Category: Start-up Loan Articles

Checking Out IF SBA Will Finance Your Franchise

Audio for Franchise ApprovalArticle by Roger Schlueter

SBA, Small Business Administration will finance franchise businesses. The only requirement is that the Franchise agreement must have certain Language that SBA approves of, in case the SBA ends up owning the Collateral. The SBA has a List of Approved Franchises. The franchises on this list have an easy time being approved for a SBA Loan if they are buying or expanding a Franchise. The Franchise Registry provides a list of most of the Approved Franchises for SBA Financing. The Franchise Registry can be found at:    http://www.franchiseregistry.com/registry/ .

Lenders and potential Franchises will have to sign in with their Email and create a password to search the registry. The Individual can search under Business Development after signing in with their created password. I searched for Domino’s Pizza and found that the franchise is SBA Eligible. This means that SBA has approved their franchise agreement. You can click on the Name of the Franchise and find out more info on the Franchise if the Franchise wants to give it to you. 
Let’s say your franchise is not on the Franchise Registry.  SBA states on their website that, “SBA Eligibility Reviews on the Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee or potential franchisee (which could result in affiliation with a franchisor). The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, conflicts of interest, creditworthiness, use of proceeds, and discrimination. It is important to be aware that SBA does not finance operations covered by a development agreement, and no development agreement may be eligible through this process.”

SBA will reveiw changes that the Franchisor make to it’s Franchise Agreement to deem it eligible. I have done this and it is a painless process except for the fact that it must be approved by a SBA Attorney. The bank or SBA Packager that the bank may use can take care of this for you. 

Please address any questions to this blog or to roger@rogerschlueter.com or to www.schlueterfinancial.com for additional contact information. 


SBA Refuses to Give a Line of Credit to Any New Company

Audio for Working Capital for New CompanyArticle by Roger Schlueter

There are several Lines of Credit that SBA offers in the SBA 7a Guaranteed Loans. These are the SBA 7(a) Loans CAPLines. There are four types of CAPLines and They are:
1) Working Capital – Unique Eligibility Requirements are: the company must sell on credit and create accounts receivable, not notes receivable.
2) Contract – Unique Eligibility Requirements are: Contract must permit lender to obtain an assignment of proceeds. Some Exceptions may apply (see ch. 7 of this subpart).
3) Seasonal – Unique Eligibility Requirements are: 30-day zero balance each year is required.
4) Builders – Unique Eligibility Requirements are: Borrower must have previous building experience of the same type. Speculative building but with documentation to support likelihood of sale.
On page 85 the SBA’s SOP 50 10 5(E) has a section IV “Various Specialized Programs”, the SOP (Standard Operating Proceedures) this is suppose to be the SBA’s Bible of the rules of SBA Lending. This section has a section entitled “7(a) LOANS CAPLines and gives the Attributes of all four of the CAPLines – Lines of Credit in Detail. There is no mention of any 12 month operations in this description on Pages 86 & 87.
Eligibility Requirements are discussed on page 130 & 131 under Section M. Additional Eligibility Requirements for CAPLines. This section states that a Seasonal CAPLine has to be in business 12 months but does not mention ” in business 12 months in the other CAPLines. The Working Capital CAPLine under M. 4. States that “To be eligible for a Working Capital CAPLine, the applicant must qualify under the standard 7(a) requirements and generate accounts receivable (not notes receivable).”, (top of page 131).
The only mention of 12 months business operation is in the Eligibility Questionnaire. This form is highly recommended that you fill out but is not required for 7a. This form states in the CAPLines Addendum H in the General Requirements for all loans that,
“1. The Applicant has been in business for at least 1 year or developed an adequate track record to assess its short-term working capital needs.” The Key Here is the word ” or “. 
Really, I’m not nitpicken but the SBA really needs to update it’s BIBLE so that others may see the light! In short – there will be not Lines of Credit for new businesses. Now, they could reinterpret the SOP or Redo the Eligibility in the future. Small Business deserves a Better Bible of SBA Rules and Eligibility.
Please send any questions or comments to this blog or to roger@rogerschlueter.com or go to the Website at schlueterfinancial.com  for additional contact information.
 

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  

Banker Confidentiality does not apply to information shared with banks

Article by Roger Schlueter

Bankers for the most part do not share information about your business unless it is with a bank. They have a confidentiality toward other businesses, individuals and organizations but this does not apply to their bank and other banks that they may deal with. There are many situations that come up with bankers, and one of the most important, is that many of the bankers have worked with one another over the years. This creates a sort of Good Old Boy system as to, who knows who, in the banking industry. Most Bankers are also extremely loyal to their banks and the Banking Industry in General. It is sort of like when you are interviewed for a job, anything you say or refer to is used in the evaluation of your business and business management. 
Many Businesses will create a bond with their Business Loan Banker but remember who is paying his salary, it is not you. Even though you may contribute income that may lead to paying the bankers salary. People know that an interview situation is very strict, anything you say may be used for you or against you. This is the same when talking to your banker. You and him may be good buddies but remember, he works for the bank and is loyal to the bank. The bank is loyal to you as long as they think you can pay your loan payments in a timely manor, and you are a good risk for future borrowing. If either of these change, then you, may be out the door.
There are bankers that will try to move companies with them if they move to another bank. The banker should still be loyal to his bank. Bankers that are more loyal to the business than to the bank they work for, may not rise as high in relation to their position at the bank as they would like to rise. Banks like company men and if you are a renegade they either think of you as a liability or as a loose cannon or both.
The best way to gauge this relationship is to remember who is paying the bankers salary or commission. If your  company is paying the banker by his commission that he makes on you loans they that is great. I will say it takes a larger amount of loans to pay the salary of a Business Banker who may be making up to six figures and this figure does not include Benefits that could be up to half of his salary.
Most bankers are good guys and will be looking out for you. Just remember, it is just like in an interview, what you say can be used to benefit you or to Harm you, in the eyes of the Banker and his Bank. Good Economic Times usually are very beneficial to the borrower but in Bad Economic Times companies are booted out of banks every day!
Please address any questions to this Blog or my email at roger@rogerschlueter.com , or go to my webpage at schlueterfinancial.com for additional contact information.  
  

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