United Bank & Trust Blog

In the recent Wall Street Journal article Collateral Damage in Lending, they discussed several items that we feel are great opportunities to clarify for potential borrowers.

Lack of Collateral

A lack of collateral shouldn’t be a reason to deny a loan under the Small Business Administration (SBA) program. The SBA does allow for the approval of loans that are under collateralized, however, all other assets of the borrower/guarantor, shy of working capital reserves and retirement accounts, are required. This includes all business assets (potentially including accounts receivable, inventory etc. if not tied to an operating line of credit) potential stock portfolios, personal residences as well as other real estate investments to name a few.

Cash Flow

We agree with the bankers in the article – cash flow is still the primary source of repayment and the most convincing way to underwrite a transaction. However, some loans won’t cash flow under conventional terms and this is where the SBA can be of assistance. The ability to amortize furniture, fixture, equipment, working capital and goodwill over 10 years and real estate over 25 years can drastically increase the cash flow position of a company making it more palatable for a lender.

Personal Guaranty

For a small business, especially a start up, a personal guaranty and the willingness of a borrower to offer one is very important. We, as a financial institution, are a lender and not an investor. We want to see that the individuals involved believe in their business and are willing to pledge their personal assets as a sign of confidence. In addition, our return (our interest rate) is priced similarly to any other conventional lender and not an investor.

We don’t get any of the rewards – for more information we have two webinars completed this year on small business lending in today’s economy and Cash is King: How to Manage Cash Flow & Increase Working Capital where we discuss this in greater detail.

In addition the SBA rightfully requires a personal guaranty on any individuals that own 20% or more ownership.

Cash and Cash as Collateral

Typically our SBA loan structure is SAFER for the client and the bank compared to a conventional loan.

Because our LTV’s can be higher, this reduces the amount of cash the client has to put into the deal allowing clients to preserve precious working capital, which they all desperately need!

Cash is usually only taken as collateral during construction- to cover cost overruns, or in rare situations when the loan is under secured AND additional collateral is available that wouldn’t’ hurt their working capital situation. We want our borrowers to have the available working capital to be able to operate their business. One of the top five reasons why businesses fail is attributed to a lack of working capital!

Accounts Receivable and Inventory as Collateral

As I mentioned above, we often will try to leave accounts receivable and inventory available as collateral for potential operating lines of credit.

Don’t hesitate to call on us with any questions, comments, or concerns at contact@unitedstructuredfinance.com. Have a great week!

Kenny Leonard

The Senate yesterday fell two votes short of the 60 needed to limit debate on a new substitute amendment to the American Bankers Association (ABA) backed small-business lending bill (H.R. 5297). All GOP senators voted against the measure in a 58-42 cloture vote, and the chamber moved on to other business. Senate Majority Leader Harry Reid (D-Nev.) said he would work with Republicans over the next few days to seek a compromise on which amendments would be offered to the legislation.

Negotiations between Senate Democratic and Republican leaders on the number and types of amendments broke down Wednesday night. Democrats had hoped to pass the bill before Congress leaves for the August recess, but that won’t happen with the House scheduled to adjourn today. The Senate is in session for another week, but Reid said there would be no more votes until Monday evening.

Here is an update on the SBA fee waiver: This bill, even if passed by the senate next week will not be enacted until they return after Labor Day. Bottom line at this point is that the 90% guaranty and the fee waiver are dead until After Labor Day at least.

While we are disappointed that this didn’t legislation hasn’t passed we are still committed to utilizing the SBA loan program to help our local small businesses.

As always please feel free to contact us.

