Some great information about SBA loans at mlive.com

Mike Chatas, president of United Structured Finance Company, a division of United Bancorp, said the SBA's allowance of longer-term loans helps customers who need assistance reducing their monthly debt load. USFC recently completed a transaction with local gift catalog company Ideation that Chatas said illustrates a common use for SBA loans.

Read the whole article ...

Late last week I was feeling pretty good about myself. I had just figured out a way to make an existing client’s real estate refinance transaction eligible under the SBA 504 loan program. It wasn’t easy, because SBA 504 loans can’t be used for refis. I still was not certain whether the client was completely on board with moving forward with us, so I decided to give him only 80% of what he needed to know:

1. That there was a way to get it done;
2. That the solution would involve some transfer of ownership in his real estate holding company; and
3. The solution would require a tremendous “sell job” to the SBA, but I was confident that we could get it done.

The Problem
Despite a fairly detailed proposal, the client wanted more specific information on how we would make the deal eligible; however, at the same time, he wouldn’t commit to moving forward with us. This makes for a difficult situation for both the bank and client.

From the Client’s Perspective
He wanted the “financial blueprint” before making the commitment to move forward with us (in the form of a good faith deposit).
From the Bank’s Perspective: We don’t want our financing solutions to be commoditized by having clients share them with competing financial institutions. As far as we are concerned, the solution is the bank’s intellectual property until we get a commitment back from the client in the form of a signed proposal and a $6,000 good-faith deposit.

The Solution
The solution is simple but not easy. We will wait patiently until the client is willing to
commit to our proposal (as detailed above) before we move forward with the solution and securing approvals. The waiting game is tough, but well worth it.

The Benefits
The client and Bank benefit in this scenario:

Benefits to Client

Conviction: Clients will attempt to find other banks or SBA lenders to do what we say we can do. By the time they come back to us, they are convinced that we (the bank) are the experts and know what we are talking about.

Concierge Service: I love telling clients that we are the “Zingerman’s” of banking. Once we get a good-faith deposit, we will assign a loan coordinator, analyst and closer to get the project underway. They will be taken care of, and we promise to make the process easy!

Solution: Clients are oftentimes amazed that we were able to help them to get to the closing table when most other banks were still sitting and scratching their heads. Trust me, there is no better feeling than providing and delivering on the right solution each and every time. They appreciate it!


Benefits to Bank

Value: Each and every time we come up with a creative solution, we are perceived as a true provider of financial services and not simply a bank. Good-faith deposits demonstrate that we have a strong interest in protecting our intellectual property. This sets us apart from the competition.

Time Management: I’m always okay with clients wanting to “shop” my proposals around. That’s fine; but if they are going to shop my commitments (where I’ve engaged my analysts, coordinators, loan committee, or board members), it’s going to cost them, because we won’t refund the good-faith deposit. Good-faith deposits ensure that we spend our time on working on real deals with committed clients, and not clients who have commoditized our business.

Client Experience: Many clients are surprised when they see a good-faith deposit agreement attached to our proposals. That being said, we almost always receive accolades from our clients via phone calls, email s, and hand-written letters. Knowing that a client has given us $5,000 to $10,000 prior to receiving a commitment ,makes us work harder, smarter, and conscientiously. It’s simple human nature. The client took a gamble on us; now it’s up to us to perform!

Greetings colleagues!

So far we are three for three with our SBA approvals in delivering on significant payment and structure relief for our in-market clients. There are several characteristics about these three deals that are worth mentioning. The SBA looks even harder at bank refi’s as compared to expansion opportunities. The common threads between all of these deals include:

• Strong personal credit
• Sound management team
• Good prospects for positive revenue and profit growth
• Adequate cash flow coverage to service debt

You might notice that I mentioned nothing about collateral coverage. That’s because right now cash flow is King in the eyes of the SBA. Collateral coverage is by far a secondary (or even tertiary) consideration. In fact, every one of these deals had very high LTV yet we received approval from the SBA anyway.

A company can demonstrate its high potential for positive revenue and profit growth by providing the bank with their most recent financial statements. We are hearing that the SBA has been declining refi’s that cannot demonstrate an ability to service debt (based on the most recent financial statements). Therefore no amount of collateral can make up for an inability to service debt.

We’ve noticed that some of our clients had great 12/31/2008 numbers; but now have poor first quarter results. We will most likely ask these clients to hold off on their SBA submissions until they become more cash flow positive. Unlike conventional deals, we won’t have to demonstrate three years of debt service; but the most current financials are extremely important to the SBA. It helps them to understand that they have, ‘turned the corner’, so to speak.

