In this exclusive podcast we talk with Steve Mariani, a business finance advisor at Diamond Financial, based in Rollin, North Carolina. Steve has been involved in small businesses since 1978. In this podcast Steve discusses myths regarding SBA loans and buying businesses, and informs us of the services SBA offers their customers and how they help business owners and buyers nationwide.
One of the things I preach to all of my clients and potential buyers is there are three basic things we do need to have: the down payment, you need to have good credit, and you need to have a resume that can fit into the business and show your operational skills.
- Steve Mariani
Jeff: What I would like to do before we kind of plunge into this, Steve, real quick, Diamond Financial, can you give us a snapshot, what are you guys all about and who do you help?
Steve: I would be happy to. We are about 20 year old company. We have been doing this since about 1995, we have offices around the country, we serve the entire United States, and we specialize into really bringing the lenders and the buyers together because what we found over the years is that over 84% of SBA loans are initially declined because of presentation. So, it's usually the buyer looking in the wrong ball park, as far as finding a lender that specifically fund their deals and so we have really created a niche where the lender, as far as the middle there, and the buyer is in the middle to help to actually make transactions happen. So, over the years we really just become the SBA expert, the lenders lean on us for the rules and the guidelines and the interpretation of them. On the buyer's side, we bring every one of the rules to utilize to their best advantage, because there are some that have changed now that are actually help buyers and we want to make sure they are aware of them also. So, that's really are niche, that in between person, between the buyer and the potential lender that is looking at financing their transaction.
We bring every one of the rules to utilize to their best advantage, because there are some that have changed now that are actually help buyers and we want to make sure they are aware of them also.
Jeff: Well Steve, I appreciate that and I know as a business owner it's always nice to have someone on your side when you're looking at either looking at buying a business or a financing the one that you have, maybe refinancing it, so it's nice to have a strength behind you as you work your way through the transactions. Steve, let us plunge into it now, top 10 misconceptions about SBA loans, I know you have some thoughts about these and we are going to go ahead and take these in reverse order and we could with number 10: it takes 9 to 10 months to get a loan through the SBA, what about that myth?
Steve: This is the list that we have compiled from what we've heard from buyers over the years and 9 to 10 months is absolutely not true. Actually, at Diamond Financial, and we have a high volume of SBA loans, our average deal size takes between 48 and 52 days. So when we are asked time frame, we usually call between 45 and 60 days. Some do happen in 2 and half to 3 weeks, but that's not the norm. Like I said, our overall national average is around 48 days from start to finish. If everyone produces the documentation that we require, it’s relatively painless, which is not what the misconception is, that it is painful and a long, tedious process and that's not necessarily the case.
Jeff: Well, that is good to know Steve. We will go ahead and continue right through the process. Everybody wants to kind of speed things up as quickly as possible. There a lot of folks that are very, very anxious indeed about taking control of that business. They've got one that they have their eye on and they want to be able to get in there and make the changes and take ownership right away. So, really, you have kind of a fast track process it sounds like there that really takes and squashes that myth about the 9 to 10 month waiting period. Now misconception 9: because the SBA guarantees this loan, the lender doesn't care if it's a good, deal true or false?
Steve: That is absolutely false. The SBA monitors every single lenders, the fault rates, and no one wants to put in a bad loan. Just because the SBA has a guarantee behind that doesn't mean that any lender is going to do our deal. Now, there are times it goes back to finding and choosing the correct lender, because every lender has a different box, but if it is a carwash and this lender has never done car washes, there is going to be a long and tedious process, going back to number 10. They do care if it’s a good deal, no one wants defaulted loans on their portfolio.
One of the other misconceptions is that SBA guarantee does not guarantee a 100% of that loan to a lender; it only guarantees a portion of it. So every lender has a little bit different credit box, things that they like to see, things that they do not like to see. On the larger size lenders, they have their own portfolio to monitor so they make their own determination, okay we have a hundred car washes, how many have defaulted, how many are performing well? So, those are the criteria at each specific lender that determines their credit policies, but we do not guarantee bad loans, we try to put together loans that makes sense and will help the borrower. We do not want to get any borrower in bad situation. We want them to succeed and prosper. That is really the bottom line.
