Dealing with debt is something many business owners are faced with even in the best of times, regardless of business or economic cycles, but many continue to tread water without an understanding of the financing that is often available to them. These solutions are intended to free up cash flow and are especially useful when your cash is tied up in long-term loan and lease payments. On this edition of “Deal Talk,” Jeff Allen catches up with Steve Mariani, founder and president of Diamond Financial, to chat about real-world solutions that will help get your cash flowing again, while helping rid your business of unwanted debt.
So when I'm looking at a refinance, it's not only looking at the actual debt and how much we can save you and add to your cash flow, we're going to explore, are there other avenues that can help now really launch your business into the future?
- Steve Mariani
Jeff: Feeling the tightening noose of debt? If you want to know how to deal with it so you can regain control of your business and just focus on running your company, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk” it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
If your cash is tied up in loan and lease payments, and you're just trying to keep your creditors off your back and at bay, we have someone on the program today that you want to listen to. His name is Mr. Steve Mariani. He's founder and president of Diamond Financial Services. This is his second visit with us here on “Deal Talk.” Steve Mariani, welcome back to the program. It's good to have you, sir.
Steve: Thank you, Jeff.
The majority of the refinances we see, we're reducing your payments by 40%, 50%, even 60%.
Jeff: Steve, last time we had you on we talked a little bit about Small Business Administration loans. This time we're talking about something a little bit different here. We're talking about companies that are having problems with cash flow. And cash flow issues more often than not can be attributed to, quite honestly, and you kind of educated us on this when we're talking a couple of weeks ago in preparation for the program, debt concerns and problems with owners trying to pay off their lease payments and other debts that they might incur. How big a problem is this cash flow situation? How many business owners are impacted by this? You see this all the time, right?
Steve: We see it all the time. And on an established business when we're looking at it and evaluating that for a possible loan, the first thing we're going to look at is their balance sheet, which is typically in the country, 76% of new businesses, they're started off of personal credit either lines or credit cards. And once they do get that business up and running and established, it's a few years down the road where they are financed and they don't know how to then at that point restructure their debt and start moving that company forward. What they do and settle themselves within the beginning is a lot of larger payments and higher interest rates, and all the unfavorable type things, because that's what's available to them and that's how entrepreneurs in the country start companies for the most part. So those are the people that we're going to look at that balance sheet and we're going to determine if, first of all, we can add immediately to their cash flow by correcting those. Not correcting so much but refinancing those current debts that they've incurred in those first few years, or even down the road, depending upon how equipment intensive or inventory intensive their company has become.
Jeff: My question might be, "Steve, I had to start on credit cards or maybe I've dipped into my retirement fund, my IRA account. Is it possible for me to be just way too small to take advantage of some of the tools that are out there now? I've still only been at this two or three years, maybe four, five years down the line. I'm not a company that does millions of dollars in revenue every year. Is there any kind of a minimum qualifier that you look at?
Steve: Typically, the lenders we bring to the market start out at about $350,000 and up. But there are still options for those companies that require less funding. They are basically a community express program that goes up to about $150,000, that has a different guarantee, and that is offered through the local banks. I say explore all those local banks if they're one of those small companies. You can also go to the sba.gov website and try and find local micro lenders, is what they're referred to in the SBA world, that are in your area and would do it. There are a special few people that just do those smaller type loans. You have to find them, and they're out there.
Jeff: Good. That makes me feel good. That makes me feel that there's going to be a light at the end of my tunnel. I know that there are folks out there, ways that I can obtain this money, there are firms and banks that are going to lend me this money, chances are. But I'm kind of wondering how established my company might have to be in order to secure a refinance type of loan.
Steve: Sure. If you're talking to a conventional lender, the majority of the lenders are going to say, "We want two or three years of established business," not so much in an SBA product. In an SBA product it's more about the historical cash flow and the ability to pay debt service. Now, if one of those factors, including refinancing three or four of your pieces and lowering your monthly debt to be able to make the debt payments, that's going to be considered when they're looking at a refinance. So you may be struggling right now and you may be under a cash flow constraint at this point, but you have to look at it as if we had the new debt to today, which typically would be on a much longer term and reducing your payments by ... the majority of the refinances we see we're reducing your payments by 40%, 50%, even 60%. If that helps your cash flow support the new debt by refinancing that, that's how a refinance is going to be considered. So I hope that makes sense.