We encourage you to call Kenny or me with any questions, comments, or concerns.

Have a great week!

One of the most helpful aspects of the SBA 7a loan program is its ability to allow banks to make loans that go well beyond established collateral guidelines. This makes it possible to restructure loans for our clients who might not have any other refinancing options.

While this is a great concept, I need to make it clear that when we (or any bank) lend beyond our established LTV guidelines, the SBA requires us to take additional collateral from any business owner having a 20% or greater stake in the company. The most common types of additional collateral (in order of typical availability) are: personal real estate; investment real estate, and marketable securities (that are not in a qualified plan such as a retirement savings account).

Our focus here will be on personal real estate. The SBA considers personal real estate to be ”available collateral” if there is 15% or more equity in the borrower’s home. If a borrower’s home is levered 90%, a second (or third) real estate mortgage on their residence is not required. However, if the borrower has more than 15% equity in their home and we are under-collateralized (per the bank’s credit guidelines), we are obliged to take a second (or third) mortgage on the borrower’s property.

While most business owners insist on keeping their personal assets separate from their business financing arrangements, it is important to remember:

• There is potential cash flow savings realized by refinancing a conventional loan with SBA financing.
• If you are working on a 10-year deal, you will often have the ability to prepay the loan at any time with no prepayment penalty. When the economy gets better and finances improve, you can take the opportunity to refinance with conventional loan terms.
• If the transaction is amortized for 15 years (or more), you only have to stay in the deal for 3 years without having to face the 5%, 3%, 1% prepayment penalty (during years 1 thru 3).
• You have reassurance that as long as the borrower makes their payments on time and abides by our boilerplate loan agreements, we can’t call the loan.
• Finally, as stakeholders in our communities, we — and many other community banks — are doing everything we can to offer as much payment relief (and additional funds) as possible. In this economy, survival is the name of the game, and our bank is doing everything in its power to keep our local economy running.

In any deal, asking for additional collateral is going to be one of our most difficult objections to overcome. What we are offering is a long-term commitment on behalf of the bank without requiring a long-term obligation from the client to stay in the loan.

We face these objections each and every day, and are committed to making SBA refinancing a win-win solution for everyone. Please feel free to contact Kenny or me with any questions, comments, or concerns.

Have a great week!

Mike Chatas named Michigan Certified Development Partner of 2009!

In 2008, United Bancorp worked with the MCDC on seven different loan projects in eight different counties statewide, totaling $10,992,948 in capital accessed. This important work is expected to impact 229 jobs in Michigan, a positive note in today’s economy.

“We continue to assist businesses statewide, providing them with the financing needed to achieve growth, and further contribute to Michigan’s economy, none of which would be possible without value partnerships with financial institutions such as United Structured Finance Company,” said Jane Sherzer, president of MCDC.

Read the whole Article

OK. I’m really not that clever. I didn’t come up with the acronym; one of my colleagues did the hard work for me. She’s pretty clever, though, isn’t she? So now for the easy part….What is TARP anyway? And what won’t / will it do for you?

1. TARP won’t pay down your mortgage...but it will allow banks to make loans to you and your small business.
2. TARP isn’t free...banks are required to pay every penny of the funds back, plus 5 percent interest. In an environment where Fed Funds are 0% to ¼%, you could argue that TARP funds are not free at all.
3. [MYTH] TARP is used to bail out troubled banks...those banks receiving TARP funds actually have to go through a rigorous application process. Only those banks that meet the Treasury Department’s standards are offered TARP funds. TARP funds allow banks to continue making loans to businesses.

Are you ready now to get the real 4-1-1 on TARP? Click here for more information.

Kenny Leonard helped a heavy-truck manufacturer in the Kalamazoo area diversify into circuit boards, and he says his employer, United Structured Finance Co., can help other manufacturers branch out, as well.

