Daily Observations - Equity Injection

Like last night tonight's will again be short and to the point.

Once again this changes is a CRUCIAL one that you must be aware of.

The area of equity injection has clearly been addressed. The requirements that there has to be a 10% equity injection for new business acquisitions and real estate transactions has been eliminated.

Before you start rejoicing realize that the equity injection is now a lender requirement, and how much of equity injection they want to require. The equity requirement is now a credit decisions left totally to the business judgment of the lender. The lender must include in its reports a complete credit analysis and a detailed discussion of the required equity and its adequacy.

The SBA now considers funds injected through the use of personal debt to be borrowed. What this means is that it is no longer acceptable to use as down payment money from an equity line of credit.

However there is one exception to the above rule and that is, if the debt can be repaid from outside sources. Therefore, if a spouse through outside income can support the equity line of credit debt then the use of the equity as a form of down payment is acceptable.

Visit our website that is only about SBA Information.

Daily Observations - Seller Requirements

Tonight's note is short and sweet and to the point. I did not want to cloud this message with a lot of info, b/c this is CRUCIAL.

A new requirement now stipulates that the analysis must show how the change of ownership will benefit the business, not the seller or the business buyer. Therefore as business brokers part of your write up during the submission of the loan process should definitely address the issue as to why the business will now benefit from the change of ownership.

Another new requirement is the obligation of the lender to discuss with the seller- seller financing. What this actual requirement means is that seller financing needs to be requested in all transactions.

The amount of the seller financing should be equivalent to the total amount of dollars for the acquisition of all intangible assets such as goodwill. There is no requirement that the seller has to carry paper, as of this update.

However, it seems very clear that the SBA is leading towards the seller carrying a significant amount of the goodwill. The only requirement as of today is that the lender must document that they requested the seller to carry the paper. And that the seller has therefore refused or state the amount the seller is agreeing to carry. Visit Loanforbiz for more info.

Daily Observations - Miscellaneous Provisions

The new SOP has elaborated on businesses that are eligible as well as ineligible. The following businesses have been questionable under the previous SOP, and now have been clearly defined.

Bail Bond companies clearly ineligible.

Check cashing businesses clearly ineligible if they received interest on their loans

Multi-Level Marketing clearly ineligible.

Prurient Sexual Nature if 5% or greater clearly ineligible.

Mortgage servicing companies eligible if loan is sold within 14 days of closing

A new requirements that mini warehouses, office suites, shopping centers, flea markets, and mobile home parks received at least 50% revenue from services provided, rather than rental or passive income. This requirement is presumed to be applicable to extended care facilities and apartment buildings which are clearly not eligible.

Change of ownership allows financing when the business applicant is purchasing 100% of the ownership interest as either a stock or asset sale. Or one or more of the existing owners are purchasing the stock of a selling owner resulting in 100% ownership transfer. The business must be either the borrower or the co-borrower.

The SOP clarifies that the seller cannot remain an associate of the business, but may consult up to 12 months. There's also a new requirement that there has be a documented site visit of all the assets being transferred.

The lenders documentation must include for loans less than $350,000 a business valuation including the real estate. For loans greater than $350,000 or there was a close relationship a qualified independent third-party report is required.

Daily Observation - SBA Changes; Experience

One of the biggest changes we have seen over the last couple months is the requirement of the buyer. to have direct experience in a related industry of which they are purchasing the business. The lenders today are no longer stretching their classification of related experience. If the buyer does not have direct experience as an owner, not as an employee or manager, the lenders are not interested in financing their new acquisition.

The only area where a direct employment experience is transferring is within the retail sales industries. For example, where an owner of a hardware store now wants to buy a sporting goods store without any direct experience in the sporting goods industry, the lenders most likely would see this as a transferable experience.

Experience is becoming a very crucial area that needs to be satisfied before a lender will approve new SBA financing. As business brokers, you should be very aware of the previous experience that your buyer has, and try to ensure that there is a direct transferable experience. One way of getting around this strict requirement is for your buyer to partner up with someone who has direct experience. The only problem with this suggestion is that that individual with experience would have to become a guarantor on the loan, as well as the individual without the experience. Visit our SBA based website for more information.

Daily Observations - SBA; SOP Changes

For the next series of Daily Observations I will be highlighting the new SBA changes that are supposed to be effective August 1, with the new Standard Operating Procedure Manual (SOP)

The content of this article comes directly from the talk that I just did to the California Association of Business Brokers. The talk was organized around the concept of Now More than Ever.