The majority of the true SBA lenders are not going to be on your local street, they're not going to be down the block. You have to look for them.
Jeff: It makes perfect sense and it almost seems like a no-brainer, Steve. Can we include our initial start-up capital though? Remember that money that I took off that credit card, or that I've borrowed from my retirement account, or that I've taken from relatives to borrow from them and then I wanted to pay them back?
Steve: Absolutely. Here's what the actual guidelines say. The actual guidelines say an SBA loan cannot be used to reduce your equity in the business, meaning the money that you put in. But moms, dads, Uncle Steve is absolutely eligible because they are not owner of the company and they're an outside third party. So we can possibly, even if you've been making no payments on their loan, if your company can now support the debt service required for our typically 10-year loan, we can include Uncle Steve, Cousin Steve, mom, and anybody else that you originally used for that start-up capital. Absolutely, Jeff. The big thing is not reducing your own equity and your own money put into the business, which is typically not the main concern of the majority of the business owners that we meet.
Jeff: What about operating capital or inventory, can that be included as well?
Steve: Absolutely. Not only that, we can include additional working capital. Again, we're going to look at the cash through post-closing to determine how much of a loan the business can support. But if it can support it, we can absolutely include working capital to grow the company. We can include additional equipment or anything new that they need to add to the company. We can include additional inventory. We can increase your inventory if that's what's required to operate your business. Any of those things can be included in a refinance loan all for that 10-year term. In addition to those, we can include some of your payrolls to maybe pay down some of the vendors that have been working with you and doing the right thing for the last couple of years. Wouldn't it be great to pay off a vendor and get to those favorable vendor payment terms where you're paying them on either a COD or within their discounted period? We see that a lot.
Jeff: What are the caps on some of these products out there, those loan products that we're talking about, or limits, in other words, that I can possibly borrow when it comes to trying to eliminate my debt as much as I can? And in also, too, you just talked about perhaps capital improvements on top of it.
Steve: The 7(a) Program, which is really what we specialize in 90% of the time, which is the best product for the majority of our clients, it caps out at $5 million. There isn't a collateral requirement on that $5 million. What is the requirement is that we have the ability to service the debt at probably a 25% coverage ratio, which means 25% more than our payment. But if we can prove historically that had we had those payments, we could make that, that service coverage, then it doesn't matter. The sky's the limit, up to $5 million, and we do them all the time.
It could also include, are you ready for this, adding on to a building. We talked about capital improvements. "Do we need the new AC unit? Do we need new forklifts? Do we need to add a couple of new offices to the building?" And it doesn't necessarily have to be your own building. It could be physical space upgrades, which is considered leasehold improvements. Those are also eligible under the SBA 7(a) Program. So when I'm looking at a refinance, it's not only looking at the actual debt and how much we can save you and add to your cash flow, we're going to explore, are there other avenues that can help now really launch your business into the future?
Jeff: That's really huge. So that there is no need to really be concerned where this particular program is concerned 7(a) that you have to keep everything in isolation. The debt first of all needs to be addressed alone. And so once that's been addressed, then we can look at this program over here. But essentially you're saying that 7(a) can essentially, not only address the situation with the debt and making sure that we can make those payments back to our creditors and take care of some of those old issues that we have, but also too in terms of growing business provide a capital injection that we might need for that as well. It sounds fantastic, it sounds almost as if it's a loan they can really do it all. Just out of curiosity, you make it sound like it's pretty simple, but the process itself in terms of securing this financing from the 7(a) Program, let's talk about that. How does the process work? What's involved?
