Jeff: Welcome to Deal Talk brought to you by Morgan and Westfield, I am Jeff Allen. If you're a business owner, entrepreneur or investor, this is the place to be, you are at the right place. Our mission here is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses so you'll be equipped with the knowledge to help you make important decisions when the time comes to either sell your business or buy one. And if you're looking to buy a business, whether it’s your first business or your next one, you're probably thinking about financing, and where your money is going to come from. My guest has some thoughts about that and specifically funding through loan programs from the Small Business Administration. Mr. Thomas Meyer is a senior vice president at Bridgeview Bank in Vernon Hills Illinois, right there in the Chicago area, and he's the manager of the bank's SBA division. Thomas Meyer, welcome a deal talk, how are you?
Thomas: I am great. How are you?
Jeff: I am doing fine. What I would like to do is start our discussion today by talking, first of all, in general terms about SBA loans and, Tom, you deal with this on a regular basis, you are the expert there at Bridgeview bank. Tell us about SBA loans in general, are they for everyone whether you're starting a business or maybe you're in your second business or your third, are these options for people who may not qualify necessarily for a loan from their local bank or exactly what are they?
Thomas: SBA loans are generally for business to use, whether they are looking to acquire a company or they are looking to expand, they might be purchasing equipment, or purchasing real state or refinancing other debt that they have, they are typically loans that fit a specific niche and offer different parameters and advantages that conventional financing typically does not offer. Last year for example, the government either provided or guaranteed up to about 29 Billion dollars in loans for small businesses and that is important, obviously, because without that help from the government there would be a significant void in the financing available for businesses today.
Jeff: And that is 29 billion, with a B. Tom, that's pretty significant. Would I perhaps be able to qualify for a loan, if, say, I could not qualify, based on credit worthiness or some other types of collateral reasons, for a regular loan from my bank down the street?
Thomas: Sure, and the biggest reason that you wouldn't qualify for conventional financing is typically the lack of collateral. Well, where that is going to come up and that comes up often, especially if someone is looking to buy a business. Typically, they’re buying a service related business or distribution companies and those companies typically don't have a lot of assets, so the purchase price includes a lot of good will or blue sky. So, from a traditional standpoint, a bank does not want to finance a loan unless they are fully collateralized. One of the advantages of using an SBA loan is that a lender has to make its decision based on the cash for the business, the character and the management of the buyer and cannot make a loan decision based on the lack collateral that is in the loan. Not only is collateral or not having collateral an advantage of getting an SBA loan, but the other thing that's a significant advance is that there are no balloons. Typically, when you do a traditional loan, they have balloons associated with them and you are stuck having to refinance it after a short period of time or the terms in the amortizations don't match the assets that are you are financing. For example, if you are buying a piece of real estate with an SBA loan, you can finance it over a 25 year term of a 25 year amortization. For a traditional loan, maybe they might give you a 15 year amortization to 20, maybe get a 25 but has a balloon in five years and you have to go to whole process all over again. Other examples are when you try to buy a business you that need that ten year financing and traditionally a bank is not going to provide that.
The biggest reason that you wouldn't qualify for conventional financing is typically the lack of collateral.
Jeff: So we're really talking about offering a business owner some real flexibility and not necessarily requiring obviously to the collateral that the traditional financing would through a bank but you did mention the one thing that I think is really important, Tom, is that they do take a look at cash flow. What if I have a brand new business, I mean I'm just getting started and maybe I've been able to put up some upfront money and I have kind of get things rolling or maybe I haven't even open my door shut, can that sometimes be a hindrance to getting financing through the small business administration?
Thomas: Sure, I mean if you don't have historical cash flow then a loan has to be made based on projections and projections, the question is how valuable are those projections, I mean how did you create them, what were your assumptions? Is this an industry that you historically been in and so if I get projections from you, can I determine the validity of them? A lot of times if you are doing a startup, you might go with a franchised system where they have a lot of other existing franchises in place and they can help you with the projection and try to figure out and determine what your sale levels are going to be. Without historical cash flow then we are typically relying on the character and the management of the person that is going to be running the business. Maybe you might have some additional collateral there to help support the loan in the event that there is no historical cash flow but just because you don't have enough collateral to cover the whole loan is not a reason to decline and we have to look at all the other factor that are involved.
Jeff: Can personal credit if I have a great personal credit history can that come into play and be helpful to me?
