Starting or operating a firm is difficult. Among your many tasks, you have to beat the competition and turn a profit or you will soon be among that 80 percent of firms that don’t make it.Making a profitHow many hats can you wear?
I think I’m making a profit so why don’t I have any cash?Sales 10 (Cash collected 0)Exp 9Profit 1
Administered through CADC’s Individual Development Account and Money Management training programCovers 10 classes ranging from banking and credit to saving and investing.IDAs are matched savings accounts. For every dollar the participant saves, CADC matches it through grant funds with $3.Approved uses: open or expand a small business, help pay for college expenses, purchase a home, or make home repairs.Participants can receive up to $2,000 per individual or $4,000 per family.Certain personal income criteria apply.
CADC is one of several IDA program administrators in the state. For a full list, visit the Southern Good Faith Fund’s website at www.southerngff.org
SBA goal is to provide a response in 14 working daysPaperwork is streamlined. Same as a bank requires.No low interest loans, but caps interest rates. It is not a government loan, it is a bank loan. Several years ago, minority low-interest loans existed, but no longer. Maximum interest rate is 2.75% over prime (WSJ). Rates are variable, but no balloon features.No free money from the government! Unless SBIR: Small business innovative research grant provides free funding for pre-commercialization market testing.
No Flipping houses, no rentals.No wildcatting for oil and dealing in commodities futures. No coins and stamps. No gambling.Must be for-profit venture (no 501c3 status).No pyramids: Avon, Mary Kay, Amway (where focus is on signing up and recruiting others).No illegal stuff, obviously.Christian bookstore ok if no classes or indoctrination on site.No brothels, adult bookstores, etc.Fitness Centers, such as Curves for Women, must have male restroom and open membership.
Catch up on federal loan before applying. If you defaulted on a federal loan, don’t waste your time. Cannot have tax liens.Bankruptcy with restitution is ok.If child support is delinquent, forget it.
Cannot buy into a business (part ownership)No speculative businesses (i.e. flipping houses, mini storage)Cannot get your money back to put into your pocket.No payments for fiduciary accounts (not your money to begin with).Must be less than 30 days on payment or must go to another bank (no bank bailout).Cannot buy a piece of the business—all partners must sign the loan.
Borrower must secure the lender (not done by SBTDC).Typically commercial loans for less than $25,000 are courtesy loans.Bank can require 3rd party to co-sign loan, but SBA cannot.
SBA encourages longer terms but maturities are based on the ability to repay, purpose of loan proceeds, and useful life of the assets
Interest rates are negotiable between lender and borrower, subject to SBA maximumCan be fixed or variable or combinationBase rate is WSJ primeVariable rate can be adjusted monthly, quarterly, annually, or multiple years (Express can be daily)Balloon payments, demand and renewal features are not permitted
To offset costs to taxpayers, SBA charges a guaranty fee and servicing fee to lender (which is passed to borrower)Guaranty fee is a one-time fee due within 90 days of closing based on gross loan amount
Lender must be preferred lender (application/approval process).It is an instant loan with a 50% guaranty to lender.Application faxed to Sacramento which issues a guaranty #.In ASU territory: Liberty Bank,Simmons First Bank, 1st National Banking Company of Ash Flat, Bank of America, and Regions Bank Corporate.
Eligible: Veterans, service-disabled veterans, active duty service members, Reservists & National Guard Members, current spouses, widowed spouse of service member or veteran who dies during service or of a service-connected disability
Most borrowers only required to inject 10% equity.Loans are provided through CDC.
Identify how much money needed, what it will be used for, how to repay the loan.SBTDC does not make lending decisions.Lender can make loan in-house, forward to SBA, or decline application.
Repayment: Must prove you can repay the loan out of the profits of the business. Usually easier to demonstrate for existing rather than start-up business. Develop projections on month by month basis for 24 month period. Utilize resources: RMA, Consumer expenditure surveys.Management: Lender wants to see some experience in the industry.Equity: No 100% loans. Borrower must invest something. Rule of thumb is 20% of total project costs. But % is set by lender and must be reasonable based on risk of the business. Ex: restaurants & clothing stores = 20%; professional offices = 15%Existing business must have + position on balance sheet. Source of equity must be legal.Collateral: Must pledge all business collateral, if personal collateral available, bank must take it. If you own < 20% of home, SBA won’t mess with it.
Debt must be repaid with cash.Must have cash at the right place a the right time in the right amount.Pitfalls: Potential accounts receivables must be factored in (affects working capital requirements). Depreciation on most assets is a real expense.
Must know start-up expenses (operating capital).When projecting, must do homework in order to make educated guesses.Get actual expense figures.Working capital must be liquid in order to pay liabilities/obligations due within one year.