(Source: ABA Daily email update)

More info:

http://thehill.com/blogs/on-the-money/domestic-taxes/111763-small-business-bill-appears-stalled-unti

http://www.bloomberg.com/news/2010-07-29/senate-republicans-block-small-business-lending-bill-sought-by-democrats.html

Kenny Leonard

CNN Money reports stimulus money helped revive the government’s small business lending program after the recession threw it into a near freeze. But this quarter, as the bonus funds ran out, the program’s growth again began to stall. In essence lending volume dropped by 75% and dollars lent dropped by nearly 84% compared to the 10 day period prior to the expiration of the above mentioned provisions. Read the full article here: http://money.cnn.com/2010/07/02/smallbusiness/small_business_sba_loans/

In similar news, the North Bay Business Journal provides a timeline of the legislation related to the fee waiver and 90% guaranty provisions which originated in the American Recovery and Reinvestment Act (ARRA) passed back in February of 2009. You can also read real-life examples of borrowers who have suffered as a result of Congress not sending a clear message to the marketplace on whether these provisions will be extended or not. Read the full article here: http://www.northbaybusinessjournal.com/22828/waiting-game-as-sba-program-lapses/?tc=ar

At USFC we have numerous customers who are in similar predicaments and are gambling on the hope that Congress will extend these provisions through the end of the year. We are actively having open conversations with our customers on their specific situations. If your SBA lender hasn’t approached you yet, I would suggest you go to your lender and ask to discuss your situation. Each situation is different and depending on the circumstances of each customer will determine whether it is advisable to wait for the reinstatement of the fee waiver or not. I will say that as time continues to pass I become less and less optimistic about the reinstatement coming to fruition.

Kenny Leonard

Recently a great article appeared in Inc. magazine. Written by Christine Lagorio, she asks the question: How to Choose the Right Bank for Your Small Business

In the article she suggests that a community banks is often the more practical and fitting choice for a small business. Since we live in work in our communities and our shareholders tend to be local a community bank tends to be more understanding of local matters and economies, more supportive of local initiatives and economic drivers and one may argue they are more reliable.

She reiterates the importance of small businesses developing a long standing and mutually beneficial relationship with a local community bank in their area since they more likely to get a loan from their community bank than they are from a large institution.

“Recent research shows that small banks are more likely than large institutions to issue loans to businesses in their community. In fact, though small and midsize banks control only 22 percent of all bank assets, they account for 54 percent of small business lending, according to FDIC data from the third quarter of 2009.”

“There’s also increasing political support for small businesses to partner with small banks. In addition to federal Small Business Association loan incentives, some experts think small businesses could have a hand in solving the credit crunch by simply changing their banking habits – and putting their money in small banks. The Institute for Local Self-Reliance’s New Rules Project has teamed up with Move Your Money, a new initiative by the Huffington Post and Roosevelt Institute to provide resources to companies in switching their business to community banks.”

For the complete article, see the following link: http://www.inc.com/guides/choosing-the-right-bank-for-business.html.

Kenny Leonard

In an analysis of small businesses and jobs the SBA Office of Advocacy says that over a recent 15-year period, small businesses created some 65 percent of the net new jobs in the private sector. (http://www.sba.gov/advo/research/rs359tot.pdf)

SBA Advocacy economist Brian Headd notes that many of the new jobs are in new business start ups, but an even larger share are in expanding firms of all sizes—particularly mid-sized firms with 20-499 employees.

“More and more, we’re finding that both new start ups and ongoing high-growth firms have important roles to play in the labor market,” said Acting Chief Counsel for Advocacy Susan M. Walthall. “Fast-growing firms scattered across the economy create a large share of jobs—and because no one can predict which idea will be the next to catch on, it’s important to create an environment in which a wide spectrum can start up and expand.”

Advocacy’s analysis of the quarterly Bureau of Labor Statistics data show that over the 15 years from 1993 to mid-2008, 31 percent of net job gains (jobs created minus jobs lost) came from the opening of new establishments. An even larger share—the remaining 69 percent—were from ongoing firms of all sizes that expanded. (These net figures are based on establishment openings minus closings and establishment expansions minus contractions.)

The business cycle is an important factor in the net creation or loss of jobs. In the current downturn, firms with fewer than 20 employees began losing jobs as early as the second quarter of 2007. From 2008 to the second quarter of 2009, these smallest firms accounted for 24 percent of the net job losses, while those with 20-499 employees accounted for 36 percent; the remaining 40 percent of job losses were in large firms with more than 500 employees.

