My SBA Loan Pro Podcast

The SBA has published updates to the Standard Operating Procedures manual replacing SOP 50 10 6 with SOP 50 10 7.  These updates will become effective August 1, 2023.  There has been much debate when and how lenders will implement these updates. The short answer is we’ll have to wait and see.

For now it’s enough to understand the enormous changes that have taken place and how searchers, entrepreneurs and business owners will benefit.

The reason I’ve waited to publish this information on The MY SBA Loan Pro Podcast until now is to let the dust settle and provide feedback from real world scenarios.

This episode will focus on the following updates:

• The “So Called” Long Winded Statement

• A Standard Loan Vs a Small Loan

• Full Change of Ownership 

• Partial Change of Ownership

• Franchise Directory

• Personal Resource Test

• Life Insurance

Ryan is always available to speak with his loyal podcast listeners. Please schedule a call via https://mysba.pro/cal to get started today!

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ThinkSBA.com

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Welcome to another episode of the My SBA Loan Pro Podcast: SBA Loans Industry Update May 1, 2023.

In today's episode Ryan will cover the following topics:

• Lender Appetite
• Interest Rates
• Upcoming SBA Rule Changes
• SBA Behind The Curtain: Everything you need to know about SBA lending that you never knew to ask

Remember to subscribe to this podcast to be notified when new episodes are available.

Also, please subscribe and turn on notifications to be notified of new video content on our YouTube Channel www.thinksba.tv.

Additional Resources

Visit our website: thinksba.com

Schedule a call with Ryan: https://calendly.com/thinksba

Complete our online loan inquiry form: https://thinksba.com/small-business-loan-submission-form/

FAQ: https://thinksba.com/faq/

Residential Care Facilities for the Elderly (RCFE’s) have become the housing model of choice for our senior population and their loved ones due to the fact that many require increased accessibility, social connectivity, and medical support services that living at home simply cannot provide.

As the name implies, RCFE’s, also called assisted living facilities, are often located in suburban residential neighborhoods.

Many of these assisted living facilities are permitted to house between 6 – 16 senior adults. As a result, buyers and sellers are often represented by residential real estate agents and brokers who are only familiar with residential mortgage financing.

Though residential mortgage financing will suffice when acquiring unconverted residential property it does not when the loan purpose includes ground up construction of a new facility, refinance or acquisition of an existing facility.  This makes finding the right financing difficult. That is why it’s important to align yourself with an expert.

In an RCFE sale transaction, both sellers and buyers should take note of the following qualifying criteria:

1. Whether the buyer is able to demonstrate direct or equivalent experience which qualifies them to own and operate an RCFE per bank guidelines.
2. The process to re-license an RCFE with a new owner, operator and how that can affect the escrow close date.
3. How the appraised value is determined for purchase transactions, refinances and ground up construction and the impact to down payment percentage requirements.
4. When a Phase 1 Environmental Report is required and when it is not.
5. How to calculate and identify use of square footage to qualify for prime lending rates and terms.
6. Whether the level of medical support services offered at the facility qualifies for prime lending rates and terms.

Loan Terms Available For Qualified Borrowers whether ground up construction, refinance or acquisition includes.

• Minimum 15% equity injection allowing entrepreneurs to keep more capital in reserves for strategic growth and unexpected expenses.
• Loan closing within 45 – 60 days to meet the demands of escrow.
• Requesting working capital to meet the demands of short term operating expenses after the transaction closes.
• Reasonable interest rates and up to 25 year amortization period for easy monthly payments.
• Flexible pre-payment penalties giving business owners the power to payoff their loan on their terms.

Life insurance is a contract between a policyholder and insurer where the insurer promises to pay the insured's beneficiary an agreed amount upon their death. The most common application is between heads of household and their dependents.

Life insurance is also used by commercial lenders as a risk mitigation strategy for loan applicants of privately held, family owned businesses.

In the same vein the SBA requires that loan applicants obtain a collateral assignment of life insurance for the lender's benefit when the business is formed as a sole proprietorship or single member LLC and is otherwise dependent on one owner’s active participation.

Examples of businesses dependent on one owner's participation include businesses where special training or licenses are required such as doctor's offices, assisted living facilities, contractors, mechanic shops, etc.