One of the other misconceptions is that SBA guarantee does not guarantee a 100% of that loan to a lender; it only guarantees a portion of it.
Jeff: It's good for everybody really, you don't want to send any bad precedents for borrowers later on, they would end up changing all the, change all the rules so great information there, Steve. Here is a misconception number eight, the SBA application is over 100 pages, now how am I going to get through 100 pages, and how can I deal with that? I do not know if I would go through that headache.
Steve: That is funny Jeff, it almost like riding a buck. That is actually not true. The actual average SBA application is about 23 pages, but when you boil it right down, it may look overwhelming in the beginning but there is only 6 to 8 pages we actually need from a borrower, the rest of it is a lot of information produced by the seller, history of the business, a lot of documentation required in the SBA application are things that people have produced already, whether it be the broker or the seller or whoever is involved in the transaction, so even out of that 23 pages, 6 to 8 comes directly from the borrower the rest of the information is out in the world and it is just a matter of collecting and correctly assembling it to present to a lender and that's where most people fall off the wagon, they don't understand the actual application and, like I said before, over 80%, over 84% are actually are declined because of the presentation because it's a matter systematically compiling that application and presenting it correctly, but the application is not a hundred pages.
Jeff: Steve Mariani from Diamond Financial is my guest, you are listening to Deal Talk, and my name is Jeff Allen. Deal Talk of course brought to you by Morgan and Westfield. Steve, Here is misconception number 7. Now I can't imagine this really has much of a foundation of solidity whatsoever because there are so many big cities in this country, we've got so many folks living downtown, renting apartments, renting housing; you must have a house to qualify and collateral. There have got to be people out there who own businesses that don't necessarily own homes and have SBA financing, isn't that correct?
Steve: Absolutely correct and here is where this really comes from, this comes from the average buyer or purchaser walking into his local bank and them declining him because he doesn't have the collateral required for their policies. Now, what happens is there is an SBA representative in every single branch so kind of like the scapegoat that bank typically says: "Well, we are not going to be able to approve your business transaction loan because of the collateral shortfall." That is a huge misconception. One of the things that I preach to all of my clients and potential buyers is there are three basic things we do need to have, we need to have the down payment, you need to have good credit and we need to have some resume that can fit into the business and show your operational skills, if you have a house it creates more paperwork for us and we prefer you didn’t, so the actual 7A SBA transactional loan which goes up to five million dollars has no collateral requirement. Now, that doesn't mean to say if you have a house we are not going to take it. It does testify that we should take all available collateral, but if you do not have collateral in no way does that disqualify you from securing an SBA loan and that is one of the first things most clients ask me, “I am looking for a million dollar loan, I have no collateral, how could we possibly get this done?” Well, that was the original foundation of the 7A and the SBA program back in the fifties, to never let collateral stop a loan that is not a qualifying characteristic. So I hope that clears out that one.
Jeff: It does clear that up and it is good news for so many of our listeners. I really appreciate you making that clear and crystallizing the fact that it's just not necessary to be a homeowner first. Misconception number 6, as we work our way down to number one on the top 10 lists of the SBA loan misconceptions, you must have a detailed business plan. Now, I kind of taking this one maybe a little for granted only because I've been told --we've all been told-- I am really sighting many of us have about the importance of having a business plan and maybe I've got this wrong too. What about this Steve?
Steve: I will happily expand on this, especially in the transaction where it is an acquisition, on an acquisition, yes, you do want to have more of a glorified executive summary, but what we've been told and what we see out the street is those people come to us with an inch and a half book that details their business plan from start to finish, and if you look at some those of business plans software writing programs, they will take in direction where we do not need to go and what I mean by that is you know 5 and 10 years down the road, your advertising budget, and 8 years from now and there is just so much. Now when we talk about a business plan on an acquisition type project what we're really looking for is who's going to handle daily operation? But, only in a couple of pages, we never want a 50, 60 page business plan, it is a glorified executive summary and for our clients we provide them with a detailed questionnaire, it's basically a business plan by answering some questions and it addresses the hours of operation, who is going to be opening the store and who is going to be closing the store, who is the management and staff, who is going to be taking this business forward? It is more of how the operation is going to continue under your of supervision more than this detailed business plan. Like I said, if you bring a 50 or 60 pages, I'm not going to read it and I can assure you that the majority of my underwriters at Belinda's are not going to read it either, they want to know that you have the ability to run the business and that is what we are going to bring out, but past that a detailed business plan and spending money on that type of item and even in the software is just out of violence, it is not necessary to apply for 7A business acquisition type loans.