Now More Than Ever we need to keep everything very simple as mentioned in our last talk, but we need to be more knowledgeable than ever before. The knowledge of what lenders are still in the games, the knowledge of what lenders like what niches, the knowledge of how a lender interprets a business plan and a cash flow model.

Because of the significance and the importance of the business plan we have created a 25 page business plan template that we are consistently using with our clients. The clients hat have used this plan are in much better control when the underwriters call to question them about their new business.

Email us at Mteam@loanforbiz.com with your contact information and we will be delighted to send one out to you immediately.

Tomorrow night we start off with the letter "E" for experience.

Daily Observation – Keep It Simple Stupid

Well we’re back on-line again, after a brief stint in Las Vegas for an Economic Summit; I am ready once again to share with you the latest in the area of commercial Finance.

I hope the title of this observation has piqued your interest. I am not saying that anyone is stupid, but the system that we have to work within everyday is getting more and more ridiculous, as more and more lenders are closing their doors. The lenders that are remaining are asking for more and more minute details in their quest to find reasons not to fund a loan,

The lesson that I am trying to share and not sound so condescending is that we as financial experts have to provide all the material the lender needs in the most simplistic and elementary way that we can present data. As I mentioned last week, there are no more exceptions, and we have to cherish the lenders that are still making deals happen.

But instead of cherishing them get them the most complete and easily understood loan scenario possible. Don’t go presenting esoteric loan scenarios as they are just not going to fund. Don’t present SBA Loans that the taxes do not reflect the true income and hope that all the brokers add backs will meet the lenders criteria for funding.

We must be very proactive in this economic environment and not reactive.

Financial Broker and Business Development Officer must work together for the good of the client. For more on the Role of the Financial Broker visit our website.

Daily Observation - The Loan Package

An underwriter while viewing a loan package needs to get a true feel for the deal, they have certain questions and criterions that need to be met. Below are some of the important issues that are raised in the underwriters mind and the corresponding sections of the professionally prepared loan package.

A properly prepared package should answer the following inquiries by the review underwriter.

Does the business in question have a positive cash flow that is supported by historical documentation?
This is answered by including the appropriate financial statements and tax returns

Can the business support additional debt?
This is answered by taking a comprehensive look at the current as well as the future cash flows. Also it can be determined by the seller’s discretionary income at the end of the day.

Is the individual that is attempting to secure the loan qualified to run this business?
This is answered by the inclusion of his current resume, as well as any supporting documentation.

Does the prospective purchaser have marketing and business plan to demonstrate knowledge of the business as well as their plans for repayment and future growth?

What are the projected revenues for the new business?

What is the current financial situation of the borrower?

If a buyer of a business just walks into their local bank, and does not have an individual who knows and understands the process the loan will definitely take longer. But a professionally prepared package answers all the above questions that an underwriter needs to have handled and thus makes the time frame for approval and ultimately closing much faster.

Daily Observation - Executive Summary

“This is where you will take all the major points that you have now synthesized and put it in a couple of paragraphs to share your venture with your friends, family, investors, and staff. Many people will only read the executive summary and skim the rest of the report to get to the salient points of the plan.

Remember this plan is for you; it is one that evolves as your business evolves and grows. Don’t just write this report and never come back to it. It is crucial that you are constantly reviewing your executive summary, along with the entirety of the business plan.”

The above section is from our business template tool. The problem is that most people do not follow this procedure at all. Just today we received a business plan that we were anxiously awaiting and all we got was fluff, 25 pages of sheer fluff.

After reading the business plan we should not have to ask very basic questions, they should all be answered within the plan. The plan should be leaving the reader with wanting more and more information to be able to make an intelligent decision based on the relevant data in the plan. The plan should not leave you wanting to know the basics but the more advanced data, especially the relevant projections and cash flows.

So as the economy heats up and you are looking to define your business and yourself follow these guidelines for optimum results. Contact us at MTeam@loanforbiz.com for your free plan.

Daily Observations - The Business Plan

Whenever you write a business plan the Executive Summary should be done last as it is comprised of a synthesis of all the other questions and answers. When you are finished writing your first draft, you will have a collection of small essays on the various topics of the business plan.

