The economy might be on life support, but news about the death of business loans isn't telling the whole story. Some institutions, in fact, are doubling down when it comes to extending entrepreneurial credit lines. Some are even tapping some of that controversial Troubled Asset Relief Program money to help out clients in need of a little liquidity boost.
A safer bet than visiting a major bank, hat-in-hand, is to query your regional lending institution. Many have avoided the subprime mess and are sitting on liquid--lendable cash. Some have even taken a sliver of that federal TARP rescue money specifically to do what Congress and the U.S. Treasury intended: Give entrepreneurs and the American economy an injection of greenbacks in the form of business loans.
"We're entering an era when specialized institutions and community banks are the go-to source for small business," says Chris Hurn, CEO of Mercantile Commercial Capital in Altamonte Springs, Fla.
Mercantile is not a bank. Rather it's a financial services corporation that focuses on administrating and supplementing the SBA's 504 loan program. With the help of the SBA, Mercantile can offer entrepreneurs a loan on 90 percent of the value of a commercial property, with terms as long as 25 years and interest rates in the 5 percent range.
"Office buildings and industrial warehouses, day-care facilities, restaurants and hotels" are game, Hurn says. "We don't do many investor projects with speculation. We don't do multi-family residential. We don't do gigantic development projects. Our niche is generally half a million to $7 million projects."
The institution's pitch, Hurn says, is to wean business owners off money-losing leases and rents. "I finance people who go from leasing a facility to owning," he says. "It's a wealth-building strategy."
At a time when troubled big banks are trimming their small-business loan departments to benefit their own troubled balance sheets, Hurn is concerned that the federal government isn't cultivating economic growth where it could count the most--at the entrepreneurial level.
"There have been about 300 lenders get out of the SBA loan business"--many that have taken TARP money, Hurn says. "It compounds the problem when we know that small businesses lead us out of recession. They're making the situation worse than it needs to be. Rather than strengthen the success of sectors like small business, we've got a government philosophy that says we need to prop up failure."
So don't expect Mercantile to prop up just any mogul-in-training. Most willing lenders are survivors of this mess specifically because they've been wary about who gets their legal tender. You can bet your bottom dollar that they're not about to weaken their lending criteria in this climate. But if you have good credit, if your business shows positive cash flow and if you have collateral such as property, you can probably get a loan.
Hurn says he asks one question when evaluating a potential customer: "Is there enough capital spun off by a company to cover the debt on the loan?"
"It's not that complicated," he says. "We look at tax returns, we take rent, profits, we look at non-cash expenses; add all that, and that gives an idea of the capital spun off on the business. We compare that to the annualized debt on the loan. Say the business spins $1.20 for every dollar of debt payments. If it's that or higher, chances are we'll approve the loan. We'll also look at credit scores and make sure you're a good boy or girl."
While major banks focus on balance sheets, the leaders of some small, regional and midsize institutions want to make it clear that entrepreneurial lending is the lifeblood of American business. They want to keep it flowing.
Monday, November 30, 2009
Monday, November 23, 2009
IU Panel: Years Before Economy is Restored
Indiana University economists believe it will take three to five years to restore the economy and reach full employment. Those predictions are among the key points in the 2010 economic forecast from the IU Kelley School of Business Outlook Panel. The researchers believe households are likely to continue being cautious with spending and small businesses will still be dealing with tight credit in 2010. The forecast is also calling for the national unemployment rate to peak above 10 percent, while payrolls add nearly 2 million jobs by the end of 2010.
Thursday, November 19, 2009
What's Your Business REALLY Worth?
A recent article in INC magazine titled ”Street Smarts,” by Norm Brodsky (his column is worth the price of the magazine)addressed the subject of the title above. However, in the very first paragraph of the article, Mr. Brodsky stated,
“Unfortunately, most of them [business owners] have grossly inflated notions of what their companies are worth.” Mr. Brodsky is not one to mince words. Some of his examples were: “One company had lost money on sales of about $60 million, and yet its owners thought it was worth between $50 million and $100 million … Another company had a net profit of less than $335,000 on sales of about $6.5 million – and still the owners somehow came to believe it was worth between $100 million and $200 million.”
Mr. Brodsky feels that the reason for this is “… our egos can get us in trouble when it comes to putting a dollar value on something we’ve created. We generally take the highest valuation we’ve heard for a company somewhat like ours – and multiply it.”