Lender and SBA will want to see some experience.
Start-up: Reasonable equity injection considered to be: 20% retail and service 15% professional 15% buyout if cash flow is strongExisting: Businesses must have positive equity position on Balance Sheet which can be used to leverage expansion loan.
Longer repayment terms = more cash in business (refer to schedule on the board). Translates into lower debt service and improved cash flow
Lowered debt service improves cash flow (increase years for repayment).Patient partners: banking holiday for unexpected events.
Microloans: First opportunity or last resortSBA has new microlending initiative and works through local lending intermediaries: local partners include alt.consulting, FORGE, and Arkansas Baptist College. Borrego Springs Bank in California is an active lending partner that services our area.Kiva.org works through two U.S. Field partners ACCION USA and Opportunity Fund. Features include somewhat higher interest rates, less stringent lending criteria, relatively short repayment terms.Sam’s Club $5,000-$25,000, 10-year term or revolving line of credit. In addition, Sam’s is an SBA microlending partner.
Takes forever to get money Requires a “ton” of paperwork Offers low interest rates Provides grants
Real estate investments Other speculative activities Lending activities Not-for-profit ventures Pyramid sales or distribution businesses Illegal activities Religious indoctrination Activities of a sexual nature Businesses not open to the general public
Businesses must meet SBA size standards to qualify (maximums): ◦ Manufacturing: 500 to 1,500 employees ◦ Wholesaling: 100 employees ◦ Services: $7 to $35.5 million in average annual receipts ◦ Retailing: $7 to $35.5 million average annual receipts ◦ General Construction: $7 to $33.5 million average annual receipts http://www.sba.gov/content/summary-size- standards-industry
Borrowers on probation or parole Borrowers with serious criminal histories Borrowers that are 90 days or more delinquent on other federal government guaranteed loans (FHA, VA, USDA, HUD, student loans, etc.) Borrowers of poor character
Finance floor plan needs (specific program for that) Purchase real estate for investment purposes Disbursements to owners or principals Pay delinquent trust accounts (withholding or sales tax) Refinance delinquent debt within a bank Acquisition of less than 100% of a business
SBA loan proceeds can be used for most business purposes including real estate, buildings, equipment, inventory, working capital, and leasehold improvements
SBA guarantees (insures) the loan, reducing the risk to the lender. Borrower must secure a participating lender. No minimum loan size. Maximum loan size is $5 million.
25 years Real Estate 10 years Equipment 7 years Inventory, Accounts Receivable, Working Capital
Fixed or variable Maximum: Prime + 2.75% for terms of 7yrs or more
2% for loans of $150,000 or less 3% for loans over $150,000 to $700,000 3.5% for loans over $700,000 Guaranteed portion over $1,000,000: $35,000 + 3.75% on guaranteed portion over $1 million
Lender must be PLP Maximum loan $350,000 Lender applies for 50% loan guaranty Lender handles approval and issuance
Loans up to $500,000 by lender approved for SBA Express (PLP) Lender applies for 85% guaranty for loans of $150,000 or less Lender applies for 75% guaranty for loans over $150,000 up to $500,000 Interest rates same as 7(a) loans Lender handles approval and issuance
Long-term, fixed rate financing for acquisition and/or renovation of capital assets including land, buildings and equipment (no working capital) Loan backed by a debenture sold to investors Maximum debenture: ◦ $1.5 million for business that create certain number of jobs or improve the economy of the locality ◦ $2 million for businesses meeting a specific public policy goal ◦ $4 million for manufacturers
Temporary program allowing for refinance of existing real estate debt Loan must have maturity or balloon before Dec. 31, 2012 Borrower must work with SBA approved CDC and third party lender
Draft a business plan Prepare loan proposal (SBTDC assistance) Present loan proposal to lender Lender reviews and forwards applications to SBA Processing Center (Hazard or Citrus Heights) for consideration
SBA is a Repayment Lender, meaning their primary concern is the ability to repay the loan from business operations. ◦ Cash Flow ◦ Working Capital
Historical financial statements and/or projections must demonstrate that cash flow is sufficient to service proposed level of debt. Projections will be compared to industry standards and demographics will be considered.
National certification program to certify socially and economically disadvantaged businesses to help secure government contracts for goods and services. Recognized by state, federal, and local governments and prime contractors SBA Contact: Wanda May 501.324.7379
Draft business plan Complete pre-application loan worksheets Gather requested information Schedule appointment (870.972.3517) ◦ Robert Bahn, Business Consultant ◦ Laura Miller, Lead Business Consultant ◦ Herb Lawrence, Center Director