The required face value amount of the insurance policy for 7(a) loans is determined by the operating businesses industry classification code, loan amount, length of loan term and available collateral.

On the other hand, Certified Development Companies (CDC) which fund the 504 2nd Deed of Trust, also known as the Debenture, are mandated to require a collateral assignment of life insurance with a face value amount equaling the Debenture minus the available collateral's discounted liquidation value based on the following schedule:

• Commercial real property including buildings: 75% of appraised value.
• Residential real property including buildings: 80%. of appraised value
• Land only: 50% of appraised value
• Equipment: 50%.of appraised value
• Leasehold improvements: 5%. Of appraised value
• Furniture and fixtures: 5%. Of appraised value

Now, pay close attention to these three important points.

1. A collateral assignment of term Life insurance is acceptable to meet the SBA’s requirement. No lender should ever require universal or whole life insurance which are generally more costly..
2. A loan applicant may assign to the lender or CDC an existing policy that meets their underwriting criteria.
3. A lender can waive the requirement to obtain life insurance if a licensed insurer provides written documentation that the loan applicant is unable to obtain life insurance. Some lenders require denial letters from a minimum of two licensed insurers.

As a best practice, I recommend loan applicants discuss the requirement to obtain life insurance with their loan broker or SBA business development officer upon or before the loan is submitted to underwriting or is scheduled to be presented at loan committee.

The length of time it takes to obtain life insurance is between one to six weeks, or more depending on the life insurance company’s pipeline density, underwriting practices and the loan applicant's age and health status.

The most frequently asked question I receive by far is how long does the loan application process take to complete from start to finish.  The quick answer is 45 - 60 days. The honest answer is it takes as long as necessary to complete all steps in the process.

The next logical question is what are the steps.  Here is a list of each step in order with an explanation.

Before I begin, I want to emphasize the timeline starts from the day the lender receives the monetary Deposit, usually $2,500 or $5,000 and the signed Letter of Interest or Term Sheet.

Step 1: Loan Application Needs List.  This needs list is sent to the Applicant by the Lender in preparation for underwriting.  Included are General Application Forms and SBA Forms 1919, 413 and 912 if necessary.  It typically takes 2 - 4 days for the lender to generate this needs list from receipt of the monetary Deposit and signed Letter of Interest.

Step 2: Underwriting.  The amount of time to underwrite the loan is 1 - 3 weeks depending on the lender's pipeline density, available underwriters and support resources and outstanding information required by the underwriter to render a decision.

Step 3: Credit Decision. The credit decision is announced upon completion of underwriting or the conclusion of ”loan committee.”  Some lenders shepherd loan requests through individual underwriters in an underwriting loan center. Other lenders maintain a decision making body referred to as “loan committee.”  It takes 5 - 10 days for an underwriter to review a loan application and either return to the applicant with questions or a credit decision, meaning the loan is either approved or declined.  Loan committees decide a loan in the committee meeting which is typically held    one day per week or every other week.

SBA 504 loan requests require a separate SBA Approval called an Authorization which may add an additional 5 - 10 days to the entire application process.

Step 4: Commitment Letter. The commitment Letter outlines conditions required to close the loan and is sent to the Applicant 2 - 4 days after loan approval. This step begins the process of ordering third party reports and the collection of closing documents.

Step 5: Third Party Reports & Closing Documents.  A real estate appraisal is ordered by the lender to be performed by an SBA approved third party appraisal company. The appraisal may take 2 - 3 weeks to complete with an additional 2 - 5 days for lender review.  If a business acquisition is included with the real estate purchase, a business valuation is also ordered which also takes 2 - 3 weeks with an additional 2 - 5 days for lender review.

Step 6: Quality Control / File Audit. Once all closing documents and third party reports have been completed and approved the lender conducts a final review of all required documents and reports necessary to close the loan which takes 2-5 days. The lender orders loan documents to be prepared for signature when the file is deemed complete.

Step 7: Loan Document Preparation. This step takes 1-3  days before loan signing may be scheduled.

Step 8: Loan Document Signing. Loan signing takes place immediately after escrow receives lender instructions and loan documents.

Step 9: Bank Funding. Loan is funded after the lender receives signed loan documents from escrow and escrow confirms all requirements to close the loan have been met by the Applicant and Seller.