He goes on to point out that prospective acquirers are more concerned about profits, especially Free Cash Flow, than sales. Too many company owners use some rule of thumb based on sales. He also points out that company owners tend to use a comparison of a similar business across town that sold for some multiple of sales and then apply it to their company. There are so many variables of how sales (and subsequently earnings) are generated that no two companies are ever alike. Business owners tend to forget the negatives of their business; e.g., sales from just a few customers, lack of contracts with customers and suppliers, lack of product diversity, out-dated equipment, etc. Also, as Mr. Brodsky points out,
“Before you try to sell, make sure you know what buyers want.”
Turning to another expert voice, here is some good advice from Allen Hahn, Senior Vice President of Valuation Research Corporation: “The level of EBIT or EBITDA used for negotiating a purchase price is the ‘normalized’ level that will be available to the new owners from the assets acquired. Often times this requires elimination of unusual, inappropriate or non-recurring expenses. Buyers will typically consider a company’s last twelve months of financial performance. However, projected results may be more relevant if a structural change has recently occurred in the business (loss of a key customer, acquisition, etc.) that renders historical results less meaningful.”
What does all of this mean? It means that owners should disregard rules of thumb based on what the company across town sold for; it means that owners should not use a multiple based on what the business did four or five years ago, or what they think the business will do next year.
Business owners should first put their egos aside, then look long and hard at the company’s cash flow, realistically assess the negatives (and positives) of their business and “make sure you know what buyers want.”
“Unfortunately, most of them [business owners] have grossly inflated notions of what their companies are worth.” Mr. Brodsky is not one to mince words. Some of his examples were: “One company had lost money on sales of about $60 million, and yet its owners thought it was worth between $50 million and $100 million … Another company had a net profit of less than $335,000 on sales of about $6.5 million – and still the owners somehow came to believe it was worth between $100 million and $200 million.”
Mr. Brodsky feels that the reason for this is “… our egos can get us in trouble when it comes to putting a dollar value on something we’ve created. We generally take the highest valuation we’ve heard for a company somewhat like ours – and multiply it.”
He goes on to point out that prospective acquirers are more concerned about profits, especially Free Cash Flow, than sales. Too many company owners use some rule of thumb based on sales. He also points out that company owners tend to use a comparison of a similar business across town that sold for some multiple of sales and then apply it to their company. There are so many variables of how sales (and subsequently earnings) are generated that no two companies are ever alike. Business owners tend to forget the negatives of their business; e.g., sales from just a few customers, lack of contracts with customers and suppliers, lack of product diversity, out-dated equipment, etc. Also, as Mr. Brodsky points out,
“Before you try to sell, make sure you know what buyers want.”
Turning to another expert voice, here is some good advice from Allen Hahn, Senior Vice President of Valuation Research Corporation: “The level of EBIT or EBITDA used for negotiating a purchase price is the ‘normalized’ level that will be available to the new owners from the assets acquired. Often times this requires elimination of unusual, inappropriate or non-recurring expenses. Buyers will typically consider a company’s last twelve months of financial performance. However, projected results may be more relevant if a structural change has recently occurred in the business (loss of a key customer, acquisition, etc.) that renders historical results less meaningful.”
What does all of this mean? It means that owners should disregard rules of thumb based on what the company across town sold for; it means that owners should not use a multiple based on what the business did four or five years ago, or what they think the business will do next year.
Business owners should first put their egos aside, then look long and hard at the company’s cash flow, realistically assess the negatives (and positives) of their business and “make sure you know what buyers want.”
Monday, November 16, 2009
The Three Ways to Negotiate
Basically, there are three major negotiation methods.
1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”
2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.
3. This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm. The buyer may want to move the business. There is an old adage that advises, “Never negotiate your own deal!”
The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good advocates for their side and they understand the company and the seller. How do the parties get together in a win-win negotiation? The first step is for both sides to work with their advisors to settle on the price and deal structure positions. Both sides should be able to present their side of these issues. Which is more important – price or terms, or non-monetary items? Information is vital to a buyer. Buyers should keep in mind that the seller knows more about the business than he or she does. Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal. Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.
1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”
2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.
3. This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm. The buyer may want to move the business. There is an old adage that advises, “Never negotiate your own deal!”
The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good advocates for their side and they understand the company and the seller. How do the parties get together in a win-win negotiation? The first step is for both sides to work with their advisors to settle on the price and deal structure positions. Both sides should be able to present their side of these issues. Which is more important – price or terms, or non-monetary items? Information is vital to a buyer. Buyers should keep in mind that the seller knows more about the business than he or she does. Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal. Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.
