Category: SBA 504 Loan

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.

The Difference Between a Commercial Loan Officer and the Bank Branch Manager

Article by Roger Schlueter, MBA

There is a Difference Between the Bank Branch Manager and a Commercial Loan Officer! Lots of Banks are having their Branch Managers do smaller Commercial Loans. This does not mean they are trained in Credit Analysis, Accounting, or Loan Structuring. They are just at the bank branch every day and they sometimes know their customers. They will be told what documents to ask the customer to provide and usually pass this information on to some other Officer or to “The Underwriter”, to hopefully get an answer in a month or two. They will usually say, “I need the underwriter to approve this loan”. I advise my clients to ask for a Commercial Loan Officer to talk about their loan. This will usually be a young, new loan officer but a loan officer just the same. The loan officer should have some lending experience, if only by seeing what other more experienced officers are bringing to the weekly loan meeting. They will also have access to other more senior officers that will sometimes give good advice. 
I had many borrowers that come to my office looking for loans, grants or lower interest. Sometimes they are working with a Bank Manager on their loan request and do not want to look for another bank because their Bank Manage told them the bank will do the loan, they just need more time. After about three months or more, they are decimated to find out that their loan request has been Declined by the bank. That is when they give up or contact someone like me to help them put together a Bank Proposal that can be presented to the bank. An experienced Commercial Loan Officer can usually tell a borrower whether their bank will approve a loan. The trouble is that the bank is suppose to log in the request and then, if they want to decline the loan, they need to have supporting information like Credit Reports or all the information for a loan request. I worked for a bank that one of the senior loan officers told me, “if you want to decline the loan, run the credit first and see if you can decline because of credit”. This is fine for the bank that may not want to do small loan requests but the borrower does not get a fair shake in the analysis of their loan request.
What usually happens when the Bank Manager looks at a Commercial Loan is they end up passing this information on to a commercial loan officer who has no real interest in the borrower or the loan. The “Underwriter” is a fictitious person that the bank uses to put the decision out of the hands of the Manager or Officer. They usually do not exist in Commercial Lending unless you are dealing with a very large bank that is sending the loan off to another office to be approved. The “Underwriter”, came from the housing market. The Mortgage Company or bank needs to sell the home loan off to Fanny Mae or Freddy Mac and needs the approval of the “underwriter” of these organizations.
In Summary, always try to talk to a Commercial Loan Officer to finance a Business Loan. Have the Personal Banker or Bank Manager finance the Vehicle loan, boat, or home improvement but always talk to a Commercial Loan Officer for any Business Loan.
Please address any questions or comments to this blog or email me at roger@rogerschlueter.com I also have a website at schlueterfinancial.com with more contact information.      

Check Your SBA Questions and Responses with the SBA SOP

Article by Roger Schlueter

The SBA Rules and Regulations are voluminous and complicated. The SBA SOP (Standard Operating Procedure) is 401 Pages and is only about the Application and Eligibility and does not include Servicing and Liquidation. The SOP is also updated at least once each year which makes knowledge of the SOP very hard to keep up with. I print the SOP out in it’s entirety every time it is updated so I will have all the current information. I find it is easier to look and flip through a binder than look at a small computer screen. 
I have found even people with knowledge of the SBA sometimes become mistaken when certain issues come up, that need some sort of ruling in order to proceed with the project. Even if the SBA states an issue that needs to be complied with or an issue that needs to be addressed, you need to check out the validity of the issue before you change or drop your plans. Most SBA employees are very knowledgeable but sometimes you find that the answer is wrong or not addressing your situation. I have even received three different answers to a question from three different SBA employees.
I will usually look my question up in the SBA SOP and then Email the office in Sacramento California because that is where they do the Processing for this area. I will also call the St. Louis office because I know several of the workers at that office. Emailing is hard because you cannot ask a followup question. I will then see if I get some correlation of the answers and hopefully be satisfied with the answers and proceed with my loan.  
I recently had the SBA stop Processing a SBA 7a Loan because they said my refinance of a loan needed an additional benefit to the borrower and quoted the SOP Pages that were used in the determination. My loan was a Line of Credit and as such did not need to show a benefit to the borrower. I really had to stop short and not respond badly when telling my banker what to say in response. 
The SOP can be found on line at www.sba.gov then you want to type in the search bar at the top of page – SOP and click SEARCH. Click on Standard Operating Procedures (SOPs) and Guides | sba.gov – Then Click on VIEW LENDERS SOPS – Then click on the SOP # which is 50 10 5(E) – this is the latest SOP. Pick the Clean or the SOP with the Track Changes. I would pick the clean. 
There You Go !!!!
The SOP’s Index is just that, an index. The index is hard to use because it is not broken into enough subsections, but it is usable. It is broken into three sections, A, B, and C. The A section is for Lender Issues, the B section is for the SBA 7a / Guarantee Program and the C section is for the SBA 504 Program. When banks ask the SBA for Assistance the SBA personnel always ask if they have looked it up in the SOP. This is the SBA’s Bible of sorts and is usually the final say on any lending issue.
Please address any questions or comments to the Blog at roger@rogerschlueter or for additional contact info go to my website at schlueterfinancial.com  