United Bank & Trust and United Structured Finance Company (USFC) are committed to our local small businesses. We all have a vested interest in helping to grow or help start-up businesses in the local communities we work and live. USFC is proud to be the largest SBA lender in Washtenaw, Livingston and Lenawee counties and is proud to be a positive force contributing to the growth in jobs cited in the study.

Don’t hesitate to call on us with any questions, comments, or concerns. Have a great week!

About The Office of Advocacy of the SBA

The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policymakers.  For more information, visit www.sba.gov/advo, or call (202) 205-6533.

For more information and a complete copy of the report, visit the Office of Advocacy website at www.sba.gov/advo.

Kenny Leonard

We are currently in one of the most protracted business cycles in modern history.  If you recall your macroeconomics class from college, a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time.

Economists note, however, that complete business cycles vary in length.  Historically, they have ranged anywhere from about two to twelve years with most cycles averaging about six years.  But, of these four stages, we seem terminally stuck in the 1st phase of this particular business cycle, namely the Recession.

RECESSION, you will recall from your ‘macro’ class, is that period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish.  This is the most unwelcome stage of the business cycle for business owners and consumers alike – and particularly this one.  Now if we believe the economists, this recession had technically been going on since September 2007, and it ended sometime in October 2009.  Now, we are supposed to be in the 2nd stage, Recovery.

RECOVERY, also known as an upturn, is supposed to be the point at which the economy “troughs” out on a graph and starts working its way up to better financial footing, i.e. things are getting noticeably better and we are moving on to the 3rd stage, Growth.

Recovery may be the stage we are ‘in’, but don’t tell that to the average entrepreneur.  Even though many of the factors which indicate recovery are beginning to emerge, it certainly doesn’t seem like much of a recovery quite yet – at least to many of the small business people we speak with every week.  To them, ‘things are just starting to happen’.  Increased consumer confidence and investment of capital are among them, but as we are on the mend, many businesses are still struggling, working capital is being drawn down to dire levels, and many are struggling to maintain their business loans at current levels.

So before the Growth stage comes at us again, and everyone can breathe a sigh of relief, businesses need to reevaluate what they are doing now and what they plan to do in the future to ensure that they can continue to survive the remainder of the current business cycle as well as the next!

Small business owners can take several steps to help ensure that their establishments weather business cycles with a minimum of uncertainty and economic damage.  They need to develop strategies that work now at the bottom of the business cycle as well as developing those that work when we are well into the Growth phase of the cycle — which we all hope is sooner than later.

Specific tips for managing businesses during this business cycle downturn include the following:

• Long-Term Planning — Business consultants encourage small businesses to adopt a moderate stance in their long-range forecasting.  We often see pro-formas that are too far reaching, even for a Growth stage economy.  So, it is wise for businesses to temper their forecasts to this particular reality, and many have difficulty doing that.

• Flexibility — Developing a business plan that allows for appropriate development times in each of the four stages of a business cycle is critical. This includes structuring alternative recession-resistant funding structures and putting away retained earnings during the strong Growth stage to help weather the next Recessionary stage, which always follows.

• Attention to Customers — Staying close to your customers is a tough discipline to maintain in good times, but it is especially crucial coming out of bad times, like we are currently experiencing.  Having your clients asking their best customers what their future orders will look like in 2, 4, and 6 months can be a specific indicator of when their company can expect an up-turn in business. But during bad times, like these, those questions often go unasked.

• Objectivity — Small business owners need to maintain a high level of objectivity when riding business cycles.  Making operational decisions based on hopes, desires and emotion rather than a sober examination of the facts can devastate a business, especially in economic down periods like we are experiencing right now.  Asking your clients to ‘get real’ is extremely important but difficult for many bankers to articulate.