Thomas: Yes, we definitely want to see good credit, the SBA technically does not have a minimum credit requirement but you know we typically as a bank who is lending out money and receiving a partial guarantee from the SBA, we do want to make sure that people have good credit history, they are paying their mortgage on time, they are paying their own personal things on time, then the odds are they are going to pay a business loan on time, as well.
Jeff: Tom, so if I came in and I wanted to sit down and talk with you and I am assuming that the if I were someone running a business or getting ready to launch my business in your part of the country for example, and I would come in your bank and you talk to me about this and I want to get set up to an SBA loan and maybe I don't have that background, I haven't been open long, I don't have that cash flow history is there someone else that I need to have with me maybe for support as far as I do not know, maybe a CPA or an attorney, someone else I need to have working with the two of us, you and I to help pull all of this together or do you do a lot of the heavy lifting for clients who come in off the street trying to gain financing?
Thomas: Typically, we do that ourselves, we help them out from start to finish. Some clients do have the help of their attorney or they have the help of their CPA but a lot of times it's mainly us helping them from start to finish, putting the whole package together, helping them through their business plan projections, gathering all the items that we need in order to submit a complete package and to credit. The other thing you had mentioned to it is additional support and one thought comes to mind is that sometimes, I have a recent example where I had a couple coming in and they want to start a retail bike shop, they did not have a lot of wherewithal, they had good credit but they didn't really have any money down as a down payment and so they ended up getting a relative that provided money for them as their down payment, that same relative was also willing to provide a personal guarantee to help with the start of the business loan, trying to get some credit enhancement support. That is not always needed but that gives an example of how someone coming in and was starting a business but just didn't have the money down that they needed for an equity injection.
When we talk about the SBA 7(a) loan program, those loans are provided by participating lenders and the SBA just provides a guarantee.
Jeff: It is really important to utilizing our personal networks whenever possible I think Tom and it's a really good reminder that you put out there to our listeners that all hope is not lost just because you walk into a bank and maybe you say no-no to all the questions that you are being asked; I don't have this and I do not have that, no I cannot afford it, it doesn't necessarily mean the end of the line, there are always ways that you can kind of work things out in order to take the next steps in order to get that to secure that financing whether it be with a down payment or something like that. So I appreciate that you brought that up. Thomas Meyer, a senior vice president of Bridgeview Bank in Vernon hills Illinois; it is in the Chicago land area. We are talking to him about SBA loans and if you have a business that you're looking at opening up or maybe you already have a business you have been operating it for a while you're looking at securing financing for maybe additional equipment or other assets if you're looking to add to your business in order to a expand your operation this is the program for you and I'm so glad that you have tuned in. My name is Jeff Allen. Tom, what are the limits of an SBA loan, whether you are talking about expanding your business or opening up a brand new one and maybe just taking out a small equipment loan, how much money can I get?
Thomas: Sure, when we talk about the SBA 7(a) loan program, those loans are provided by participating lenders and the SBA just provides a guarantee. The limit on those loans is $5 million dollars. That is the maximum amount that you're able to get, whether it’s equipment and whether it is real estate purchase, whether it debt refinance, buying a business, working capital, startup, or all of the above, the maximum amount that you can get under that loan program is 5 million dollars.
Jeff: 5 million dollars, okay, very good. And how does that program work? I've heard about the 7(a) program, who does it really applies to? That specific program. Is it to everybody who is interested in obtaining that up to 5 million dollar limit or what is specifically, what is the program if you would?
Thomas: The SBA 7(a) Program is by the main program of the SBA. Last year the SBA guaranteed $19 billion dollars in SBA loans. Basically, any banks throughout the country can participate in the SBA loan program as long as they follow the process and the procedures then they will ultimately get the approval from the SBA, but that loan can be used for anything related to like I said buying a business, buying real estate, buying equipment, starting a company, or all the above. Most people think SBA loans are they are only for small businesses and I am here to tell you that, that's not the case and the SBA rules says that for a business to qualify for an SBA loan they have to have historically over last two years had less than five million dollars in net income as reported on their tax returns and less that a $15 million dollar tangible network. I can tell you in all of companies I looked at over the years I have yet to see a business tax return that have more than five millions of dollars in net income. So primarily, every business I talk to is eligible and qualified for an SBA loan.
Jeff: So, would you agree then that the 7(a) program is probably the best option when buying a business for example, Tom?