Thursday, November 12, 2009
Make the Most of Your Advertising Dollars
These days, most U.S. markets are buyer's markets, meaning that consumers have great leverage to get a lot of value for their dollars.
Right now, this is especially true in the advertising world. Which is good news if you're just starting your company or revamping your existing marketing strategies.
In fact, this is in stark contrast to a few years ago, when advertisers in some markets were being bumped in favor of higher-paying advertisers for the same TV or radio spot, or were stuck on waiting lists for outdoor billboards in high-traffic areas.
We're also shifting from an economic winter to an economic spring. This means you can pump your ad budget up with loads of added value that could result in increased reach and frequency--both of which are key to getting more business and profits for your company.
So to make sure your ad budget will be a wise investment as opposed to an unnecessary expense, here are a few things to remember:
1. Leads are more important than branding. No matter what the media or ad agency experts tell you, generating leads for your business is more important than building a brand at this point, especially in startup mode.
The most critical component of your campaign will be drilling down to find media that deliver your message to people actively looking to buy your product or service, as well as those looking for a new, lower-cost or better service provider. To truly build your brand, you need to be that provider.
2. Negotiate, negotiate, negotiate. Since it is a buyer's market right now, you're in a good position to push for as much value as possible. In TV, this may mean additional mentions into or out of commercial breaks. For radio, it may mean more frequency or co-sponsorship of a local promotion or event. And for print, it may mean a bigger ad or additional placements, or even space for an advertorial.
3. Remember PR. These days it's great to be contrarian: optimistic because everyone is pessimistic, or opening and running a business when everyone else is getting laid off or is fearful of starting his or her own company.
4. E-mail is a necessity, but don't forget direct mail. E-mail marketing has taken off in the past few years, but there are limitations. Double opt-ins--where people have to confirm twice that they want to receive your emails--are the norm these days. Even so, click-through rates average less than half of 1 percent.
Remember, marketing is all about numbers. Be sure to test, measure and track your ads to determine how many leads they generate.
It may be a buyer's market, but as always, it's important to know what you are buying and to make sure you are getting ROI and strong leads from your advertising dollars.
Right now, this is especially true in the advertising world. Which is good news if you're just starting your company or revamping your existing marketing strategies.
In fact, this is in stark contrast to a few years ago, when advertisers in some markets were being bumped in favor of higher-paying advertisers for the same TV or radio spot, or were stuck on waiting lists for outdoor billboards in high-traffic areas.
We're also shifting from an economic winter to an economic spring. This means you can pump your ad budget up with loads of added value that could result in increased reach and frequency--both of which are key to getting more business and profits for your company.
So to make sure your ad budget will be a wise investment as opposed to an unnecessary expense, here are a few things to remember:
1. Leads are more important than branding. No matter what the media or ad agency experts tell you, generating leads for your business is more important than building a brand at this point, especially in startup mode.
The most critical component of your campaign will be drilling down to find media that deliver your message to people actively looking to buy your product or service, as well as those looking for a new, lower-cost or better service provider. To truly build your brand, you need to be that provider.
2. Negotiate, negotiate, negotiate. Since it is a buyer's market right now, you're in a good position to push for as much value as possible. In TV, this may mean additional mentions into or out of commercial breaks. For radio, it may mean more frequency or co-sponsorship of a local promotion or event. And for print, it may mean a bigger ad or additional placements, or even space for an advertorial.
3. Remember PR. These days it's great to be contrarian: optimistic because everyone is pessimistic, or opening and running a business when everyone else is getting laid off or is fearful of starting his or her own company.
4. E-mail is a necessity, but don't forget direct mail. E-mail marketing has taken off in the past few years, but there are limitations. Double opt-ins--where people have to confirm twice that they want to receive your emails--are the norm these days. Even so, click-through rates average less than half of 1 percent.
Remember, marketing is all about numbers. Be sure to test, measure and track your ads to determine how many leads they generate.
It may be a buyer's market, but as always, it's important to know what you are buying and to make sure you are getting ROI and strong leads from your advertising dollars.
Monday, November 9, 2009
My Planning's Off. What Now?
I've said many times that what really matters in business planning is the planning, not just the plan. This time around I'd like to go into more detail about that moment of truth when you're working your plan, time has passed, but the plan is out of synch with reality. What do you do then?
Just asking this question means you're already on the right track. You can't get to this point without having done several things right:
• You have a business plan. I'm hoping that your plan lives on your computer, not just on paper. It's all right to have a printout, but it's far more important that you still have it on the computer where you can manage it easily.