The most frequently asked question I receive by far is how long does the loan application process take to complete from start to finish.  The quick answer is 45 - 60 days. The honest answer is it takes as long as necessary to complete all steps in the process.

The next logical question is what are the steps.  Here is a list of each step in order with an explanation.

Before I begin, I want to emphasize the timeline starts from the day the lender receives the monetary Deposit, usually $2,500 or $5,000 and the signed Letter of Interest or Term Sheet.  

Applying for a small business loan can be stressful, grueling and confusing when you hear the dreaded NO from your bank.  Does this sound familiar?

Hello, my name is Ryan Smith, Principal Broker and Founder of ThinkSBA.

If you are listening to this podcast it’s likely you are a small business owner or entrepreneur who is purchasing real estate, acquiring a business or franchise or are in need of working capital to grow or start your business.

If this describes you, you’re in the right place.

I started ThinkSBA because, as a former banker, I was tired of saying no to good people with good businesses.  And now I don’t have to.

That’s because I’m not constrained by one bank or one credit platform. I work with local, regional and nationwide lenders to find the loan that meets your unique business demands.

My process is simple, yet effective.

First, I get to know you, your company and business goals.

Second, I conduct a thorough financial analysis to determine which lenders are the best fit.

Third, I engage the lenders, receive proposals, and then you choose which lender funds your loan.  Don’t worry, I am with you every step of the way.

And just like that, I’ve put the power to determine your company’s financial future back into your hands.

The best part, the majority of the time I am paid by the lender, not you.

Yes, it can be that simple with your cooperation and my years of experience leading the way.

If you’re ready to discuss your purchase or acquisition visit the ThinkSBA website at thinksba.com and click the Get Started button in the top right hand corner of the homepage.

If you’re not quite ready but want to learn more about SBA guaranteed loans, feel free to browse the My SBA Loan Pro podcast library and please remember to subscribe and leave a review.

Have a great day!

Seller Discretionary Earnings referred to as SDE equals net profit, which is the sum of annual revenue minus expenses, plus add-backs of seller discretionary spending.

SDE directly impacts enterprise value, buyers equity injection, loan amount, seller carry   amount, and debt service coverage ratio which ultimately determines whether a loan application is approved or declined.

Common expenses added back by sellers beyond Interest, Tax, Depreciation and Amortization include officer salary and benefits, meals and entertainment, travel, automobile loan payments, cell phone and internet bills and personal care items.

I've also witnessed seller discretionary add-backs of child care, alimony, child support and a whole host of other questionable expenses. I don't recommend business owners expense these items if their exit strategy is to earn maximum enterprise value in an arms length sale transaction.

Sellers are incentivized to add back expenses, even questionable one’s, primarily to inflate the businesses enterprise value.

Sellers feel justified adding these expenses back due to their years of blood sweat and tears starting and operating the business and also because they are convinced these expenses are unique to them and are indeed discretionary.

On one hand, sellers are correct, as the word discretionary means available for use at the discretion or choosing of the user.

However, lenders literally review hundreds of profit and loss statements each year with nearly all of them including most, if not all, of these aforementioned expenses.

Therefore, though these expenses may be discretionary they are also so common most lenders expect buyers to also expense these items thereby nullifying their discretionary nature.

Sellers should expect that in almost every case meals and entertainment, travel, automobile loan payments, cell phone and internet bills and personal care items will not be added back by lenders.

Proceeding with the loan application without accurately assessing SDE may set up a scenario where the loan is conditionally approved but the business valuation derived is less than the sale price.

If this happens, In almost every case there are three possible outcomes: The applicant is required to inject more equity, The seller is required to carry a larger loan amount or the loan application is declined.

That’s why it’s important to structure the loan for success, in compliance with all SBA policies and procedures prior to submitting the loan application.

One last thought and recommendation for business owners preparing their business for sale.

Be extra careful to hire a business broker who understands how lenders allocate seller discretionary expenses to ensure the businesses purchase price is aligned with the buyer's ability to qualify for financing.  If you need one, I’m happy to make an introduction to a respected business broker in your area.

The most important step in the SBA loan application process is closing the loan. This is obvious, right?  You would think so. However, many applicants make the mistake of focusing their attention on closing after it’s too late, and they've missed a critical step or piece of information that inevitably prevents them from closing the loan.