Thomas: Yes, it is probably the only option because you typically don't have collateral and so the bank that would participate in lending that money wants to have the strength to the SBA guarantee in order to advance those funds.
Jeff: Well, Tom what we are going to do is we will take a break because I want to kind of chew on this a little bit more and get more into the process, we are going to get into some details here that I think our listeners going to want to probably take note of so hopefully everybody's going to get themselves a pad of paper or turn on their recorders on their cell phones so you can go ahead and listen with what Tom has to say, we're talking with Tom Meyer, senior vice president of Bridgeview bank in the Chicago area and we are talking all about SBA loans and what you need to do in order to qualify and to get that funding that you need to either open or expand your business and we're doing that all today on Deal Talk brought to you by Morgan and Westfield my name is Jeff Allen, I will be back after this.
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Jeff: Welcome back to Deal Talk, you are with Jeff Allen and my guest is Tom Meyer, he is senior vice president and manager of the SBA division of Bridgeview bank group in Chicago, we are talking about money for your business specifically through loans from the small business administration and Tom thanks so much for staying with us through the break. Let's talk about the approval process now. In order to get that 7(a) funding through the SBA, what's necessary?
Thomas: The first thing that is extremely important is every bank throughout the country can provide an SBA loan. The question is do they or have they, and that is important because you want to make sure that you're working with a bank and or a specific lender that specializes in SBA loans, You want to talk to them and ask them their history in doing SBA loans and how many they have done recently, you also want to ask them if they have done along specifically as to your related needs, so if you are buying a business and you talked to them and they say they never had provided business acquisition financing, that's probably not the bank that you want to work with. So, once you found the bank and determined that they are a qualified SBA lender then you want to make sure that they will help you with filling out a formal application. They typically turn that into their underwriting department that takes probably about a week and half for the bank to come back with the formal approval, once they issue the formal approval they will give you a written commitment letter, you typically sign that and then you begin the process of starting to get the loan closed. Now if they are preferred lender, PLP lender, they can approve close and fund the loan themselves without really having really to go to the SBA, they just electronically get approval from the SBA. If they are general lender, what do they do is they package your loan, they would send it to the SBA and they have to get additional sign off from SBA prior to them closing your loan. Either way, the process typically takes 45 to 60 days, and generally if they are not a preferred lender it does not add that much additional time but you want to like, like I said you want to make sure you're working with the bank that specializes in doing SBA loans.
Either way, the process typically takes 45 to 60 days, and generally if they are not a preferred lender it does not add that much additional time but you want to like, like I said you want to make sure you're working with the bank that specializes in doing SBA loans.
Jeff: So really, it's not too much longer than it would take up for someone to obtain a loan from a lender in order to buy a home really, it is about the same amount of time required. But you mention a PLP lender and generally they can go through in approve the whole process and get the ball rolling without even having to go to the SBA. Generally speaking the PLP lenders do they tend to be business only banks?
Thomas: No, not necessarily. I think they typically tend to be larger banks, I have worked for a PLP lender for years and now I work for a lender that's a GP lender, which means we have to submit out loans to the SBA and I can tell you that the PLP are not quicker at getting them approved closing fund than we are. We are all about the same; once again it is about working with a SBA lending specialist.
Jeff: And obviously when you say specialist you are talking about someone who has some real skin in the game and that they have been doing it for a long time, they have got a lot of experience doing this, they know all of the hoops to have to jump through, the timeframes that are required, they are in the waiting process and all the things that are needed. What is that typical down payment that I might be required to make for an SBA 7(a) loan?
Thomas: Sure. It depends, if you're looking to purchase commercial real estate and typically the down payment is going to be 10% down. If you're looking to purchase a business and you're down payment is typically going to be between 15 and 25% down. Sometimes you can get the seller to help with part of that down payment, if you are looking to start a business and typically your fee will range anywhere from 20 to 30% equity injection for a startup loan, if you're looking to refinance real estate or anything else you don’t have to put any money down and it's possible for an existing business to not put any money down, if they are looking to buy equipment and to expand.
Jeff: Now, also other particulars too, talking about loan term, Tom, we touched on this just a little while ago but I was wondering for people who may have forgotten, maybe they did not have their pens out. How long do I have to usually to pay off these loans?