Like I said, if you bring a 50 or 60 pages, I'm not going to read it and I can assure you that the majority of my underwriters at Belinda's are not going to read it either, they want to know that you have the ability to run the business and that is what we are going to bring out, but past that a detailed business plan and spending money on that type of item and even in the software is just out of violence, it is not necessary to apply for 7A business acquisition type loans.
Jeff: So a comprehensive business plan is important for the operation of the business once you get there and it doesn't mean you can't work on it now and have a comprehensive business plan prior to taking ownership of a business spot for the purpose of obtaining financing, the simpler the better, having that long comprehensive document just not necessary. “No bank will do this loan, I've already asked.” That is the number 5 misconception, as we work our way down that list Steve, tell me is that true, someone says “no bank will do this loan, I already asked,” what do you tell them?
Steve: Absolutely. Here is our standard line to that actual question: if we tell you the loans not going to get done then it is going to get done. This misconception come from the borrower who are looking for that million dollar or 800 thousand dollar uncollateralized acquisition loan that does go shopping to their local community banks, the bank on the corner will not put an $800,000 uncollateralized loan in your portfolio. Now do they want to take responsibility for that and do they want to say: "Hey this is all our internal policy and we do not want your loan in our bank," they will never going to say that. So what happens to our clients by the time they get to us, they have been through 5 or 6 of the local community bank because that's what the world preachers, if you're looking for money you go to your bank, you go to where your checking account is, you got to where your mortgage is and those are the banks that really have absolutely no appetite for the transaction loans that we provide and that true SBA lenders provide. If you look at the top 10 SBA lending list in the country that is the lenders that have the actual highest volume, they are not going to be your local community banks. So what we find is by the time the client gets to us, they have been put through the wringer by all the local community banks and then they come to us sometimes as the last resort saying: "No one's going to fund this loan, I have asked everyone," and we find out it's really been the wrong people that they have been talking to because, like I said, community banks, this is a negative to have them in their portfolios, as far as uncollateralized money goes, it devalues the bank so that's one of the biggest misconceptions after they've been talking to multiple community local banks. So, that is where it actually comes from, Jeff.
Jeff: I am talking with Diamond Financial about SBA loan misconceptions. I'm Jeff Allen and this is Deal Talk brought to you by Morgan and Westfield.
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Jeff: This is Deal Talk and I'm Jeff Allen here with my guest, Steve Mariani from Diamond Financial and Steve is here to help dispel some myths, the top 10 misconceptions of SBA loans, and we've worked through 10 down to 5 and now we've got to the top 4 remaining out of that list of 10 and Steve, number 4, SBA loans cannot be used toward leasehold improvements or goodwill, true or false?
Steve: Absolutely false. Big parts of the loans we write every single day include leasehold improvements and goodwill, the majority actually are mostly goodwill deals. Here's where this comes from, if they are talking again to local community banks, their familiarity is probably is with the 504 SBA loan on the bank level, which is where the bank as the first position and no exposure, well when it comes to the 504 loans they must be fully collateralized and that's why the local community bank, if they're going to do an SBA loan, have an interest in that type of loan because they are fully collateralize and this is not uncollateralized money we spoke of before. But when it comes to an SBA loan in the 7A program, which is where all the goodwill and leasehold improvement deals get done, the majority are leasehold improvement and goodwill and intangibles, that's where we're going to finance the inventory, we are going to finance the goodwill and the business that we are going to finance the working capital and all of those pieces that are in collateral backed, so that is absolutely false just by saying SBA loans cannot be used to a lease hold improvements. There would be no franchise start up loan within the country, all of the little mom and pop stores and everything you see in the strip center, majority are financed through SBA loans and they're all in leasehold facility, so that is an absolute myth.
