not a sensitive industry. The seller also had an industry that was not a sensitive industry. Our Environmental Person went to the property and found out that the previous owner to our seller was an Environmentally Sensitive Industry but when the Prior Owner sold the property to our Seller he had a Phase I Environmental Report done. We thought this was great because the since the phase I was done there had not been an Environmental Sensitive Industry occupying the Site. 
SBA ruled that we needed a Phase I even though our environmental person stated they did not need the Phase I. SBA said that we needed a Phase I Environmental Report done because our Phase I was over 10 years old. Go Figure. I still do not see the logic in this but I now, just do what the SBA Environmental People say to do because You Just Cannot Win. Believe Me I Tried!
Please respond through this Blog with any questions at roger@rogerschlueter.com or go to my Website for additional Contact Info at www.schlueterfinancial.com.