Then you will want to edit them into a smooth-flowing narrative. I cannot emphasize this enough. This has to be your work, not the work of someone else. Banks want to see what the new owner has in mind for his or her business. Banks are not interested in what a professional business coach, a SCORE representative or your CPA has written about how the business will function.

They want to see what the potential business owner has written. If you are not aware of what is in YOUR Business Plan, then you will not be able to talk intelligently when you are interviewed, which you inevitably will be, when you are seeking outside capital.

The real value of creating your own business plan is having the tools necessary to research and think about your new venture in a logical and methodical way. The act of planning helps you to think about the important elements of your business, to do additional research and study when needed, to look at your plans and ideas critically and to make those critical costly changes before they are implemented. For our 25 page business plan template e-mail me at mteam@loanforbiz.com.

Daily Observation – You must know your numbers

Today more than ever you must be able to understand and correlate the numbers in your loan package. Lenders today want more specific data as to cash flow analysis, debt service coverage, and return on investment than ever before. If you are not able to tell a lender precisely how much that you can borrow, and how much you need to borrow, which may be two different things, the lenders may say no to your total loan request.

What we are seeing now is that if you want $10,000,000.00 for example and the project only generates $6,000,000.00 The lenders are not coming back and offering six million they are just denying the inital loan request. You may say that this is unfair, but what I believe now is occurring is that the lenders only want to deal with sophisticated borrowers and sophisticated financial brokers/mortgage brokers.

If the broker that you are using is not able to determine the appropriate loan sizing then they are not the right ones for you.

The game my friends has changed drastically within the last three months. Knowledge is power more than ever. To determine Return on Investment for your project you need to understand cash flow, it as simple as that.

Daily Observation - E=Experience not Expense

Since I miss-typed last night the "E" for experience rather than expense I will spend tonight’s blog on experience. Experience today is more important than ever before. Experience used to only pertain to SBA Loans and not to commercial loans at all. Well all that has really changed. NON-SBA Loans are now requiring the experience factor as well now.

What am I talking about?

Well for example you want financing on an apartment, if you have never owned an apartment that is now a major flaw in your application. Lenders want to make sure that you have the experience in the investment that you are trying to finance. Another example is for a development deal, it used to be sufficient if the master developer had a team of sophisticated professionals, and they would be able to procure financing for their development.

Today if the master developer has not done many similar projects the lenders are not interested in talking with them, at all. Another example was that Self-Storage facilities were being bought by anyone who had the capital to put down and lenders were financing them one after another with no experience.

Today without direct Self-Storage facility ownership experience it is very difficult to get a loan approved. My last example is that we have a client that owns a mobile home park and was looking for additional financing. The lender came back and asked what other experience in mobile home parks the client has. I know by now you are seeing the picture.

I apologize about the previous version that went out. Microsoft updated the computer and somehow remembered the draft copy of this e-mail.

Daily Obserations - There are no Exceptions

I heard this statement today from two bankers that we regularly deal with.

The very short but powerful lesson today is that there are no exceptions, if a lender can find any fault with a loan they will decline it immediately. In this economic environment the lenders that are still committing their funds to new projects have their pick of the litter so to say. Lenders are Cherry Picking not bottom feeding.

So what does this mean to you? It means that you must have all your ducks in a row before you submit a loan. You need to make sure that you loan meets all the 5C's +E test. Collateral, Credit, Contribution, Capacity, Character and Experience.

If any of the five are not there the likelihood of the loan being approved is minimal. If two are missing the likelihood is Nil. Can you qualify?

Daily Observation - Other Municipal Financing Methods

Yesterday I talked about Public financing of infrastructure, today I want to continue the thought and get a little more specific.

The issuance of municipal bonds only occurs when the public agency known as the issuing agency offers their support to the project, By support they are the sponsor of the project, that does not necessarily mean that they are putting up their bonding authority, no they are just sponsoring the bond financing. The bonds that we are discussing in this blog are not general obligation bonds which would be supported by the full faith and credit of the sponsoring agency, nor are they revenue bonds, but they are bonds issued for a specific purpose.

In the state of California for example they are are known as either Assessment Districts or Community Facilities Districts or as they are affectionately known as CFD's. These two type of bonding districts are a developers best friend. They allow the developer to finance all their public infrastructure such as public streets, sewers, lighting, water, maintenance for the streets, drainage, public utilities and even school, police and fire fees.

In addition to the above there are also bonds that can be issued by an RDA or Redevelopment Agency known as tax increment bond financing. There the property tax base is frozen and the increment, which represents the difference between the frozen tax base and the new tax base is pledged and bonds are sold against that increment.