• You've reviewed your plan. This is another good sign. It means your business plan had specifics in it. You had some numbers projected in your plan, probably forecasts of sales, expenses and costs. I hope you also included a milestones table, listing dates, deadlines and responsibilities for the tasks you included as part of the plan.
• You can compare your plan to your progress. You're getting actual business numbers back from your accounting system and comparing them to those in your plan.
If the three points above don't apply to you, you're missing out on the benefits of planning for managing your business. An idea-only plan--without specifics--can be useful but not nearly as useful as a planning-to-manage-your-company plan. If these points do apply to you, congratulations; but you still have the problem of what you do with the difference between plan and actual.
Step One: Review the Assumptions
I hope your plan includes a list of assumptions. This is a normal part of any modern business plan. Here's where you put the assumptions to use. Examine each assumption and figure out which ones, if any, have changed.
Step Two: Comparison of Plan vs. Actual
In the finance world we call it variance: the difference between plan and actual. Variance is positive when there are more sales or profits, or reduced costs or expenses. It's negative when sales and profits are lower, or expenses and costs have increased.
But variance isn't the end; it's the beginning of the analysis. It's not just numbers; it's the people and the activities involved. For example, expenses lower than planned are always a positive variance, but what if expenses were lower because the marketing programs weren't implemented? That would mean the variance is really the result of a failure to work the plan.
Regardless of whether the variance is positive or negative, the question is always: What management is required? If your plan included a good sense of who's in charge of what, then you know whom to talk to when things don't go according to plan. What went wrong? What should we do better from now on? What has to change? And remember: Changed assumptions are the best reason to change a plan.
Step Three: Revise the Plan Accordingly
It's about the planning process. Avoid falling into blame mode. Give credit easily. Revise wherever it will make the continuing management more likely to succeed. It's not a guessing game, it's like steering: You correct constantly to stay on course and keep heading for your destination.
A business is a web of interrelated factors. Sales and marketing programs affect cash flow, employee management affects morale, and morale affects productivity. I imagine a loose web of things that swing together. When sales go one way, we need to track the other things that need to move along with sales. Planning isn't about just guessing; it's about being able to follow the links in the web as things change.
Ultimately you develop strategic choice based on your judgment. Yes, your plan will be wrong because all plans are wrong. But having a plan will help you figure out what you misjudged. And then you can decide whether your best course is to give things more time or to let them go. And always look first to see what assumptions have changed.
Just asking this question means you're already on the right track. You can't get to this point without having done several things right:
• You have a business plan. I'm hoping that your plan lives on your computer, not just on paper. It's all right to have a printout, but it's far more important that you still have it on the computer where you can manage it easily.
• You've reviewed your plan. This is another good sign. It means your business plan had specifics in it. You had some numbers projected in your plan, probably forecasts of sales, expenses and costs. I hope you also included a milestones table, listing dates, deadlines and responsibilities for the tasks you included as part of the plan.
• You can compare your plan to your progress. You're getting actual business numbers back from your accounting system and comparing them to those in your plan.
If the three points above don't apply to you, you're missing out on the benefits of planning for managing your business. An idea-only plan--without specifics--can be useful but not nearly as useful as a planning-to-manage-your-company plan. If these points do apply to you, congratulations; but you still have the problem of what you do with the difference between plan and actual.
Step One: Review the Assumptions
I hope your plan includes a list of assumptions. This is a normal part of any modern business plan. Here's where you put the assumptions to use. Examine each assumption and figure out which ones, if any, have changed.
Step Two: Comparison of Plan vs. Actual
In the finance world we call it variance: the difference between plan and actual. Variance is positive when there are more sales or profits, or reduced costs or expenses. It's negative when sales and profits are lower, or expenses and costs have increased.
But variance isn't the end; it's the beginning of the analysis. It's not just numbers; it's the people and the activities involved. For example, expenses lower than planned are always a positive variance, but what if expenses were lower because the marketing programs weren't implemented? That would mean the variance is really the result of a failure to work the plan.
Regardless of whether the variance is positive or negative, the question is always: What management is required? If your plan included a good sense of who's in charge of what, then you know whom to talk to when things don't go according to plan. What went wrong? What should we do better from now on? What has to change? And remember: Changed assumptions are the best reason to change a plan.
Step Three: Revise the Plan Accordingly
It's about the planning process. Avoid falling into blame mode. Give credit easily. Revise wherever it will make the continuing management more likely to succeed. It's not a guessing game, it's like steering: You correct constantly to stay on course and keep heading for your destination.
