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SBA Loans

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This is a presentation that was made on August 28, 2019 in collaboration with Azlo. It is intended too give small business owners a broad (yet somewhat detailed) overview about U.S. Small Business Administration (SBA) financing.

It does not cover the subtle nuances and minutia required to be considered "training" for professional commercial lenders.

Keep in mind that SBA regulations evolve, so refer to the latest SBA SOP for guidance.

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SBA Loans

  1. 1. SBA Loans Oscar Novelo, Eleva Financial Azlo Webinar - August 28, 2019
  2. 2. Purpose • Define “Small Business” • Demystify “SBA Loan” • Overview of SBA Products • Cost of SBA Loans • SBA Programs • Loans vs Lines • Underwriting • Advice • Resources
  3. 3. Small Business BUSINESS TYPE PHOTOGRAPHY STUDIO COMMERCIAL PRINT SHOP NAICS CODE 541921 323111 GROSS SALES $7,500,000 $10,000000 NUMBER OF EMPLOYEES 750 500
  4. 4. Small Business BUSINESS TYPE PHOTOGRAPHY STUDIO COMMERCIAL PRINT SHOP NAICS CODE 541921 323111 GROSS SALES $7,500,000 NUMBER OF EMPLOYEES 500
  5. 5. The Good News • SBA guarantees help banks say “yes” to more borrowers. • SBA guarantees are great if your business lacks adequate collateral, assuming you demonstrate the ability to repay. • SBA guarantees may help you qualify for more than your history support, assuming there are compensating factors. • SBA guarantees may help you purchase an owner- occupied building with 10% down. • SBA guarantees are profitable for banks.
  6. 6. Fake News! • Myth: The SBA makes LOANS to small businesses. Truth: The SBA provides banks with a PARTIAL GUARANTEE. If a borrower defaults on a business loan, the bank gets a percentage of the outstanding principal (after collateral has been liquidated). • Myth: If I default on a “SBA loan” the SBA will pay the bank and I’ll be left alone. Truth: (a) If you default on an SBA guaranteed loan, the bank gets a portion of their outstanding principal, and (b) the SBA refers this payment to the U.S. Department of the Treasury for collection.
  7. 7. Guarantee Fees GROSS LOAN SIZE FEE $150,000 OR LESS 2% of the guaranteed portion $150,001- $700,000 3% of the guaranteed portion $700,001- $5,000,000 3.5% of the guaranteed portion, up to $1MM + 3.75% of the guaranteed portion over $1MM
  8. 8. Percentage Guaranteed GROSS LOAN SIZE GUARANTEED PORTION $150,000 85% $127,500 $700,000 75% $525,000 $5,000,000 75% $3,750,000
  9. 9. Guarantee Fee GROSS LOAN SIZE GUARANTEED PORTION $150,000 $150,000 X .85 = $127,500 X .02 = $2,550 $700,000 $700,000 X .75 = $525,000 X .03 = $15,750 $5,000,000 $1,000,000 X .75 = $750,000 X .035 = $26,250 $4,000,000 X .75 = $3,000,000 X .0375 = $112,500
  10. 10. SBA Programs & Best Uses PROGRAMS 7(A) 504 LINE OF CREDIT INVENTORY EQUIPMENT COMMERCIAL REAL ESTATE
  11. 11. What’s the difference between a “Loan” and a “Line of Credit”
  12. 12. Loan • A lump sum of capital lent at loan closing • Amortizing payments (capital and interest) • Upon making all predetermined payments, the loan balance reaches zero • Normally, interest rate is fixed Best Use: Finance purchase of tangible assets (equipment, machinery, commercial real estate) with a useful life greater than 12 months.
  13. 13. Line of Credit • Partial draws of capital at borrower request • Typically, only pay interest on funds used • As long as the approved limit isn’t surpassed, borrower may repeatedly use the capital that has been approved and repaid • Typically, line is renewed every 12 or 24 months; terms can change • Normally, the interest rate is variable Best Use: To cover gaps between invoicing and getting paid, and to weather times when cash flow is low. Also good for the purchase of inventory.
  14. 14. What are the requirements for an application?
  15. 15. What are the requirements for an application? • Business Income Tax Returns • Personal Income Tax Returns • Interim Financial Statements • A/P & A/R Aging Reports • List of Business Debt Hint 1: Everything must match! Hint 2: Owner = someone that owns 20% or more.
  16. 16. What does a lender consider when analyzing my loan request?
  17. 17. What does a lender consider when analyzing my loan request? • Is the business profitable? • CAN the loan be repaid? • Does the borrower WANT to repay? • Has the owner invested in the business? • What collateral is available? • What does business history tell us? • What is the loan for?
  18. 18. When comparing loan offers, which elements should I evaluate?
  19. 19. When comparing loan offers, which elements should I evaluate? • Interest rate • Repayment period • Bank fees • SBA fees • Loan covenants • Prepayment penalties
  20. 20. What advice would I give a business owner?
  21. 21. What advice would I give a business owner? • Show profit on your tax returns • Maintain good personal credit (FICO 680+) • Maintain good accounting practices & produce financial statements • Obtain your number with Dun & Bradstreet • Speak with one or more professionals focused on small business lending • Prepare your questions, compare your options • Ask for help as soon as possible, before it’s too late • Be careful with companies that promise quick solutions
  22. 22. Best of luck! Thank you for your time.
  23. 23. For additional information: • sba.gov Search for: SOP 50 10 5(K) • sbdcnet.org • cdfifund.gov/Pages/FAQ.aspx • Oscar Novelo oscar@elevafinancial.com

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