Thomas: Sure. The SBA 7(a) loans for buying a business is typically a 10 year term and a 10 year amortization, there's no prepayment penalty at all so you can pay it off as soon as you like, the loan term for buying real estate is 25 year term with a 25 year amortization and there is a three year prepayment penalty associated with that, 5% the first year, 3 in the second and 1 in the third and then you could pay it off as quickly as you want to but 25 year term and amortization. There are times where you might have blended use of the proceeds so maybe part of the loan is used for buying a business and part of the loan is used for buying real estate, then we might take a blended terms so maybe we have a 16 year fully amortizing loan but typically it is either 10 or 25 years.
There are a lot of times people have save their seller notes in there to keep the sell honest, and to make sure there is some money in there from a claw back provision in the event something might have been misrepresented by the seller but typically it's not a requirement by the SBA.
Jeff: Now. If I'm buying a business is it common Tom Meyer for the seller to have to carry the note?
Thomas: Not necessarily, that is not a requirement from the SBA but you might want that. I mean there are a lot of times people have save their seller notes in there to keep the sell honest, and to make sure there is some money in there from a claw back provision in the event something might have been misrepresented by the seller but typically it's not a requirement by the SBA. The other reason why you might want a seller note, is you want to have them help contribute with the equity, and let’s say you are putting 25% down and you are trying to buy a business and maybe only have 20% while we, you could maybe have the seller do 5% of it as long as they put it on standby with no payments for two years, and the SBA counts that as equity.
Jeff: Now, is that something that you see very often Tom in your line of work?
Thomas: Seller notes?
Jeff: Yes, correct.
Thomas: I would say it's more so than not typically a buyer does want a seller note for various reasons.
Jeff: But how involved does the seller actually get in the process from what you can see when it comes to the transitioning a business over to the new buyer and are coming in the buyers coming in to get financing from you, so how often you see that the seller involved?
Thomas: I mean, typically we do not necessarily see the seller but we end up seeing the selling business broker actively involved. In fact, many time that's why I find out about a business, is the selling broker will come to us and say: "Hey, is this a company that is eligible for SBA financing and we run through numbers and everything and make sure it is and then a lot of times either a) we might bring a buyer to the table that we have pre-qualified and introduce them to the selling broker or b) the broker has buyers that are looking at the business and they want us as the bank to be able to qualify them for financing it and then we end up are able to finance the deal but we typically don't see the seller until or prior to closing.
Just to see the ability for you to provide the financing for people to fulfill their American dream by owning the business is just a great feeling.
Jeff: I am interested in getting, maybe your take Tom on maybe just some examples, or a story or two that you can kind of share with us about situations where maybe a guy came in, first he comes in to your office and maybe there are kind of the last shot that they have in order to get their business funded in, maybe even up and off the ground or maybe even say that do you have any kind of stories you can share about a situation where maybe it was the kind of last chance for someone to gain financing and they were able to do so successfully.
Thomas: Yeah, I mean I think when someone is buying a business, it is typically their last and only chance is SBA financing, it is unfortunate but many banks do not want to provide traditional financing for buying a business, and with the amount of baby boomers out there that need to retire and need to kind of obtain their wealth in order to retire they have to sell business and so the SBA loan program is in many case is the only option. But we finance everything from…we had two women selling a pet supply web site online and two gentlemen purchased the company and they have grown the company larger than even what it was today so website financing, we financed a couple of guys last year looking buy a tool and die shop, we financed someone buying a day care and we do partner buyouts as well; that is the thing that's emerging, you might have a younger and an older partner and the younger partner wants to stay on and wants to continue to run the business and that all their perks wants to retire and that provides for them to retire and provides some funds in order for them to kind of get out and like I mentioned, we had a deal before a startup deal for someone to be able to start a retail bike shop there's no other way they could have done that deal without SBA financing and it is rewarding for me, I financed over 300 million dollars in SBA loans over the last 15 years and it is still just as fun as it was when I did the first loan. Just to see the ability for you to provide the financing for people to fulfill their American dream by owning the business is just a great feeling.
Jeff: Amen to that and it really would be, particularly when you see those businesses go on to become really successful. Have you found Tom, that throughout your career that because the Internet has just become really it's ingrained in everything that we do now. It is oftentimes the first thing that we do is we go online and we would either read maybe one of our favorite Media Resources to start our day rather than look at the morning paper like we used to do, it's our go to the source for information, for shopping and everything we do. Have you found that over the years you are getting more visits from people who are starting their businesses because they have found they have been able to accelerate the process of starting their own business because they've been able to market and communicate via the Internet, and that has been their springboard for starting their business?