An SBA loan is considered closed after a loan number has been assigned by the bank and boarded to their loan management platform, applicant and bank funds have been moved into escrow or a construction account, deeds of trust have been recorded and/or licenses obtained and escrow finally and formally notifies all parties its job is finished.

Unfortunately, many SBA loan applications never close.  This is extremely frustrating for the applicant who has invested time, money and other precious resources with nothing to show for it. No new business, no new office building, no working capital. I know this because many applicants who are referred to me or find me on Google have personally experienced this frustration first hand.

Reasons for the loan application stalling out prior to close include inadequate bookkeeping and financial reporting, improper legal entity documentation and structure, applicant non-disclosure of prior adverse credit, criminal background or other malfeasance, insufficient asset value resulting from a real estate appraisal or business valuation, discovery of soil or water contamination from a Phase 1 environmental report, ineligible business applicant, individual guarantor or purchase contract, inability to obtain proper licenses and certifications and/or uncooperative and unreasonable partners, sellers, contractors or landlords and the list goes on.

The good news is there is a tried and true method to successfully close an SBA loan and avoid the frustration of watching your hopes and dreams disintegrate into thin air.

Are you ready? You must Identify and mitigate all obstacles and impediments, if possible, that will keep the loan from closing, and this is key, you must do this prior to submitting the loan application.

You can attempt this on your own but let’s face it, you don’t have the time or desire to become an SBA expert.  You can choose to work directly with a lender but you just never know if they’re the right fit for your specific loan request.

I recommend hiring an expert loan advisor and broker, like me Ryan Smith, who can help you structure the loan for success, in compliance with all SBA policies and procedures, from the very first conversation.

Following my tried and true method will give you the best opportunity to successfully close your SBA loan application and become the proud owner of a new business, office building or obtain that much needed working capital to grow or start your business.

Navigating the SBA loan program and application process can be complicated.

For starters, the entire SBA loan program, including borrower eligibility requirements and all policies and procedures, is governed by the SBA’s Standard Operating Procedures Manual also known as the SOP for short.

The SOP is a 400 page document filled with industry jargon and references.  To make matters worse, it is regularly updated making it nearly impossible for an applicant to know everything necessary to successfully apply for an SBA loan on their own.

This begs the question, “Where should an applicant turn to prepare themselves to successfully apply for an SBA loan without wasting time, money and other precious resources?

Many applicants simply turn to their incumbent Bank.  The benefits of working with an incumbent bank include familiarity, trust and rapport.  The potential negatives include; the bank not being a respected SBA Lender, the bank not being the right fit; which may result in a bad experience or even worse a credit decline, and the bank not offering the lowest rates and fees for which the applicant qualifies.

An alternative many applicants choose is asking for lender referrals from their trusted advisor network.  This option amounts to a crap shoot as most trusted advisors have little to no familiarity with the ins and outs of SBA lending.

The third option is hiring a trusted SBA Small Business Loan Broker.  Many consumers are comfortable hiring a residential mortgage loan broker to finance the purchase or refinance of their primary residence and it should be the same for business owners and entrepreneurs who are in need of financing to purchase or refinance their owner user real estate and/or acquire a business.

The benefits of hiring an SBA loan broker include:

• Working with an expert who is proficient in the details of SBA financing
  
• Being matched with the right SBA lender from the start
  
• Having a trusted advisor who is on your team and can answer questions or give advice through the entire application process from start to funding
  

I want to warn you that not all loan brokers are created equal.  Beware of any loan broker who doesn’t focus primarily on SBA loans, requires fees to be paid upfront, is not properly licensed, makes unsubstantiated guarantees or promises regarding interest rates and loan approval, and anyone who advises and/or encourages unlawful actions to get the deal done at any cost.

Now it’s time to talk about one SBA loan broker in particular, me, Ryan Smith.  After all, I am the host of this podcast.

I choose to best serve my clients by aligning my goals with my client’s goals ensuring we are both proceeding with a common purpose for a common good.

I accomplish this by not charging an upfront fee. Instead I earn my commission only after the loan has been funded and my clients goals have been met.  Even better, in most cases my commission is paid to me by the SBA lender with no additional our of pocket expense to my clients.