Handling Multiple Companies in a Financial Analysis

Article by Roger Schlueter, MBA

Companies looking for Financing have many problems that they need to overcome. Some of these problems are common and some problems need a little creating problem solving to overcome them. Most good financial people and banks will always start the analysis of a financial need with a Financial Analysis of the companies financial statements. 
The financial analysis is always started with a Spread of the companies financial statements. This is pure grunt work and is usually accomplished in a few minutes or hours depending on the complexity of the financial statements, the number of years analyzed and any changes made to the format of the financials themselves. This is mind numbing enough if the analysis is one company and three years financial statements. Sometimes the analysis is five years and then the individual or company has other companies which are related or connected in some way. Then the analysis can be a combination of Watching the Grass Grow or the Paint Dry and the most boring three hour lecture that you ever had in college. 
The way I start the spread of a company that will take many hours of pure grunt work is to buy a six pack of tallboys and a bag of  Snyders Sourdough Nibblers and Hunker Down for a long protracted engagement. 
The whole idea of the Spread Sheet of the financial statements is to do three things:
1) Spot Trends in Sales, Earnings, or Expenses
2) Check Ratios – Cash Ratios, Debt Ratios, and Expenditure Ratios
3) Analyze Cash Flow and end up with a Coverage Ratio for your debt
I will always spread each company on its own for three to five years. The spreadsheet is a good tool to create the sales and expense projections that will also be needed. The projections and cash flow statements need to be done for each company before putting them together to create the End Result of the combined entity that will pay the debt service of your loan from the bank. 
When you have several companies owned by the same person or entity, they may all be run out of the same physical location and managed by the same people. Decisions are probably made by the same people and when getting a loan for Assets that can benefit several companies, it is wise to put the spreadsheets together for that purpose. This is because, on their own they probably do not have the wherewithal to buy the building or equipment, but together they have ample cash flow and capacity to make the deal happen.
Lets start with an Example:
I’m working with a individual that has a total of four companies. Two of the companies are slow growth companies and had problems during the 2008-2010 Recession. they may still may make money but it would be unwise to put all your assets into an entity that may become obsolete or could go out of business in a few years. One of the companies has had exceptional growth and profits over the last three years. They owners have also started a forth company that is related to the high growth company but was only recently created and has only three months of operating financials. 
The owners want to buy a building that would house all four companies but the main reason for the new location is so the High Growth Company and the Newly Created Company can operate more efficiently and grow to their true potential. 
The spreadsheet is done on all four companies, really three with the newly created company not having any years to spread. Giving all four spreads to the banker caused problems because he may not understand the situation the way you want him to understand it. We decided to combine the High Growth company and the Newly Created company to show the new direction of the Owners. The Slow Growth companies were also combined to show a slower entity that still created cash flow but was not the focus of the New Direction the Owners wanted to go. 
The two spreadsheets were both given to the banker and it showed the new direction with Growing Sales and Earnings and the Slow Growth entities that still had earnings. If we had combined all four spreads it would show an entity that was deteriorated and weakened by the Slower Growth Entities. Our Cash Flow was done with the High Growth and the Slow growth but also combined to show the Cash Flow available to pay debt service by all entities. 
The bank has a spread and cash flow that shows the true potential of the High Growth company but also has a spread and a combined Cash Flow that shows the value added by the Slow Growth companies to the Cash Flow. The End Result of the combined Statement is enough Cash Flow to cover the Debt Service and a Coverage Ratio which impressed the banker. The banker could now see the direction of the company and the true Cash Flow Available to Pay Debt Service and was not bogged down or diluted by the Slow Growth companies.
Please address any questions to the Blog or email me at roger@rogerschlueter.com  You can also get more contact info at my Website at www.schlueterfinancial.com