Thomas: Yeah I think that helped. I think at the end of the day it still goes back to traditional business practices and you use the internet as one of the items that you would use in order to try to market your business, so most of the companies that we finance have bricks and mortar component to and a portion of their business is derived online, not a hundred percent except for the one website company that I mentioned that we financed last year, one hundred percent of their business was done via the Internet and there are an extremely successful company online but I would say for the most part it's typically bricks and mortar store with a component of their business online.
Jeff: Now, to kind of get back on track with regard to loans in the maximum loan size I think you said was 10 million dollars, what if a business exceeds that need, what is there available out there that they can do?
Thomas: Well, the maximum of the 7(a) program 5 million dollars.
Jeff: Okay, thanks.
Thomas: A maximum, if we look at it, it was called an SBA 504 loan now that's the type of loan you can use for large stationary equipment or for commercial real estate projects, now that program you could be into a 15 million dollar project where the bank provides 50% of the financing on an unconventional basis and the SBA provides a five million dollar debenture and then the business owner puts down 10% but you can get it in a much larger projects. The other thing that we have done as a bank, to actually help with customers, is we have built the web site called SBAlendinghub.com and this is the first web site of its kind to allow people to get pre-qualified for an SBA loan, so if they are looking to buy a business, or they are looking to buy a commercial real estate, they can input their information and we can instantly tell them the maximum sale price of the real estate they should be looking for and the amount of the loan that they are pre-qualified for. Same thing with buying a business, we can tell them the maximum sale price of business they should be looking for and amount of the SBA financing they are qualified for, so we think this is the game changer and we have got quite a few people that have come to us via this SBA lending hub option.
A maximum, if we look at it, it was called an SBA 504 loan now that's the type of loan you can use for large stationary equipment or for commercial real estate projects, now that program you could be into a 15 million dollar project where the bank provides 50% of the financing on an unconventional basis
Jeff: Can you give us that website again it was SBAlendinghub.com, is that right?
Thomas: That is correct, SBAlendinghub.com, h-u-b. Take a look at that and that is sponsored by Bridgeview bank.
Jeff: And that might actually accelerate the process as you have mentioned Tom. I have got just a couple of minutes left; any interesting challenges or things like that you have seen, that come up time and time again, common instances or problems that arise when someone comes to you and they are looking for financing and maybe they haven't done their homework or have not given enough thought to something before they come in. A hurdle that people time and time again have to get across or get over before they are approved?
Thomas: I think the biggest and then I think this is probably just human nature is we tend to get a little bit arrogant. We think because we have a good job and we were able to get a home loan that we can easily get a business loan. And a lot of times when I see that I work with a lot of people that are looking to buy businesses, they just assume that they can get the financing and that's really the wrong approach. What they really need to do is meet the SBA lender before they go out and try to find a business so that when they can see they are actually qualified for any. Can you imagine going out to look at a home and thinking that you can afford a million dollar home when in essence you can only afford a 400 thousand dollar home. You are going to waste your time and you're going to waste the time of everybody else you are involved with. That's why typically a real estate broker makes you get pre-approved first. So I think the best advice I can give is taking the time to sit down with an SBA specialist, explain what you're trying to do, show them your personal financial situation, going through your management background and everything, and really get an understanding of what your pre-qualified for, that makes the whole process go a lot easier.
Jeff: Thomas, it has been such a great talk and I wish we had more time, we have kind of run out but I'm going to give you an opportunity right now to let people know where they can reach you if they have any questions and people will have questions to with regard to SBA loan funding and any other business loan finance questions that they might have.
Thomas: Sure, my office number is (224)543-4047, my cellphone is (847)-899-3793, and if you want to email me email@example.com and then if you want to check out website, it is www.sbalendinghub.com.
I think the biggest and then I think this is probably just human nature is we tend to get a little bit arrogant. We think because we have a good job and we were able to get a home loan that we can easily get a business loan.
Jeff: And Tom Meyer that bell goes off, we have ran out of time, thank you so much for being with us today on Deal Talk. It has been a pleasure.
Thomas: Thank you very much for having me, I appreciate it.
Jeff: Tom Meyer, senior vice president of Bridgeview Bank Group Chicago.
Deal talk is 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 and make a point to check in with us again soon for valuable information and insight from our growing list of small business experts on Deal Talk, until next time I am Jeff Allen.