In addition, from the outset I expose potential obstacles and impediments to successfully completing the SBA loan application which dramatically decreases the likelihood of a dreaded last minute decline. Also, I structure the loan application to ensure borrower eligibility and compliance with all SBA policies and procedures and when possible, I will negotiate the lowest fees and rates for which my client qualifies.

Are you a business owner or entrepreneur applying for an SBA loan or planning to in the near future?  If your answer is yes, then keep listening because this podcast was recorded specifically for you.

In this podcast I reveal the science of obtaining SBA loan approval.  That’s right, being approved for an SBA loan is a science and is based on the following five fundamentals.

The first fundamental is Experience, the second Liquidity, the third Personal Credit History, the fourth Cash Flow and the fifth Credibility.

Business succession planning is vital to the longevity of any business.  This is especially true when a business is owned by two or more individuals, for seldom do business partners share the same retirement and life goals.

Therefore, a business is most likely to experience an interruption or even worse, the ceasing of operations altogether, when one partner is ready to exit the business and the others are not.  This matter is further complicated when the partnership also owns both the business and the real estate from which the business operates.

Possible scenarios, when one partner is ready to exit and the others are not,  include a private loan from the partner exiting the business to the remaining partners, an earn-out for the benefit of the partner exiting the business paid out over several years or a venture capital non-bank funding source.  These funding sources are often expensive and complicated.

None of these scenarios likely meet the goals of all parties involved.

On the other hand, if a partner buy-out is structured correctly, the SBA 7(a) loan program is perfectly suited to meet the goals of both the partner exiting the business and the remaining partners.

The partner exiting the business is able to receive full payment for their equity ownership and therefore enjoy retirement by dropping all involvement in the business.

The partners remaining in the business take 100% control with no cash out of pocket as long as the business balance sheets for the most recently completed fiscal year and current quarter reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.

Other benefits of the SBA 7(a) loan program include:

1. SBA loan interest rates are competitive with conventional rates
   
2. SBA guarantee fees may be financed instead of paid out of pocket preserving precious operating capital
   
3. The loan is amortized over a 10 year period
   
4. There is no prepayment penalty
   
5. There are no financial covenants or burdensome annual documentation review requirements
   
6. When the real estate is owned by all partners and included in sale, there is the ability for the partners remaining in the business to combine the partner buy-out with the real estate purchase into one loan amortized over a 25 year period

In conclusion, the following three tests must be met to ensure the partner buy-out passes the SBA’s eligibility requirements.

1. The partners remaining in the business must own 100% of the business upon change of ownership and certify they have been actively participating in the business and held the same ownership interest for at least the past 24 months
   
2. There is no earn-out to the benefit of the partner exiting the business in the purchase contract
   
3. There is no mezzanine debt in a second position to the SBA Preferred Lending Partner
   

Business owners purchasing or refinancing commercial real estate financed by an SBA 504 or 7a loan are required to hire a certified commercial appraiser to prepare a commercial real estate appraisal report which includes the “as is” value of the subject property on the day the report is delivered to the lender.

Every loan applicant needs to know the following regarding the commercial appraisal report.

• The cost is generally between $2,500 - $4,500
  
• The lender’s appraisal department orders appraisal bids from their approved vendor list
  
  • This means that neither the loan applicant, lender representative, nor the loan broker order the appraisal bids
    
• The returned appraisal bids will reveal the delivery date and cost of the appraisal
  
• The lender’s appraisal department chooses the appraiser based on the business owners goals, ie. delivery time and cost
  
• The lender’s appraisal department will not disclose the appraiser’s name to the loan applicant prior to selecting the appraiser

The World of SBA Lending - 0:46

• SBA Lenders are actively approving and closing loans.
  
• Everyone's pipelines are flush with loan originations.
  
• Underwriting is taking up to three weeks with the loan package sitting in the queue for nearly two of those three weeks.
  
• 25 year fixed Interest rates are as low as 2.9% for SBA 7(a) real estate purchases and refinances for qualified applicants.
  
• Real estate and working capital projection based loans are still being funded if 100% collateralized by real estate.
  

The World of Conventional Lending - 4:01

• The top conventional lenders in the Country are still not lending to new customers and are lending only a limited bases to their existing portfolio.
  