Read the entire article here: http://www.mlive.com/business/west-michigan/index.ssf/2009/02/alternative_lending_exists_for.html

Our newest team member - Kenny Leonard has been featured in the "Young Alumni Spotlight"

"Kenny Leonard graduated from Western Michigan University’s Haworth College of Business in 2003 with his Bachelor’s in Business Administration with a concentration in management. ..." read the whole article

(link is to the archives section of the spotlight)

Are you curious about what the SBA Program will look like after President-elect Obama takes office? Click on the link below to see what Jeremy Quittner from BusinessWeek has to say. Better funding, stronger leadership and product overhauls don’t sound half-bad!

http://www.businessweek.com/magazine/content/08_72/s0812018619554.htm

If you’re a lender, you already know why the switch to LIBOR-based pricing is so critical to the success of SBA 7a lending. If you are a borrower, you might be confused about why your loan proposal went from Prime-based rate to LIBOR. Are you interested in learning more about the Prime vs. LIBOR debate? Click on the link below for more details.

http://www.colemanpublishing.com/public/CPR%20Report,%2012-2008.pdf

TALF…No it doesn’t stand for Takes A Lot of Flack….but it just might help to unclog the secondary market for SBA 7a loans. Click on the link below to learn more:

http://www.colemanpublishing.com/public/CPR%20Report,%2012-2008.pdf

Whether you are a democrat, republican or independent we all can agree that credit is tight for small business lending. As explained in Senator Kerry’s letter to Treasury Secretary Paulson, liquidity could be opened back up with the use of TARP (Troubled Assets Relief Program) funds. Senator Kerry explains that SBA lenders make loans, and then sells those loans into the secondary market. This helps banks to get their cash back and re-lend those funds to new clients. Unfortunately, SBA loans aren’t selling, which means that bank capital isn’t’ being replenished.

It’s disappointing that Senator Kerry isn’t specific about his ask. He fails to quantify for Mr. Paulson how much TARP money is needed to bail out the SBA; Additionally he doesn’t say much about the safety and return on those investments (which is a great selling point).

I do like Senator Kerry’s sense of urgency. He also correctly identifies the source of our Small Business liquidity crunch: the Secondary Market. The liquidity crisis is not about overly-conservative banks being stodgy. It’s about SBA lenders having enough cash to lend out.

Please take a read of the attached article and feel free to post with your comments or questions. And don’t worry, USFC is still lending money and open for business!

Tarp Funds for SBA

There is a great article with Steven Terhaar and Kenny Leonard in the latest MiBiz.

Unlike other lenders, Terhaar said USFC doesn’t shy away from complex deals even though they do require more attention and time to complete. According to Leonard, USFC considers itself a "boutique lender, an investment banker for small business." The company is able to offer businesses some unique financing options traditional lenders can’t offer or won’t even approach because of the volatile market.

You can read the whole thing "East Meets West" at MiBiz.com

It has been about a month since I officially started with United Structured Finance and it has been a great start. I have now moved into my permanent office and have several deals under my belt . With each day that passes I am getting more and more comfortable with the unique niche in the market that we serve. Since I began we have turned around a bankruptcy acquisition in 15 business days; done a business acquisition bridge loan to allow traditional financing to get in place; we have made several proposals for interim construction financing where a lead bank will take us out once construction is complete; we have taken several commitments over for banks whose capital position or underwriting criteria didn't allow them to fund; and we have done several 7a and 504 loans. In fact, through the 3rd quarter of 2008 we are the 9th largest SBA lender in dollars in the state!

The depth of knowledge and resources at our disposal make us a unique, creative, and fast small business lender. I look forward to working with my existing customers and contacts and developing new ones as we continue to grow throughout the region.

Back in May I offered some advice to individuals looking for a source of cash to inject into their new business. I came across this New York Times article that I thought you'd find interesting. The New York Times article, written by David S. Joachim discusses the pros and cons of utilizing 401(k) savings to fund your startup. I hope you enjoy it as much as I did.

Check out the New York Times Piece and leave us a comment about what you think back here.

Western Michgian Business Review features United Structured Finance Company's opening of a new office on the Western side of the state.

USFC hopes to appeal to borrowers that may have been denied credit in today's environment and are willing to shop around, said Kenny Leonard, a commercial lender who'll run the office.
USFC decided to move into the Kalamazoo-area market after connecting with Leonard. USFC was a client of Leonard's when he previously ran the local office of SBA-lender Michigan Certified Development Corp.

Check out the whole article

Ann Arbor company that specializes in coordinating U.S. Small Business Administration lending plans to open a Kalamazoo-area office next month.

check out the rest of the article on United Structured Finance Company's diversification mlive

United Structured Finance Co. (USFC) is proud to announce that it has become Michigan’s Fourth Largest (by dollar volume) Small-Business Lender through the first three quarters (ending 6/30/08) of the SBA fiscal year. Since its inception in May 2007 USFC has been committed to helping small businesses to grow and thrive here in Michigan and Midwest.