Timing – Timing any decision within a company during a stage like this is difficult, and often we see businesses looking to the economists, politicians, media and even the stock market for their indication as to when to ‘pull the trigger’ on large expense items, like ordering additional manufacturing equipment or increasing the sales force or support personnel.  However, expanding too quickly when the markets are not there places huge demands on working capital.  But, in contrast, waiting to make these decisions till the Growth part of the business cycle is in a full upswing may result in decreased market share or an eroding customer base.  Again, the best route may very well be to listen to your customers, learn what they plan to do and when they plan to do it and then time your response to spending on capital items and personnel around their decisions.  For small businesses, customers are ultimately their ‘business destiny’ and who they rely on regardless of what ‘others in the industry may be doing’.  So, to the extent that small businesses utilize their current (and new/future) customers as a resource rather than an excuse for their current failings is paramount to their continued success.

We at United Bank & Trust and United Structured Finance Company are here for you. Luckily the SBA programs provide a great opportunity for customers to extend their amortizations, reduce monthly debt obligations, and add new working capital when other banks turned off their willingness to lend. As a resource to our clients as well as your banker we are here to help you manage these phases.

Don’t hesitate to call on us.

Source: Jim Fliss, Zions National Real Estate weekly rate update

Kenny Leonard

Late last night the Senate and House passed — and President Obama signed — a bill (H.R. 4851) that among other things extends through May 31 funding to reduce or eliminate fees under the Small Business Administration’s 7(a) and 504 loan programs or until the funds are exhausted. The Senate passed the bill by a 59-38 vote, and House approved it two hours later, 289-112.

This is the fourth extension of the funds allocated to reduce or eliminate fees related to the SBA loan programs.

All of our trade publications still seem to hint that these extensions will be made through the end of the calendar year. Legislation has been proposed to do so and final House and Senate action is still pending.

For more information please read:

• http://money.cnn.com/2010/04/15/news/economy/senate_extends_unemployment_benefits/index.htm?hpt=T2
• http://www.prnewswire.com/news-releases/landrieu-praises-extension-of-important-recovery-act-lending-provisions-91002419.html

Source: American Bankers Association

Kenny Leonard

The provisions in the American Recovery and Reinvestment Act, also known as the “stimulus bill,” that were signed into law in February 2009 has resulted in an increase of SBA lending by over 100% compared to volumes prior to the stimulus. The funds have run out three times now and each time Congress has extended the provisions for only a month or two. The volume of SBA loans submitted after the funds were exhausted dropped over 90% the following week.

Learn more about the affect of the stimulus bill clicking on the link: http://finance.yahoo.com/news/Governmentbacked-small-cnnm-4262871372.html?x=0&.v=2

Mike Chatas

We received some good news from NAGGL late last week. On March 26th it was reported that new legislation was introduced and passed by the House of Representatives (HR 4938), followed late last night by approval in the Senate. The measure (HR 4938) that extends the Recovery Act SBA loan provisions through April 30: Up to $40 million is available for 7(a) and 504 fee reductions/waivers and the 90% 7(a) guarantees, as well as extension of SBA’s authority to provide the higher guarantee (up to 90%).

I remain cautiously optimistic that these provisions will be approved through December 31, 2010, but nothing is certain. Because it’s an election year, some lawmakers are reluctant to vote on additional spending. While loan demand remains quite high here at USFC, we encourage you to contact Kenny Leonard or me to discuss how you can take advantage of these subsidies.

Check out the full details here.

Kenny Leonard

We had a great Let’sTalk Webinar this week discussing Small Business Lending in Today’s Economy. Our participants had a lot of great questions and we thought it would be great to publish those for everyone to see.