• There are still conventional lenders who can approve and fund loans in 30 days.
  

What’s In My Loan Pipeline - 6:41

• Owner occupied real estate purchases for manufacturers, distributors, physicians, contractors and residential care facilities also known as residential assisted living facilities.
  
• Business Acquisitions for QSR food franchises, in home health care franchises, speciality general contractors not directly tied to new construction and a collision center in the inland empire.
  
• I’m also negotiating the full relationship transition including treasury management, factoring, borrowing base and the refinancing of commercial real estate of a local sporting goods manufacturer and distributor.
  

My Greatest Compliment - 9:43

Online Loan Application - 11:09

A Message To My Friends (You Know Who You Are) - 13:15

The Landlord Lien Subordination And Collateral Access Agreement is required to be executed during the loan closing process when an applicant receiving an SBA loan has secured an interest in real property through a commercial lease.

Parties to the agreement include the SBA Lender, who is referred to as the Lender, the SBA loan applicant, who is referred to as the Tenant and the Landlord who owns the premises occupied by the Tenant, who is referred to as the Landlord.

The purpose of this agreement is to solicit and confirm the Landlord's willingness to facilitate the loan by agreeing to subordinate its interest, if any, in the collateral, and permit Lender access to the collateral located at the premises in the event of Tenant default subject to the following terms and conditions.

Contrary to popular opinion SBA Loans are quite flexible.  Case in point, The SBA Standby Creditor’s Agreement.

This Agreement establishes the interest rate and loan terms of a promissory note between the buyer, referred to as the Standby Borrower and the Seller, referred to as the Standby Creditor, to mitigate three fundamental credit weaknesses in the loan application.

There are many instances where borrowers applying for an SBA loan to purchase real estate, acquire a business or franchise or obtain working capital for growth do not possess the required 10% minimum equity injection.

The good news is that the SBA permits the applicant to receive a monetary gift to assist with the equity injection.  This gift may be given by any willing participant.

November 1st, 2018 the SBA combined SBA Form 159(7a) and SBA Form 159(504) into one form known simply as Form 159.

Form 159 requires applicants to disclose services and fees charged by an Agent hired in connection with applying for an SBA loan whether a 7(a) or 504.

The purpose of this form is threefold.

1. To reduce fees paid by applicants in connection with applying for an SBA loan
   
2. To protect applicants from predatory Agents who charge unreasonable fees
   
3. To promote transparency and integrity between all parties involved with assisting the applicant
   

The applicant is required to complete the form after the loan has been approved.

Form 2202 must be completed on behalf of the subject business requesting the loan and all affiliate businesses.

Affiliate businesses are defined by the SBA as any business owned 51% or more by a 20% or more owner of the subject business.

Form 2202 documents the subject business and affiliate businesses monthly debt obligations which is essential to determining the debt service coverage ratio or dscr for short and debt to tangible net worth ratio also known as leverage.

Both The dscr and debt to tangible net worth ratios are key indicators used by lenders to determine the businesses ability to repay the requested loan.

Hello and welcome to the State of SBA Lending Address presented by yours truly, Ryan Smith, Principal and Founder of ThinkSBA.  I help business owners and entrepreneurs find the right loan to purchase real estate, acquire a business or franchise or  obtain working capital to grow or start their business.

State of SBA Lending Address Topics

• Recent updates to PPP
  
• Three types of lenders
  
• Qualifying for financing today!
  
• Current rates for SBA 7a real estate and non-real estate loans
  
• Current rates for SBA 504 real estate purchases
  
• Surprise topic to be revealed in the podcast (hint - I always get asked this question)
  

The SBA Statement of Personal History Form 912 must be completed by everyone who answers yes to questions 18 or 19 on SBA 7(a) Borrower Information Form 1919, Section II: Principal Information.

These questions ask whether the individual principal applying has been arrested within the last six months or whether they have EVER, I want to stress EVER, been convicted, pleaded guilty, pleaded nolo contendere, been placed on pretrial diversion or been placed on any form of parole or probation for any criminal offense other than a minor traffic violation. Just to be clear a DUI is not a minor traffic violation.