Lastly there are public and private joint ventures. This occurs where a private developer creates a participation venture with the public agency and they share in the income stream of the project and at the end of the lease term the developer is able to buy the property back, For more on Public Financing

Daily Observations - Public Financing for Infrastructure

As more and more lenders tighten their lending criteria, especially for construction projects alternative financing is becoming once again in vogue. Most people are aware of the hedge funds, and the conduit lenders and the mezzanine lenders, but are you aware of bond financing?

As an expert in the field of municipal finance for the last twenty five years I have seen many different variations of bond financing being used throughout the United States for different types of construction projects. But in the nutshell bond financing allows the developer to float a bond and have the infrastructure built for the project and paid for by an underwriter. The tax that supports the debts service is then passed through to the ultimate user of the property.

The purpose of this blog is not to teach you how to do bond financing, but to make you aware of its existence. Any large project that has public infrastructure needs over a couple million of dollars should be examining the possibility of utilizing bond financing for this cost. Also banks love bond financing because it becomes part of the exit strategy to pay off the construction debt.

For more on bond financing and how it benefits the developer check out my article that was published in the Scotsmen Guide Going to the Public, Understanding Public Financing.

Daily Observation - Conversation with a Sr. VP

I had a conversation on Thursday before the holiday with a Sr. VP of a National Real Estate Company and I thought it was quite eye-opening so I wanted to share the gist with you.

His firm is considering going into commercial real estate in a "BIG" way. He told me that the hardest transition for him was to get the agents to understand the financing aspect to the deal. Not that they did not understand loans, they did, what they did not understand is that all deals are not able to get financing.

We discussed the fact that at least 85% of all the real estate commercial deals will never get financing, and therefore will never close. His concern is that his agents will spend so much time on deals that will never close that they lose focus on the deals that should close.

Think about this thought as we start the month of July. Take advantage of our No Obligation Professional Loan Analysis today to make sure this does not happen to you.

Daily Observations - SBA & Leases

One of the most important aspects of a new or existing business is their lease. A proper lease can increase the value of a business and an improper lease can cause a business valuation to be significantly lower. It all depends on the type of business, the location of the business and the current landlord.

With an SBA Loan assuming the loan is for the purchase of a biz op (business opportunity) the lender will not lend unless there is a long term lease in place. The length of the lease has to be commensurate with the term of the loan. For example, a seven year working capital loan must have a lease the equivalent of seven years. The lease can be a five year with a five year option. Therefore the current lease term does not have be the length of the lease but the current term plus written options to renew must be at least the length of the term of the loan.

For a purchase of a biz op the average length is ten years therefore the length of the lease should be ten years as well. There are however exceptions and they have to do with, is it crucial that the business be at this particular location. This caveat mainly affects retail businesses that are established and a move if required would surely mean diminished cash flow.

The other main point about leases as it relates to SBA Loans is the requirement that the current landlord must sign a waiver known as the landlord waiver. This agreement gives the lender the right to be in first position over the landlord so in the event of a default the SBA lender gets to grab whatever collateral there is before the landlord can perfect their legal rights.

It is my recommendation from years of experience that the discussion of the landlord waiver should happen early in the transaction and do not wait till the end of the loan approval process to discuss this. SBA will not close a loan unless the landlord waiver is signed and executed. Read on for more Eligibility Requirementsfor an SBA Loan.

Daily Observation - Negotiate Today More than Ever

I have a client that due to the poor economy is in a position where he may lose his property to the Second Trust Deed holder. He has been trying to develop the property for over five years and the lenders which approved him for his construction loan at the last minute declined it. He is down to his last "nickle" so to speak and he is concerned that he may lose the property.

Here's a hint tonight.

No one wants to take back a raw piece of dirt even though it has a map approved, at least not today. Also for the Second Trust Deed holder to take the property he has to pay the first(which is current). Do you think he wants to pay off the first to protect his position when the First Trust Deed is ten time the amount of the second?

Not a Chance!

What I shared with him this evening is that he has to Negotiate from a position of strength. Use the facts that I just alluded to in this blog, Renegotiate the amount of the loan and increase the loan amount to make up for the back payments that are due as well as buy himself another years worth of payments by increasing the note another 100K for example.

Now is the time to stand up to the trust deed holders and not let them push you around!

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