Credit | Bank Loans for business – Omniscient

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

Spousal Guarantees under Regulation B in Business Loans

Article by Roger Schlueter

Business Loan Lenders are notorious for getting your spouse to sign on the loan and guarantee the debt. In the old days this was a common practice, no mater what the credit and collateral was like. Regulation B changed this practice. Under Regulation B the person who is applying for Credit must be looked at on their own merits. The bank or lender must first see if the applicant qualifies under the creditors Standards of Creditworthiness. The Lender may then require the Spouse get another person to sign to strengthen the credit but it does not have to be the spouse.

The main exception to this rule is when the borrower has assets that are owned by both Spouses on the Personal Financial Statement. The Personal Financial Statement must be the statement of the applicant, and as such, only have their Assets and Liabilities on the Statement. The other exception is when the Asset owned by both spouses is used as collateral for the loan.

Business Loan Applications need to have only the Applicants Financial Information included in the Application and Documents. This includes the Personal Financial Statement, Bank Application, and Income Verification. The Applicant needs to make it plain and clear that they are applying for Credit on their own account. Sometimes the bank will still ask about the spouse and when they do, they need to be reminded that you are applying for credit on you own account. This should do the Trick. I wouldn’t bring up Reg B, unless absolutely necessary. Banks do not like borrowers that bring up Federal Regulations. Only bring up Federal Regulations as a last resort.

Banks still expect the spouse to sign and guarantee the loan, so do not be surprised, if the bank asks for the spouses signature and guarantee. The Bank will still try to get the spouse to sign but this may be averted if the spouses keep their finances as separate as they can. Remember to report, on the Personal Financial Statement, only the Borrowers Assets and Liabilities and only use the income of the Borrower to apply for the loan. Remind the bank you are applying for credit on your own account.

Please respond with comments or questions though this blog at roger@rogerschlueter.com or for more contact information please go to my website at schlueterfinancial.com

Projection of Income

Projection of Income – (updated on 3-16-2013)
By Roger Schlueter, MBA

The Projection of Income or Earnings is a Projection (Educated Guess – based on Fact), that uses Sales and Expenses to arrive at the Net Income or Net Earnings for a period of Time. I usually do my Projection of Income and Expenses for three years. The Projection of Income and expenses should be done differently for a Start – Up Business than an existing (already in business) Business. Both the Start – Up Business and the Existing Business will project Sales and Expenses, and Provide Assumptions, that is explain how you came up with these numbers.

The Start – Up Business is harder to project because the Start – Up Business does not have any existing numbers for Sales and Expenses, so it will have to Project these numbers and include a basis (Assumptions) for the estimates. The Expenses are usually, what they are – they are easily estimated after checking with suppliers. Sales can be tricky – and lets face it, sometimes it is a sheer guess. The Bank and SBA would like that guess to be an educated guess. There are several easy ways to project Sales: 1) Ask several companies in the same industry, 2) Ask the Associations that the Companies are part of, 3) You can estimate by looking at Populations, Age Groups, or Companies that use your product and estimate what percent of market share that you think you can get.

The Existing Company has many Advantages in the projection of Sales and Expenses. They already have an amount of Sales and Expenses per reporting period. It is easier to say that you will increase the percentage if you already have a number. The Trick is to remember to explain and justify your numbers and how you came up with the numbers. The expenses are the easiest because you already have some numbers and they can be equated to Sales as a percentage of Sales. This works best if the past, Months or Years numbers are consistently a certain percent of Sales. RMA has a publication and online presence, where you can look at the averages of Expenses of Companies in your Industry or NAICS Code. This is good to see if your company is within the Average up or down for your particular industry. This publication can be found in most large Metro Libraries (the online version is not free).

The Projected Profit and Loss Statement. This is what the statement should look like. The Explanations should be listed on the same page as the Statement. Look at this example:

      Sales                            $100,000
   – COGS*                          $ 50,000
= Gross Profit                   $ 50,000                  $50,000

– Expenses

     Rent                              $12,000
     Electric                          $ 1,200
     Postage                         $    200
     Office Supplies             $    300
     Interest                          $    800
     Other                             $    500

Total Expenses                $15,000                 –  $15,000

                                                   Net Profit     $35,000

* COGS is Cost of Goods Sold, which is the cost of resold merchandise or the cost to do a service or build a product. The Assumption should really tell the reader what it is made up of. COGS is usually a variable cost and as such will vary with Sales.

