Category: SBA 504 Loan

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

Nonverbal Messages in Commercial Lender Meeting

Article by Roger Schlueter

Nonverbal Messages in Commercial Lender Meetings need to be Listened to with Keen Observation. A meeting with a Banker is a rare occasion and should be treated with the Preparation of a Final Exam. Most meetings start with the Banker asking you to describe your business and the need for the loan. This is always to see if you Know Your Stuff and to provide the Banker with enough information to see if he wants to waist his time in Analyzing the Loan Request. The Banker should be listening to you and should not be looking at your information or looking at his computer or doing anything except for listening to your loan request. 
If you give him any information, which you should, give him a Summary of your Oral Presentation. This Summary can be looked at by you during the meeting as an Outline to make sure you are on track to discuss or talk about all your concerns. Do Not give him a 30 to 100 page Business Plan because he will be leafing through this booklet during the whole meeting and will not be listening to you. You can give him a Detailed Business Plan after the meeting has wound down and you feel confident that you have concluded your presentation. 
The Banker should be: Number One – Listening Intently and Asking Questions Periodically. You should have his total Attention and again he should not be looking at anything, (other than your Summary), including his computer or gazing out any windows. Number Two, he should seem interested in your business and your Loan Presentation. Again asking questions to clarify any part of your presentation. Number Three, the Banker should ask you before he runs your credit but when the meeting is over and your have applied for credit he will run credit as soon as possible. Some bankers have ran credit on his computer when you are in his office but again he should ask you before he runs credit before you have concluded your presentation. Number Four, the Banker should ask you for any additional information that he needs at the end of this meeting. Some banks have a separate Application. This Application allows them to run credit and is usually proprietary to that bank. Some banks just use the Personal Financial Statement as your request for credit and run credit as soon as they have this document. Number Five, the Banker should at the end of the meeting move to the next step in the loan process and tell you what that Process is going to be like, including a timetable for a decision and a timetable for the funding of the Loan Request. 
Now just because the Banker is interested in you doesn’t mean he is your best bud. He works for the bank and will do whatever the banks wishes are, whether those wishes are open or have a hidden agenda. The real thing to look for is a genuine interest and his attention during your loan meeting. Remember to be like a Boy Scout, “Be Prepared”. I would also visit at least three banks because there is a great deal of varying viewpoints as to what is considered a good loan.
Please direct any questions to this blog or to roger@rogerschlueter.com    
  

The First Commercial Loan Screen is Your Credit Report

Article by Roger Schlueter, MBA

Commercial Lenders are busy, (Playing Golf, Talking to Friends, Buying things on the Computer, Planning Vacations), and Oh Yea, Looking at Loans. 
My First Commercial Lending Job, I had a Prospect that I didn’t think was a very good Commercial Loan and I wasn’t sure how to look at the Borrower. My Superior Lender told me to, “Just Run Credit and then Turn it Down”. Thus my first lesson in How to Turn Down a Loan, just Run The Credit and if it’s Bad, Turn it Down. This is really bad when the borrower took the time to write up a full blown Business Plan or Fill Out the Banks Application and bring in all the Items Requested by that Application. 
Since, The First Commercial Loan Screen is Your Credit Report, Run Your Credit Before Applying for a Commercial Loan and See What it Says About Your Credit! If your score is relatively high, like over 700 then you have little to worry about. Their are several negative items that are not a real negative to banks and they are: Health Related Collection Items, Cell Phone Collection Items, any Small Collection or Owed Item that is a matter of Principal for the Borrower. Some people buy and sell real estate and have many Credit Report Hits on their Reports. These can be easily explained. The real problem is Habitual Credit Problems that don’t seem to ever be rectified. These are real Problems for Banks. Many Banks will even give a Commercial Loan to someone who has had a Bankruptcy if the Bankruptcy has been at least a couple of years ago and the borrower has had good credit ever since. 
Bankers and Lenders are Real People Too and they will many times accept an explanation for a Negative Credit Reported Item or Report Itself. The banker will ask you about these Items and expects you to have a ready response. They do not want to see the “Deer in the Headlights Look”, when they ask you a question about your Credit Report. They expect you to give an insightful explanation as to what happened or the situation that existed which hurt your credit. I have had many times that the borrower said he or she had good credit when asked, but in reality had the worst credit imaginable. They had to Know, they had to have gotten calls from creditors. The banker would rather have an Explanation than be blindsided with an Absolutely Terrible Report. 
What is Bad Credit? You Ask. Bad Credit historically has been a Score that is below 600. A Score of 600 to 650 is probably definitely below average but in some cases could be explained. A Score of 650 to 699 is Passable but not the Best and a Score of 700 Plus is considered Excellent. The Credit Reporting Agencies have raised the scores needed to qualify for what is considered Good. Pre 2008 a passable score was a Score of 620 or Higher. Now that Passable Score has been raised to closer to 670 and above. Most small banks and/or Community Banks have the ability to be discretionary when it comes to Credit Scores. The Large banks have a number that may move up or down but that number is an absolute. Have a Score blow the number and the loan will be declined, have a score above the number and the loan will be approved. 
Summary: always check your Credit Report and be ready to quote the Score and also to answer questions about the individual Payment History of any of the Creditors Listed on the Report.
Please refer any questions to this blog or to roger@rogerschlueter.com  

Bank Business Loan Approval – Be Sure to Get Approval in Writing

Article by Roger Schlueter, MBA

Congratulations! You have a Bank Approval for your Business Loan. Your Banker has told you verbally that your business loan was approved. They are just waiting on the Underwriter to Finish Up the Approval or Process. 
I Hate to Break It To You but “Your Loan Has Not Been Approved”. Your Loan is Not Approved Until You Sign Your Loan Documents! You should always get the approval in writing. Even if the approval is in writing, it is usually written with so many ways out for the banker and many Written Loan Approval Confirmations have a disclaimer at the end of the Letter that will say that this approval can be denied for several reasons. 
Statements in the Approval Letter:
1) Approval Contingent on the Building or Business or Equipment Appraising at the agreed upon Amount and be acceptable to the bank.
2) The amount of agreed upon Equity will be put into the project.
3) All Hazard and other Insurance will be acceptable to the bank.
4) “These Conditions are only general terms on which the loan will be extended and is not an exhaustive statement of terms and conditions of the loan.”
The Catchall of coarse is number 4, where the bank says there may be additional terms and conditions that are not included in this letter. 
The Written Approval Letter will give you some security but most will not hold up for you in Court. The letter is better than a verbal approval which for some banks is the only approval you will get. You can of course have your Lawyer call their Lawyer and pay an enormous amount of money to get an absolute approval, but this could jinx the Deal, or Slow the Approval or Loan Process Down to a Snails Pace. 
Just Remember: THE LOAN IS NOT APPROVED UNTIL YOU SIGN THE LOAN DOCUMENTS!!! 

Please address any questions or comments though the blog or email me directly at roger@rogerschlueter.com 

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.
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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