November 23, 2009

A point about business plans

The market analysis portion of your business plan is critical as it provides an analysis of data supporting the market demand for your product or service.  It answers:  

Who will buy your service or product? 
What do your customers have in common with each other? 
Where do your customers live and how much will they spend? 

But sometimes business plans are too long on the market analysis and too short on a clear description of the business model and its execution; details explaining how the business works, how it's managed, and how it produces cash.

November 11, 2009

SBA OneSource - Another good resource

Joanne Thompson of SBA OneSource writes a frequently updated and informative blog on all things SBA - Check it out.

Regarding my post of November 5, 2009 titled The SBA giveth, but the SBA can taketh away, check out the top reasons for repair and denial of the SBA guaranty.

November 10, 2009

SBA hot topics

A national small business forum of business owners, lenders, lawmakers and regulators is set for November 18 in Washington D.C.  Ideas for increasing the flow of credit to small businesses include at least two SBA hot topics:
  • Increasing the maximum SBA 7a loan amount up from $2 million to an amount of $5 million or more.

  • Allowing for fixed asset refinancing via the SBA 504  loan program.  The SBA 504 loan program provides long term fixed rate financing for the acquisition of fixed assets such as commercial real estate, construction/improvements, and machinery and equipment, but it cannot (except in a very limited way) currently be used to refinance existing business debt on fixed assets.
See #2 and #3 in the list of suggestions being offered by a leading SBA lender.      

November 9, 2009

Key person life insurance

Your bank may require the collateral assignment of a key person life insurance policy.  Specifically, the SBA gives the following: 

The lender must determine if the viability of the business is tied to an individual or individuals. In these situations, the lender must require life insurance.  The life insurance required must be consistent with the size and term of the loan. The amount and type of collateral available to repay the loan in the event of the death of the borrower may be factored into the determination of the appropriate amount of life insurance.

Expect your bank to require a collateral assignment of key person life insurance; the required policy amount being at least equal to that of the loan.

Collateral requirements

The SBA states: A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons lenders use the SBA-guaranteed program is for those small business applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults.

The SBA requires that SBA 7a loans be collateralized to the fullest extent possible, up to the amount of the loan; first with the available assets of the business, then, if not fully secured, with the available personal assets of the principal owners of the business.  So the bank will secure your SBA 7a loan first by placing a lien on all the business assets and then by taking your available personal assets as collateral for the loan.

The SBA considers a loan as “fully secured” if the lender has taken security interests in all available assets with a combined "liquidation value” up to the loan amount.  Business operating and trading assets are excluded from the calculation of “fully secured” (even when liens are taken on these assets) because these assets typically have negligible value in a liquidation.

Liquidation rates, like underwriting standards, vary by bank; sample liquidation rates shown below.

Commercial Real Estate -- 75%
Single Family Residence -- 80%
Machinery and Equipment -- 50%
Inventory -- 0%
Accounts Receivable -- 0%
Furniture,Fixtures and Equipment -- 20%
Leasehold Improvements -- 5%

November 5, 2009

The SBA giveth, but the SBA can taketh away

The SBA expects its guaranty to be protected at all times; that banks perform proper due dilligence when underwriting small business loans; carefully documenting and managing their SBA loan portfolio through maturity.  Banks are expected to treat SBA loans as if the bank were fully exposed without an SBA guaranty.  The SBA guaranty on a given loan that defaults can be partially cut or worse, completely denied, if the SBA finds that the bank carelessly structured, improperly documented, or otherwise grossly mismanaged the loan.        

Got a low FICO score?

Negative marks on your credit report don't necessarily preclude you from getting an SBA loan but your SBA lender will need your satisfactory explanation for each mark; how it happened and how it was resolved.  How you resolved past due accounts to meet your debt obligations speaks to your good character and will be noted in the underwriting of your loan request.  But below are red flags to keep in mind:
  • Recent bankruptcy and accounts presently in default or collection are most serious because they indicate your recent or current difficulty in meeting debt obligations.
  • Likewise for unpaid taxes and unresolved tax liens
  • Likewise for chronic, slow-paying accounts

November 3, 2009

A few good resources

Below is a quick list of the websites I regularly refer to for resources and news on all things SBA.