Steve: That's a great question, Jeff. And here's really what's given the SBA such a horrible reputation all these years. Typically, your local business owner thinks of their local banks as their funding options. And a lot of times they'll go to their number one banker where they bank now and there again, they're not a big 7(a) lender, so they're not really aggressively going after him or trying and help him, so he goes down the block and talks to them. Local community banks aren't set up to do the larger 7(a) transactions. Finding those lenders is a whole other job that most business owners don't have the time or even know that they're out there. So that's half the battle is finding the correct lender. If I had a dollar for every time a client came in here and said, "Nobody's going to do this all, and I can't imagine that you could even consider it." When I found out you've been in the wrong ball park. Not only have you been in the wrong ball park, you haven't even been on the field. You've been out in the parking lot because all the people you've been talking to are the wrong people. Once you get a decline or we can't do it from a true SBA lender, that's what changes the game. But the majority of the true SBA lenders are not going to be on your local street, they're not going to be down the block. You have to look for them. You have to check the sba.gov website, whose volume level is high. It's a little behind the scenes time and niche that people don't really understand because they're not out advertising, they're not going to get a postcard from them, they're not going to get a flyer from them or anything like that. It's bringing those true SBA lenders to your business, that's where you have to spend some time if this is a product that you're really in need of.
In the beginning we want to understand the debt that you have out there. We're not going to go for a full, entire package until we understand the cash flow of the business and the business debt schedule as a whole.
Jeff: Why do you suppose that it's so difficult then for business owners to track these lenders down, Steve? Is it just that these lenders, they don't gain too much public exposure only because they don't want everybody coming in who believes that they are owed a loan by SBA to come in and apply? Is that what it's all about? Basically, they're kind of trying to keep the wheat separate from the chaff, so to speak out there?
Steve: That is probably 75% of the concern. They know if they go out and start advertising business loans, the phone's going to ring off the hook. And their niche is in a specific industry either, or loan amount size, or even geographic territory. And they don't want that information out there because they don't want to staff all the phones to just try and find that one true loan or that... They want a screening process in place where they're not going to the general public. You won't see them on the TV, you won't see them, like said, in postcards or anything like that. It's a very specific industry, business, financing. And to get to that higher level of talent, the higher level of talent comes with even more stringent guidelines. They don't want to talk to anyone between a certain amount level, or there's a lot of different, specific criteria that the higher... A lot of the people that we deal with have been in the industry 15 or 20 years. They're not going to talk to a $125,000 startup business owner. And that's why they're not out selling to the general public, because those are the calls that will happen constantly.
So their names are kind of behind the scenes. But it doesn't mean you can't get to them. SBA.gov and every one of the local district offices puts out a newsletter quarterly, and it shows the lender volume in your area. I encourage everyone to monitor that. If they're seriously looking for a loan, you can find out who the real players are. You can get to their names through the SBA district office. They are out there, you have to do a little searching, but they're not going to come to you.
Jeff: That's Steve Mariani, founder and president of Diamond Financial Services. We're talking about how to eliminated your debt, if not eliminate it certainly how to deal with it better by making sure that you have the right financing to take care of it while allowing you to free up the cash to allow your company to grow. My name is Jeff Allen and you're listening to “Deal Talk” brought to you by Morgan & Westfield. We'll be back with Steve Mariani right after this.
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Jeff: My name is Jeff Allen, back again with Steve Mariani, his second visit on our program. Steve is founder and president of Diamond Financial Services. Steve, we appreciate you being in our program. Again, really an interesting conversation talking about how to better deal with our debt and ways that we can secure financing to help us deal with that problem. But also really not just that but to help us move forward with our companies. We don't want to be held hostage, obviously, and you've got some great suggestions. Of course we talked a little bit about the 7(a) Program from SBA. If I were to come into your office, Steve, and I'd like to say, "Steve, very interested. I've been doing a little research on the 7(a) Program and I think I'd like to sit down and talk to you about doing that." How long is it going to take from the time I sit down with you to the time that I finally start to see some money rolling in and we can take care of this situation we have?