1. Can the SBA loans be used to refinance existing debt? Yes, you can refinance existing debt with the 7a loan. There is certain criterion that must be met, however.
2. Aren’t there maximum annual revenues allowed by the SBA? Yes there are maximum revenue limits but it is industry specific not a standard across the board. There are also other personal and business financial ratio tests that must be conducted. And just because you exceed one of them doesn’t mean we can’t do the loan. Contact a USFC representative for more details
3. Are there prepayment penalties for early termination? There are prepayment penalties on the 25yr 7a loan of 5%, 3%, and 1% for the first 3 years respectively and for the first ten years on the 504 loan declining from 10%-1% reducing 1% each year.
4. In talking about the 504 loan, is the information pertinent only to small businesses holding real estate? No, 504 loans can also be used for the purchase and partial refinance of existing debt that was used to acquire fixed assets such as machinery and equipment (no rolling stock, however, such as trucks etc.)
5. How to choose correct loan for my customer? Business buyer purchasing property and business and will need remodel capital and start-up funds. Turn to the experts at USFC. That is what we are here for. We find innovative solutions for various small business transactions and one of our loan officers would be happy to walk through potential structures and find the best opportunity for the customer
6. Do you handle the small SBA loans just for business cash flow no real estate? We do finance loans used for things not related to real estate such as lines of credit, equipment and permanent working capital. We would have to look at having sufficient collateral to support our loan. If there isn’t any additional personal or business collateral we would heavily rely on the business financials and the historical performance. Often times, however, we are able to look at a company’s existing debt structure and refinance all of it resulting in considerable monthly payment savings for the customer.
7. Are self storage properties able to be SBA 504 or 7a loans? Generally the SBA doesn’t allow self storage units to be eligible. There is a requirement that the real estate must be 51% owner occupied and no more than 49% can be rented out. That being said, however, if the business has a retail store on the property that rents moving trucks, sells boxes and other moving supplies etc. and the revenues from that operation are greater than the revenues generated from the rental of the self storage units it is possible that the project may become eligible.
8. When a local source of loan funding offers to become a part of a business loan project, how is that seen w/in an SBA 7(a) or 504 lending project? We like it and so does the SBA! I am assuming this is referring to Downtown Development Authority dollars or other grants or loans from municipalities. These can be complicated to get done if you don’t have experience doing it so rely on us to help you through the process we have the experience and expertise!
9. Is the new SBA Sr. Area Mgr assigned to the Grand Rapids Office aware of the “Interim Loan” program offered through United? That is a great question. I don’t know if they are or not but we will reach out to them. I am only aware of a few financial institutions in the country that offer this program. It is very risky from the financial institution’s perspective and very complicated to pull off. Because of our incredible team, expertise and experience we have successfully done several of these and look forward to doing more.
10. Are you able to pre-approve a small business for a certain selling price before a potential buyer is secured? Unfortunately no. The reason is because the potential buyer is really what we make our loan decision on. Obviously the business they are buying is of interest to us too, but the individual is crucial. What could be done, however, is a business valuation ahead of time that can determine what the “going concern” value of the business is. Unfortunately, however, this would cost money to have done.
11. With the proposed increases in the SBA loan amounts what will happen to the industry specific size criteria? For instance Restaurants can’t be over 6MM in annual revenues. There are also net worth limitations too. So far I haven’t seen anything that would allow for an increase in the “size standards.” That being said please keep in mind that just because a business exceeds one of the size standards doesn’t automatically make them ineligible. With our expertise we are able to successfully propose to the SBA accepting alternative size standards in certain cases.
12. What is the minimum credit scores needed for SBA 7a? Are there ever exceptions? As we mentioned credit scores are important in dealing with the history of good decision making and financial management. That being said if there is a good reason for the credit scores that can be proven via documentation it doesn’t disqualify the borrower. It is still required; however, that there aren’t any outstanding judgments and that there hasn’t been any late payments on government obligations such as taxes and student loans.
13. Follow up on prepayment penalty is business outgrows existing property and needs more space. Can the loans be transferred to the new purchase to eliminate the prepayment penalty? This is an interesting situation. Depending on the specifics I could potentially see a scenario where there could be a second loan done in a subordinated position with a transfer of collateral (i.e. real estate). That being said we would have to look at the entire big picture and get the SBA’s approval.
14. Does United Structured Finance do business valuations? We do not. In an effort to keep free of any conflicts of interest we outsource business valuations this is also true for appraisals and environmental due diligence. We do have a program that allows us to do much cheaper business valuations for smaller loan amounts (typically less than $500,000).

Take some time to review the event recording or the PowerPoint presentation (PDF). All of these materials and a complete transcript of the Q&A session are now available for download on our website.