Explanations of Sales and Expenses

    Sales – Research from other firms my size
    COGS – Actual cost estimate from suppliers
    Rent – Actual projected cost
    Electric – Estimate based on rented facility
    Postage – Estimate based on sales
    Office Supplies – Estimate based on sales
    Interest – Actual based on projected loan
    Other – Projected unexpected expense

This is a good example but it is only an example. Your expense will differ and if you have a service business, you probably will not have any Cost of Goods Sold – COGS.

Remember to base your Sales or Income on a fact or methodology. Sales are much harder to estimate than expenses. Your cash available to pay your banks debt service on your loan will depend on enough sales to cover expenses and hopefully have a profit at the end of the month or year. The Projected Income Statement is based on fact but may have much subjectivity on its creation and application.

Questions can be addressed to this blog or to roger@rogerschlueter.com There is more contact information at Rogers Website at www.schlueterfinancial.com

New Business Constructing an Opening Balance Sheet

Article by Roger Schlueter

Individuals that decide to Start a New Business sometimes forget to Project the Balance Sheet Statement. If you obtained funding from SBA then you, the borrower, will be forced to create a Projected Balance Sheet and a Projected Income Statement.

The reason the construction of the Balance Sheet seems so hard is because you need to know your Accounting Debits and Credits. This means that for every entry in Accounting there are corresponding entry’s for Debits and Credits. Lets look at this problem as if we had started a New Business. The following Balance Sheet will be created on our business, ” Rogers Whiskey Supplies”. Needless to say that Roger sells Whiskey Stills and the Related Supplies.

Roger has a hobby of making Wiskey and has never obtained a license or sold any of his Equipment or Recipes to anyone. He has about $50,000 in Equipment and another $10,000 in Supplies for sale in his business. He has decided to obtain a SBA Loan from his local banking institution that is owned by Mr. Ebenezer Scrooge. The loan will be in the amount of $150,000 and will be used for Equipment ,Inventory, Working Capital and Loan Fees. The Equipment will be $125,000 and the Inventory will be $20,000 and $2,000 in Working Capital, with the Guarantee fee of $2,499 and Bank closing Costs of $501.

The Bank has asked Roger to prepare a Projected Balance Sheet to go with his Projected Profit & Loss Statement (Earnings Statement). This is how Roger tackled this problem:

Balance Sheet

Assets Liabilities

Cash $ 2,000 Accounts Payable

Accounts Receivable

Inventory $ 30,000 Current Portion Loans $ 10,884

Other Assets $ 3,000 Other Liabilities

Total Current Assets $ 35,000 Total Current Liabilities

Equipment $175,000 Loans $139,116

Total Assets $210,000 Total Liabilities $150,000

Equity $ 60,000

Total Liab. & Equity $210,000

Let’s start with what we already have and that is $50,000 in Equipment and $10,000 in Supplies. We can do ahead and put those on the Balance Sheet as $50,000 in Equipment on the Assets Side and $10,000 in Inventory on the Assets Side also.

Ebenezer Scrooge actually approves our loan and goes though the SBA and has the loan Approved by SBA and is ready to close the loan and fund out project.

The loan amount is $150,000. This is broken out into the Current Liability that is due in the next year and the other part of the Loan that is due in the future. So $10,884 is a Current Liability and the remaining $139,116 is put under Loans. This money was used to purchase several things: we had Working Capital of $2,000 which is the same as Cash and is put under Cash. The Inventory is combined with Rogers Supplies and put under Inventory for a total of $30,000 in Inventory. The Equipment that was purchased was $125,000 and was combined with Rogers Equipment of $50,000 for a total of $175,000 in Equipment and put under Equipment. Now I’m done! Not! you say, what about the $3,000? That was Fees for the SBA Guarantee and Bank Closing Costs for a Total of $3,000 and put under Other Assets.

That’s It! Not too bad for Accounting stuff. Remember the Assets always Equal the Liabilities plus the Equity. The Equity just happens to be in this example the Starting Equipment and Inventory that Roger put into the project but it is not put directly into Equity, it is derived by taking the Assets and subtracting the Liabilities and that number is your Equity.

Please Address any questions to this Blog or to roger@rogerschlueter.com or get additional info and contact info at www.schlueterfinancial.com