Steve: We do a high level of volume here. Our average from start to finish is about 48 days. But here's the actual timeline. The way we describe it to our clients is typically it's going to take us just two to three days to know if we have a deal and produce a lender term sheet from a bona fide lender. From that point forward it's about 10 days to two weeks to secure a complete commitment letter, and then our work begins. After the commitment letter, from commitment letter to close, when we'll be giving things like the actual notes for refinancing and things of that sort, that's usually a four to five-week process. So the entire process there from start to finish is some place between 45 and 60 days. Our average here at Diamond is about 48 days, so that fits right into that timeline. Don't let anyone tell you it could happen much faster than that. Sometimes it happens a week or two faster, but give or take it's going to be right in that time frame for the most part. So I hope that answers the question.
Jeff: Not too awfully bad. It does answer the question. What are you going to need from me, Steve, in order to make sure I can get approval for this financing? What is necessary? What do you look for?
Steve: The first thing we're going to look for within the established business that comes to us at financing is going to be a current business debt schedule. Let's look at your balance sheet and your debt schedule and see what you have and what makes sense to refinance. If there's going to be something that's paid off in the next four to five months, it's probably not a good candidate for a refinance scenario. But if you have some equipment leases and payables, and some other items that are on your business debt schedule that you make since, that's what we're going to look at, because our ultimate goal, me and you as a business owner, is reducing that monthly payment. I have one right now that we're going to go from about $18,000 a month to just over $9,000. That's adding a considerable amount of cash to his bottom line on an annual basis.
So those are things that are going to help him move forward. But in the beginning we want to understand the debt that you have out there. We're not going to go for a full, entire package until we understand the cash flow of the business and the business debt schedule as a whole.
Jeff: Our company, Steve, produces some large invoices that we factored during busier seasons. Will this loan that we want to take out, 7(a) we're talking about now, allow us to continue factoring when we need to?
Steve: Excellent question and I'll tell you why, because if I know that upfront and address it in the beginning, it's not going to affect your ability to factor. If I'm not made aware of it, or you go to a less experienced lender that doesn't recognize that fact right up front, then it could be in jeopardy, and here's why. The SBA requires a UCC filing on every business asset, which includes your accounts receivable. Now, it isn't difficult to justify to the lender to leave it out and make sure that that happens. But if that's overlooked, and we see it many times, if that's overlooked in the beginning, you're going to find out that you can't factor because that lender has those receivables as collateral. Now, on a collateral position, the lenders, if they can justify the reason for leaving them out, they don't give a lot of weight to receivables anyway. So it isn't like they're losing a big piece of collateral. It just has to be documented in the file because the SBA is ultimately looking out for the good of the business. If you need to factor, we need to be able to make sure that you have the ability to do that. But it does have to be addressed in the beginning and not overlooked if there's a factor and capability there. Specific industries will raise a flag to me and I will explore that in the very beginning. But I know after all these years what industries will need a factoring arrangement. We've built a factor that sells to Wal-Mart, while their invoices are $1 million, $2 million dollars, and the company we built couldn't afford that. So we knew at that point based on his industry that he was going to need that at least as an option, even if he didn't need it that day. So we had to justify, write that up, and make sure that that lender documented all that in the file to be able to leave those receivables out of the UCC filing. But it can be done, and do not let any lender tell you that it can't be.
So it seems that with this particular program, 7(a), it does help us to do a couple of different things. It helps us to relieve our debt burden and can really cut the amount that we pay each and every month on our debt. And at the same time it allows us to have that freedom that only cash flow can provide.
Jeff: Are there some industries that SBA show a certain degree of favor on, or is this really a loan program that is for everybody? Is this one of those types of programs that pretty much anyone, any business in any particular industry could benefit from?
Steve: For the majority it's any business. There are specific criteria. It can't be discrimination type business, and I'll give you a quick example of that: A health club that will only cater to women. If they prohibit men from joining, they are excluded from using an SBA product. Some of the other ones, lenders don't like to do used car lots. They won't finance cars or vehicles, so we try and stay away from those. But as far as ineligible businesses, that list is pretty short. Like I said, unless they discriminate against a religion or something like that, SBA is pretty much open to everyone. You might not get that impression from initially talking to a lender because they have their own criteria and their own industries that they blacklist, or on the watch list, or whatever else. But they'll try and convince you it's the SBA that doesn't want to finance this industry, which is typically never the case.