Jeff: SBA loan misconception numbers 3. “Friends have told me the SBA would finance 100% and I don't need a down payment,” what you have to say about that?
Steve: Well, we hear that again just all the time. They basically think because the business comes with 25% worth of a collateral or intangible assets and the SBA is going to guarantee the other 75% that pretty much covers the entire project and that the lender has no exposure and that is absolutely not true. There is always going to be a required down payment and there we can -- as much as is internal bank policy, no one wants to put someone into a million dollar transaction with no, for lack of a better term, no skin in the game. So there is always going to be a down payment required on an SBA loan. There are some special programs if it is a leasehold or rent replacement, which means you have been operating out on the building for quite a while and now you are going to buy that building we can, in that case, use some equity in your own business so it does not require a cash dumping, but that is just specific scenario, that doesn't happen all that often, but that's the only case where there would be no down payment. Or, a partner buyout, there again a partner buyout requires no down payment because that particular person already has equity in that business, but aside from that it's not going to be a transaction that where you are coming in to buy a business with no down payment. Typically, on the lower side, it is going to be between 10 and 15% , the maximum sides can be between 25% and 30% and each scenario is a little bit different but that's about where the down payments for all these things.
There is always going to be a required down payment and there we can -- as much as is internal bank policy, no one wants to put someone into a million dollar transaction with no, for lack of a better term, no skin in the game.
Jeff: You know Steve as we get closer to number one and we have just two left on this list, the myths get a little bit to crazier as we kind of move up the scale and number 2, “my credits score shouldn't matter because this loan will be insured by the government?” [Laughs]
Steve: It would not be on here and we would not be laughing about it, people did not actually bring this up. That is what they say because back to that thing if the government ensuring that the government got my back I do not need good credit and it does not matter what my credit history is. Well that's not true, there again it goes back to that specific lender default, they don't want defaulted loan on their books, they do not want to -- they always have and exposure there, they have to make what is called “prudent lending decisions” according to the SBA rules. So, if you have a 500 credit score it's going to be difficult to get a loan now there are explainable circumstances, medical bills are kind of a common occurrence these days and understandable from the lender, so there are some circumstances, but for the most part, especially now after we have got through that financial disaster that we did through 9 and 10, a lot of people have some blemishes on their credit and the majority of SBA lenders are outstanding as far as that goes but if you have been a habitual late payer and your credit is just always been horrible than that is going to be a difficult thing to get through any SBA lender or any lending institution in general.
Jeff: Now, we've reached to the number 1 misconception about SBA loans. Number 1: you must be declined by three banks in order to apply for an SBA loan.
Steve: Jeff, actually this goes back to the late fifties, where the SBA did say when they first created this program, they said: "if you cannot find financing on reasonable terms, we will consider backing your loans." What you had to do back in the late 50's and early 60's was you'd have to prove to the SBA you have 3 official declines from banks, so there is some truth to this, but that has gone away and by the end of the 60's, that was all history. Now, the SBA rule is if you can't seek your financing on reasonable terms, which there aren't any more reasonable than the SBA, so there's no reason for declines anymore. That was an old rule that was since fallen into the wayside, like I said, probably 40 or 50 years ago, but you did have to show them that you were declined by three different banks. So anyone who is offering up this advice is probably using an old tire or does not understand the current SBA rules because we all know these days, your local community bank is not going to do a two million dollar goodwill transaction, so there's no more actual “you must be declined” by anybody anymore. What we can relate this too is if you have a loan in place already that it is on reasonable terms from a bank then refinancing that with an SBA loan is going to be difficult because you already have a really good loan but on the refinance side, if we can save you 10% or more then the SBA says that it is even more reasonable than what they have and we can refinance them, but no, being declined is a thing that ended like I said many, many years ago, but it's still something that we hear from time to time. So I hope that clears it up. You can be declined by anybody before coming to us and applying for SBA loan.