The SBA 7(a) Borrower Information Form 1919 is required to be completed by every individual with 20% or more ownership in the applicant business entity whether applying for an SBA 7a or 504 loan.

Completing this form is not complicated but there are a few things that are important to know.

First, the form consists of 26 questions spanning two sections,  The first section pertains to the Applicant business and the second section to it’s individual principals or owners.

Before answering the questions, review the Definitions section on Page 1.  This section defines the terms Affiliation, Close Relative, Eligible Passive Company, Household Member and Operating Company. You’ll need to know these definitions to answer questions 5,6,7, 8, 12, 14, 15, 16, 21, 23, 24 and 25.

Once you’ve reviewed these definitions you’re ready to move forward to Section I: Applicant Business Information.

The Personal Financial Statement, often referred to as a PFS for short, is one of the most important documents to the loan application.

The PFS must be completed by all individuals who own 20% or more of the borrowing entity and is to include all personal assets, liabilities, annual income and debt obligations. I want to stress personal financial information, not business. I will address what is necessary to properly document Business financial information in future episodes.

The PFS requires that all requested and relevant information be included. Leaving out details such as monthly rent, credit card obligations, home equity lines of credit and real estate owned will render the PFS incomplete and cause delays, or even worse, a mis-understanding of one or more of the business owners capacity to borrow, which can be the difference between a decline or approval.

One of the most popular ways to become a business owner is to acquire an existing business.  And the easiest way to qualify for financing is through the SBA 7a program.

Before I highlight the advantages of the 7a program, I’d first like to raise the point that acquiring an existing business is not always the best route to becoming a business owner.  In some cases it makes better financial sense to start a new business rather than acquiring an existing one.

Here’s the test I like to apply.  If you’re able to start a new business with similar or less capital requirements, and ramp up revenue and profitability within two years from opening, it’s likely best to start a new business.

If this is not the case, you can confidently focus all your attention on finding the right business to acquire.

In this episode I will answer the 10 most frequently asked questions I have received from business owners regarding the Paycheck Protection Program. 

Can I use loan proceeds to hire new staff? The answer is no, you must maintain current employment levels or re-hire employees laid off or furloughed and use 75% of loan proceeds on payroll. 

Can I use loan proceeds to pay my primary residence loan payment if I am a home based business? The answer is no, loan proceeds are to be used to pay commercial leases and mortgage interest on commercial loans. In the interim you may request forbearance from your residential lender. 

Can I use loan proceeds to make tenant improvements to my commercial building? The answer is no, Tenant improvements are not an allowable PPP loan use. 

Will my bank take responsibility if I completed my PPP loan application incorrectly? The answer is no, the federal government has given the Bank immunity from responsibility related to the completion of your PPP application. 

Can marijuana related businesses receive PPP loan proceeds? The answer is no, the manufacturing or distribution of Marijuana is illegal at the federal level and therefore businesses engaged in one or more of these activities are not eligible to receive PPP loan proceeds. 

Can I use loan proceeds to buyout a partner or acquire a new business? The answer is no, PPP loan proceeds are to be used to maintain your business through a difficult time, not facilitate growth strategies. 

Can I use loan proceeds to fund my marketing campaign? The answer is no, you cannot use funds for marketing purposes. 

Can I be prosecuted for lying on the PPP loan application? Yes, the Department of justice is currently reviewing loan applications for any information therein that is considered to be misleading or fraudulent for future prosecution. 

What happens if I don’t use all of my loan proceeds? You may either retain unused proceeds that turn into a loan or return unused funds to the bank during or after the eight week period. 

What if I don’t have any work for my employees? You must rehire and pay your employees per the specifications detailed in the PPP loan legislation regardless if you have work for them or not.

One of the first questions business owners ask when applying for a loan is what is the interest rate. In this episode of SBA FM you will learn how SBA 7(a) guaranteed loan interest rates are determined and what to expect in your own situation. SBA 7(a) guaranteed loan interest rates are determined by three factors: the SBA Standard Operating Procedure manual, The lending institution which is reviewing the loan application and the economic market conditions at the time of the loan application. Page 154 of the SBA Standard Operating Procedure manual includes a quick reference chart that outlines the maximum allowable interest rate charged by SBA Preferred Lending Partners categorized by loan amounts, loan maturities and loan programs.