The official site of the Small Business Administration

The National Association of Government Guaranteed Lenders - conferences, training, SBA notices, and newsletters

sbaAccess - an excellent newsletter with valuable tips

Coleman Publishing - breaking SBA news

SBA loan deferments

If you are a small business owner with an SBA loan and your business is being impacted by the recession or otherwise, such that you're having difficulty making your monthly SBA loan payments, consider asking your bank for a deferment.  If your bank is a Prefered Lender of the SBA (a PLP lender) it has unilateral authority to defer your SBA loan payments for a period of time.  I've been working with borrowers on deferments as of late and below are points to keep in mind:
  • A deferment is the temporary postponement of some or all of your monthly loan payments (deferred princpal, deferred interest, or deferred principal and interest).
  • The total amount deferred must be re-amortized over the remaining post-deferment life of the loan so expect your post-deferment loan payments to be a bit higher than your pre-deferment loan payments because you're making up for the missed payments over the remaining time to maturity.
  • Your bank will want to understand and document your company's need for a deferment and at a minimum, if it hasn't already done so, will want to document your loan file with a complete set of updated financial statements and tax returns for you and your business.
Tip: Be straightforward and specific regarding the factors impacting your business; the root causes behind your need for a deferment.  Formulate a turnaround plan identifying steps the business will take to improve its performance.  Provide a sound financial projection with reasonable assumptions that illustrates the ability of the business to make post deferment loan payments.      

November 2, 2009

New business startups

When seeking to finance the startup of a new business, I highly recommend developing a business plan that clearly describes your business; the ownership/management, initial capitalization, products/services, operations, market analysis, financial projections, etc. 

If your business plan does nothing else, make sure it clearly describes the scope of your project and your need for financing.  What needs to be done to make your business a reality and how much money is required to do it?  Specifically, how much equity capital is being contributed to the project by ownership and how much of a loan is required to complete the project?  Finally, what exactly, will the loan proceeds be used for?

Tip: In the world of SBA loans, there is no such thing as 100% financing for a new business startup.  Every new business project must include an equity stake contribution from ownership.  But how much of the project must be owner's equity and how much can be debt financing?  There's no exact rule because it depends on the level of risk associated with a given project but in general, expect no less than the 80/20 rule.  The owner's equity stake should make up no less than 20% of the total project and the SBA loan or debt financing should make up no more than 80%.  It depends on the bank.  Some banks require a 70/30 or even a 60/40 mix of debt to equity for new business startups and some banks shun startups altogether.    

SBA 7a loans: the basics

SBA 7a loans are term loans that can be used to finance a variety of small business needs including:
  • Land/Building Acquisition
  • Construction/Tennant Improvements
  • Business Acquistion
  • Business Debt Refinance
  • Machinery and Equipment
  • Inventory
  • Furniture, Fixtures, and Equipment
  • Working Capital
7a loans are normally guaranteed 75% to 85% depending on the size of the loan; an 85% guaranty is available for loans of $150,000 or less and a 75% guaranty is available for loans greater than $150,000.

Special note: As of the writing of this post and per the provisions of the American Recovery and Reinvestment Act of 2009, the SBA guaranty on new 7a loans can be raised to a maximum of 90%.

Term to Maturity:
Depending on the primary purpose of the loan, its term to maturity generally ranges from 7 to 25 years.  7a loans are fully amortized through maturity with no prepayment penalties for loans with less than a 15-year term.  Loans with a term of 15 years or more come with a 3-year declining prepayment penalty; a 3% prepayment fee in year 1, 2% in year 2, and 1% in year 3. 

Interest Rate:
Typically, 7a loans are variable rate loans, adjusted calendar quarterly.  Interest rates are set at a margin above the Wall Street Journal Prime Rate; within a range of WSJ Prime Rate + 2.00% (presently 5.25%) to WSJ Prime + 2.75% (presently 6.00%). 

Tip: When developing financial projections for your business and estimating your monthly loan payments, assume your SBA loan will be priced at the maximum = Prime + 2.75%.

The SBA guaranty fee for a 7a loan is paid by the borrower and is as follows:
  • 2% of the guaranteed portion of the loan for all loans $150,000 or less -- For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700
  • 3% of the guaranteed portion of the loan for all loans $150,001 to $700,000
  • 3.5% of the guaranteed portion of the loan up to $1,000,000, PLUS 3.75% of the guaranteed portion of the loan over $1,000,000, for all loans $700,001 to $2,000,000 -- For example, the guaranty fee on a $2,000,000 loan with a 75% guaranty ($1.5 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) PLUS 3.75% of $500,000 ($18,750), which totals $53,750
The SBA guaranty fee can be rolled into the SBA loan.  Note: As of the writing of this post and per the provisions of the American Recovery and Reinvestment Act of 2009, SBA guaranty fees on 7a loans are temporarily eliminated.

SBA 7a loans are comparatively flexible and the terms noted above make them a great source of financing for new business startups and small business expansions. 

November 1, 2009

Innitial Post


This blog is about small business financing and SBA loans.  SBA refers to the United States Small Business Administration and SBA loans are government guaranteed loans for small businesses.  More info on the SBA and available loan programs can be found on the the SBA's official website

I've been an SBA loan officer at a small community bank for  the past five years and my hope is to provide an insight to SBA lending that serves as a resource for lenders and small businesses alike.