What we can relate this too is if you have a loan in place already that it is on reasonable terms from a bank then refinancing that with an SBA loan is going to be difficult because you already have a really good loan
Jeff: That is Steve Mariani, he works with a Diamond Financial and he's a business finance adviser with Diamond Financial, they help business customers coast to coast, business buyers coast to coast, those people looking to refinance, those people looking to purchase businesses and Steve you have been really a generous with your time today, we want to thank you so much. Before we go we're just a couple minutes left, I want to find out Steve, why it is that most loans get declined? There are a few important reasons here that loans get declined that if it weren't for just a couple of details, the applicant to the borrower was able to take care of that maybe in fact they could have had their loan approved, can you tell us up a little bit of some of those common reasons for the loans being declined the borrower's?
Steve: Absolutely, like I mentioned before, the number 1 reason is its incorrect pre-package and presented to a lender. One of the largest lenders in the country, because we were very close with the top lenders in the nation, and they've actually disclosed to me that they declined 70% of all applications that come in and usually it is because of the level that they get to in the lending institution, so there are initial review of that package it could leave out the pertinent information, I'll give you -- for instance, resumes are one of the key things that we have to have. Well, no one knows they have pull up the resume that they produce 2, 3, 5 years ago and used it as their resume when they could have critique a little bit better to fit into the business and it is not making things up, it is just bringing out the skills that will transition over into that new company, so resume is key thing, the clients that we see these days by the time they get to us because they incorrectly presented their resume that's one of the things.
Also, presenting the down payment, a lot of borrowers don't know exactly what they need to produce as far as the down payment goes and a lender will look at their personal financial statement and say we do not see the down payment on here, so you are declined. Meanwhile they did not understand what is in there for 1K or IRA and they are going to actually roll that money over, which is unavailable item these days, and use that for a down payment. So, if a lender initially sees the lack of personal liquidity to secure the down payment they are going to initially decline it because they are going to quote he does not have the down payment. There is also the borrower interview, where the borrower professionally with the location of the business or the actual operation, we try and go through that with them and make sure that they have an understanding but probably just the number one reason that most SBA loans get declines is that they are talking to the wrong lender.
Like I said before, every underwriting criteria at each lender they have their own boxes, they have their own default rates from their own monitoring of their loans, they have their own thoughts on that so the majority of the time it's just been presented to the wrong lender and that's really where we become a huge asset to the borrower. Sometimes borrowers will ask us: " Well, how did you get me approved so fast?” Well that is because after understanding your entire project, we presented you to the lender that most fit your transaction, that is why. I had a borrower question me on exactly that, “you should be talking to other lenders,” but no, this is the actual lender that really likes this particular transaction and we're just good at our job and that's why we were so efficient at it. But the majority of the time Jeff, the biggest issue is just talking to the wrong lender and understanding their policies and guidelines, a lot of times if they can understand their policies and guidelines you wouldn't be applying to that lender and that's probably 90% of the issue right there.
Jeff: And we're going to underscore those of points there, it is kind of the key takeaways from this conversation but Steve, what I would like to do right now is just give our listeners a chance to connect with you at some point if they have any questions of how can they reach you, who do the call?
Steve: They can always visit our website which is easySBA.com that is e-a-s-y SBA dot com. They can also send us an email anytime at askdiamond@easySBA.com, on our website there is a recent deal space, you can see some of the transaction that we do and we have done recently, there are all data’s you can tell how recent they were but our web site has a wealth of information, we are always happy to help people, we're not bankers here, we're small business owners and we think along the lines that the seller and the buyers, it's all about making that transaction happen so we are proactive as far as that goes and like I said you can always send an email at askdiamond@easySBA.com or even call our toll free number at (888)-238-0952, we have offices around the country and we would be happy to assist you over, with an adviser that can help you reach your dream.
Jeff: Steve Mariani, we appreciate your time today, thank you so much for helping to dispel those myths about the SBA loan and misconceptions and hopefully we can have you again in the future edition of Deal Talk. Thank you again.
Steve: Thank you, Jeff, anytime, my pleasure.
Jeff: That is Steve Mariani, business finance adviser at Diamond Financial. We appreciate he has taken the time out to join us today on Deal Talk presented by Morgan and Westfield, a nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business call Morgan and Westfield at (888)693-7834 or visit MorganandWestfield.com. My name is Jeff Allen, looking forward to seeing you again next time.