According to the August 18, 2008 Crain’s List United Bancorp (USFC’s parent) had six SBA loan approvals totaling $5,017,445 (Source: US Small Business Administration) in Michigan. We are pleased with our results and are glad that we are a part of Michigan’s turnaround: To date we have saved an estimated 100 jobs from leaving the State. We have also funded projects that have added over 50 new jobs in the marketplace.

It wasn’t long ago that small business owners could walk into a bank and obtain a loan for their small business without too much hassle. Many banks providing credit to these owners simply would run a credit bureau report on the business owner and then underwrite the loan much like a consumer loan. Many of these loans went “unsecured”, meaning, that the banks oftentimes had nothing to collect if the loan were to go into default.

Fast forward to 2008: both conventional and SBA lenders are retreating, making it much more difficult for small businesses to secure funding.

The facts are compelling. According to the Wall Street Journal and Biz Journals liquidity is drying up in the marketplace:

• 2008 is experiencing a 15% drop in SBA 7(a) loans, which will result in a billion dollar reduction in government loan program liquidity in the marketplace;
• On April 1, Bank of America discontinued the Business Credit Express program and began steering customers to other small-business products such as credit cards;
• Surveys released in May by the Federal Reserve found that half of US banks are tightening their loan standards on small business loans. Nearly 2/3 have raised rates;
• Many of the top 10 SBA lenders in the country (representing 60% of all SBA 7a loans) are retreating from making SBA loans;

Given the above it’s safe to say that small businesses are going to have trouble finding access to capital.

Is there a glimmer of hope? Perhaps…

Many economists feel that the retreat by larger banks is an opportunity for smaller community banks to enter into the SBA marketplace.

There is also a coinciding reduction of sale prices for businesses and real estate being bought and sold in the marketplace. Businesses being offered for sale these days (which are oftentimes financed by SBA and traditional loans) are being sold at or less than book value. Selling a business at or less than book value means that the purchase price is equal to or less than the value of the assets being acquired. Simply, we aren’t seeing good will, intangibles or non-competes included in purchase agreements any more.

OK, so what does this mean to me???

Do you remember what I said about tighter underwriting standards earlier? Taking premiums (such as intangible and good will) out of purchase agreements means that purchasers are only paying for the value of those (tangible) assets that you can touch, feel and obtain an appraisal for. This makes banks feel more secure in financing your transaction because they aren’t facing a collateral ‘airball’ (a situation where a bank loan is greater than the value of the collateral supporting the loan).

I propose that we begin to use this tough environment to our advantage. If you are looking to purchase a business, put in an offer at or less than the purchase price. Chances are, the seller knows about the tight credit market and he/she will be willing to work with you. Obviously, a purchase price that’s in line with the book value of the business makes it easier to get financing and also reduces your monthly loan payments.

Have a question or would you like to discuss this article? Call or email us any time!

Fifteen years ago I was sitting at the loan committee table as a credit analyst marveling at the “masterpiece” credit approval memorandum that I had created for one of my loan officers. The document was full of all the fancy ratios and analysis that all of my MBA counterparts wanted (or so I had thought).

The commercial loan manager leaned over to me and said, “Hey Mike, I know you like this deal a lot, don’t you? After all, you sure did spend a lot of time analyzing this credit. But tell me, what gets you excited about this one?”

I eagerly began to go through all of my hard work, showing him my cash flow, collateral, and financial ratio analysis. Almost immediately he began to shake his head and smile. “Thanks for the hard work, don’t worry, I like this deal, too. But I like it for a different reason. It’s not because of that, though.” he said as he pointed to my work. I like this deal because of this.” I looked down at what he was pointing at. He was pointing at the applicant’s 800+ credit score!

I quickly learned the following from this mentor: a prospect might have incredible corporate cash flows, ratios, and collateral; but if the project sponsor (business owner) doesn’t have good personal credit, you don’t have a deal.

Why? Think about it for a moment. With small business lending we deal with individual project sponsors and their willingness to pay us back — not CFOs and nameless shareholders. Business owners with better personal credit tend to do a better job paying off their business obligations as compared to those who have worse credit.

One of the biggest myths about small business lending is that personal credit bureaus don’t matter. “What does my personal credit matter?” we oftentimes hear. “My business is profitable! We can cash flow this deal!” Yes…but are you willing to make your loan payments?

In just about any credit environment, poor personal credit is the number one knockout factor that lenders are not willing to look past. Why? Because it says a lot about the person’s character. If a business owner is willing to take care of his or her personal obligations, regardless of what the economy or business is doing, it says a lot about that person.