Jeff: So, Steve, it seems that with this particular program, 7(a), it does help us to do a couple of different things. It helps us to relieve our debt burden and can really cut the amount that we pay each and every month on our debt. And at the same time it allows us to have that freedom that only cash flow can provide. It allows us to move our companies forward and perhaps in some cases accelerate our progress by allowing us to build into the loan additional funding for capital expenditures, maybe new equipment leases, or perhaps adding additional personnel. Anything else at all that we should know about the 7(a) program, any other advantages or benefits that you can think of that you might want to leave us with? And it’s kind of another reason to consider the program as opposed to maybe some of the other choices that are out there?
Steve: Absolutely. And this is where I have to give kudos to all those entrepreneurs and the people that are starting and growing companies. If you go into the second, third, fourth year in business and you bootstrap it from the beginning, now's the time to let an experienced, correct financing program take over and understand your business, understand where you need to go. Those are the people I surround myself with and you should too as an entrepreneur and get somebody really on board, who looks after your well-being. You've gotten it to this point, you've done a great job. We're all proud of you. Now it's time to really, correctly finance the company and take you forward. It's one of the things that's near and dear to my heart having owned seven different companies in my life and started many of them from scratch. You've done all the work. You've gotten it to the point where you have a successful business. So now to really correct it and move it forward, refinance it correctly. What happens is the first couple of years you're kicked by everybody. No one wants to help you, no one wants to give you any money. You might get money from Cousin Steve, or Mom, or Dad, or whatever else. But there is a point where you become a true, viable business that can't get financed. And by then a lot of times I see and meet entrepreneurs that have been just through the mill and beat up so much they never think anyone's ever really going to help them, and that's not the case.
My goal is to give them hope and to understand where their company has been, is now, and is going in the future. And truly correct their financing needs and help them move forward. There's a lot more options than the majority of the entrepreneurs out there understand and are exposed to. It takes a little work and it takes some effort there. It's not going to be your local community bank, and that's really the key thing is to not give up. Nothing makes me happier than when I see a borrower say, "I'm going to get there with or without you," because it's that spirit that builds America, and that's what we're all behind. And that's what the people I surround myself are focused on, is helping those people that you can see the effort there. I hope that helps give hope to all those entrepreneurs that are out there starting businesses, and growing companies, and really moving America forward. That's my bottom line.
Jeff: Very, very good, Steve. You will work with clients all across the country, don't you?
Steve: Yes, sir, all across the country.
But there is a point where you become a true, viable business that can't get financed. And by then a lot of times I see and meet entrepreneurs that have been just through the mill and beat up so much they never think anyone's ever really going to help them, and that's not the case.
Jeff: How can people get in touch with you if they've got a question for you and they said, "Steve, I liked what you had to say. I'd like to talk to you a little bit about my particular situation."
Steve: We can always be emailed at firstname.lastname@example.org. That is an email box where we typically respond within 24 hours. One of the staff members here will get that answer back. We help people whether they're our clients or not our clients. We field questions from all over the country from brokers, to entrepreneurs, and businesses just from everywhere because, like I said before, our goal is to help the entrepreneurs across the country move forward. Or we can always be reached at our toll-free number, which is 888-238-0952. That comes to our corporate headquarters here in Raleigh, North Carolina. You'll either be directed to a local office if you're looking for help or we can help you right out of our corporate headquarters. But we are always happy to answer questions and provide information, whether they're our clients or not. It's about moving America forward.
Jeff: Steve Mariani, I appreciate all the time that you've given us once again today, and this is your second visit with us on “Deal Talk” today. Really enjoyed what you had to tell us about the 7(a) Program. Thank you so much. Hopefully we can have you back on again soon.
Steve: Absolutely, Jeff, it's always my pleasure helping get the information out there. I support not only your organization but all the entrepreneurs in America.
Jeff: That's Steve Mariani. He's the president of Diamond Financial Services.
I hope that you enjoyed our conversation. Tell a friend, won't you, about “Deal Talk.” In addition to morganandwestfield.com, you can find us on iTunes, Stitcher and Libsyn. “Deal Talk” has been brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Until next time, thanks so much for listening. We'll talk to you again soon.
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