United Bank & Trust Blog

Over the next five years, a substantial number of commercial real estate loans will be up for renewal, and unless the market changes drastically, businesses could be in for a shock when it comes time to renew.

With this in mind, what should an investor real estate project sponsor or owner do? The best answer is, “Start the Renewal Process Early,” and don’t let the threats of defeasance, prepayment penalties, etc. scare you. Posturing is normal in this economic climate, but to tell you the truth, many of these lenders would welcome the opportunity to have their clients find ‘new homes’ for their financing. Companies such as United Structured Finance Co. have recently expanded their financing solutions  and are ready to help clients brace for the potential impact that commercial real estate owners across Michigan and the Midwest might face. United’s new service is called Capital Market Solutions (CMS).

What types of properties are we talking about? Multi-family housing, senior housing, retail, office, medical office, industrial, self-storage and hospitality projects ranging from $500,000 to $50 million plus — would qualify for CMS solutions. While other big national banks play in this market (of off-balance-sheet financing solutions), most community banks do not get involved with these types of transactions. CMS  programs are  typically for stabilized properties. Companies like United Structured Finance look for national lending sources to bring a wider variety of financing options to meet client needs. These finance companies serve as correspondent lenders for various funding sources, including life insurance companies, government agencies like HUD and Fannie Mae. Sources also include specialized real estate financing companies or investment banks. The goal of an off-balance sheet finance company is to bring these national lending sources to Michigan and Midwest.

We’ve found that this credit environment makes it even tougher to place these types of loans. So starting early on your lender or finance company might be your best advice. To read more on this issue, go to http://MiBiz.com.

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.