In fact, good personal credit is the number-one mitigating factor that allows lenders to get comfortable with just about any deal that might have deficiencies in the borrower’s repayment capacity, collateral, capital, or market conditions.

What you can do:

• If you don’t know your personal credit score, get a free credit report by going to any of the following credit reporting websites:
• http://www.transunion.com/
• http://www.experian.com/
• http://www.equifax.com/home/
• Http://annualcreditreport.com
• Look for the following on your report:
• Is your score less than 680? If so, look for derogatory comments. The bureaus will list why your score is less than perfect.
• Look for any public records, liens, and other comments.
• Look for any collection accounts that are tied to your name
• Work diligently to get the derogatory items removed from your report. Even if it’s a medical claim, you are best served to get all outstanding items paid off.
• Lingering disputes from creditors can kill your credit score. Tackle each dispute head-on and resolve all of them.
• 
  

If you need help, try the following site: The Credit Law Group www.creditlawgroup.com

Questions, comments, or concerns? Write us! We’d be happy to help. contact@unitedstructuredfinance.com.

Where to Find Money to Fund Your Company

Raising equity is one of the toughest tasks for any aspiring small business owner. Even with an SBA guaranty, banks still require small business owners to put some “skin” into the game by requiring them to come to the closing table with their own funds. This is commonly called an “equity injection”. The minimum equity injection required for borrowers is 10%. So on a $500,000 transaction, the small business owner has to come up with $50,000.

But who has $50,000 hanging around in their bank account? Even if you do have $50,000 in your money market, savings, or mutual funds account; it’s usually ear-marked for a rainy day, kids’ education, wedding, or some other major life event.

So where do our clients find their money? In no particular order here are a few sources:

• Gifts from Family and Friends — Can you look at them in the eye at the Thanksgiving dinner table if things don’t work out and you aren’t able to pay them back for some reason?
• Private Placement Memorandum — Very expensive and time consuming to put together. Expect to pay at least $10,000 in attorneys and CPA fees. Having shareholders also means you have to live with them as long as they still have ownership in your company.
• Borrow Against Your Retirement Account — Even if it’s your own retirement account, you are still obligated to repay the loan. Although this is a viable option, it increases your personal debt service, so banks will see this as a negative.
• Liquidate your Retirement Account — This is also possible, but you will be subject to IRS penalties and fees (especially if you are taking a distribution before you reach 59-½ years of age).
• Leverage your House — Typically we see this in the form of a home equity loan/second mortgage. This happens very frequently; but it puts your home at risk and increases your personal debt service.

So what’s an Honest Joe supposed to do? Are there any other sources of cash that won’t subject you to penalties, fines, taxes, or embarrassment around the family buffet?

There is an answer! Our friends at DRDA, PC, a CPA and Consulting firm headquartered in Houston, Texas, researched the issue of utilizing qualified retirement plans to fund a business. Douglas Dickey, CPA, developed the Business Owners Retirement Savings Account plan (BORSATM).

What is BORSA? It’s a tool that allows you to fund the purchase of a franchise, business start-up, or business property using your holdings in a 401(a) pension, profit sharing 401(k), 403(b), 475, or IRA rollover. Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.

In its simplest form, the BORSA plan allows your retirement plan to purchase shares in your new company. Your business basically becomes another investment in your retirement plan’s portfolio. It’s not a loan to the account holder (you) and it’s not a distribution either. Your retirement plan basically becomes another investment in your retirement portfolio. This solution saves you thousands of dollars in taxes and interest expense. Best of all, it provides cash to your business from the Plan and is not a loan (and therefore not an obligation) for you or your company.

For a nominal fee, DRDA PC can put a plan together for you so you can put your money to work for you. These plans have been approved by the IRS and Employee Retirement Income Security Act of 1974 (ERISA). Certain terms, conditions, and restrictions to apply, so make sure you call DRDA PC before you act.

For more information, I recommend you look at the following websites and documents:

• www.borsaplan.com
• www.drdacpa.com
• Business Owner’s Retirement Savings Account (BORSA) Overview [PDF]
• Retirement Plan Rollover Checklist [PDF]
• Working with Qualified Plan Rollovers and SBA Regulations: The Opportunity and Issues [PDF]

You can also contact Suzy Granger. She’s a great source of information on how to get started:

Suzy Granger
Sales & Marketing
DRDA, PC
suzy@drdacpa.com

Questions? Call us at (734) 214-2726. We’re happy to help!

- Mike