A business is a web of interrelated factors. Sales and marketing programs affect cash flow, employee management affects morale, and morale affects productivity. I imagine a loose web of things that swing together. When sales go one way, we need to track the other things that need to move along with sales. Planning isn't about just guessing; it's about being able to follow the links in the web as things change.
Ultimately you develop strategic choice based on your judgment. Yes, your plan will be wrong because all plans are wrong. But having a plan will help you figure out what you misjudged. And then you can decide whether your best course is to give things more time or to let them go. And always look first to see what assumptions have changed.
Friday, November 6, 2009
Current Inventory
Niche Marketing—Child Safety Service/Product: This company provides a popular children’s safety service/product. Unique business revenue structure and marketing method has proven extremely successful with a database in excess of 1,200 clients. The company is home-based and while it currently operates mostly in the Indianapolis and Central Indiana region, the owner has been approached by national companies. It can be expanded and duplicated. Rev: $211,978 CF: $144,106 Ask: $390k
Midas Franchise: One of the most recognized names in auto repair and maintenance. This store is well established with a great location on a major thoroughfare and exceptionally clean. Rev: $700k CF: $106k Ask: $229k, RE is available
Auto Repair Facility: This 5 bay auto service shop has been established for close to 50 years. They are located in a large growing community on a major thoroughfare in the Indianapolis area. This shop is a full service repair facility that includes all assets. They are well known for their exceptional service and dedication to the community. The Seller will introduce the buyer to major fleet accounts and to other clients as needed. Rev: $1.1M CF: $272k Ask: $880k, RE is available
Midas Franchise: One of the most recognized names in auto repair and maintenance. This store is well established with a great location on a major thoroughfare and exceptionally clean. Rev: $700k CF: $106k Ask: $229k, RE is available
Auto Repair Facility: This 5 bay auto service shop has been established for close to 50 years. They are located in a large growing community on a major thoroughfare in the Indianapolis area. This shop is a full service repair facility that includes all assets. They are well known for their exceptional service and dedication to the community. The Seller will introduce the buyer to major fleet accounts and to other clients as needed. Rev: $1.1M CF: $272k Ask: $880k, RE is available
Thursday, November 5, 2009
Local lenders support small-biz loan initiative
Small-business lenders in Indiana are supporting a proposal announced by President Obama that would increase the size of government-backed loans.
Under the plan announced Wednesday, loan amounts made through the U.S. Small Business Administration’s flagship 504 and 7(a) programs would increase to $5 million. Current maximums are $4 million for 504 loans and $2 million for 7(a) lending.
The initiative would be funded by the Troubled Asset Relief Program and would need to be approved by federal lawmakers.
“I think that increasing the caps on SBA lending is absolutely the way to go,” said Joe DeHaven, president and CEO of the Indiana Bankers Association. “It’s the correct way to spur small-business loans.”
The credit crunch has severely slowed lending activity, although most bankers contend that capital remains available to clients with a solid credit history. Still, the number of SBA-backed loans in Indiana dropped nearly 30 percent in fiscal 2009 from the previous year.
For the fiscal year ended Sept. 30, 1,035 loans totaling $266.8 million were made through the two SBA programs. That compares with 1,460 loans totaling $307 million in the previous fiscal year.
“We’re still cautious, but I think we are lending to credit-worthy borrowers,” said Scott Burns, vice president of SBA lending at the Indianapolis office of Pittsburgh-based PNC Financial Services Inc. “And you’ll see [lending] starting to step up over the next year.”
Burns thinks Indiana’s large manufacturing base could benefit most from the proposed increase, because a mid-size factory can’t purchase a lot of equipment with a $2 million loan.
The Washington, D.C.-based Independent Community Bankers of America issued a statement supporting the proposal, as did the National Association of Development Companies.
NADCO is the trade association for the nation’s certified development companies that make 504 loans. Jean Wojtowicz, director of the Indiana Statewide Certified Development Corp. in Indianapolis, is chairwoman of Virginia-based NADCO.
“Raising the ceiling on SBA 504 loans to $5 million is a big step toward bringing more job-creation money to Main Street,” Wojtowicz said.
504 loans typically are used to purchase land, buildings and equipment.
The SBA currently guarantees as much as 90 percent of loans it backs through approved financial institutions. The guarantee provides an incentive for banks to lend to small businesses that are more at risk of defaulting.
Under the plan announced Wednesday, loan amounts made through the U.S. Small Business Administration’s flagship 504 and 7(a) programs would increase to $5 million. Current maximums are $4 million for 504 loans and $2 million for 7(a) lending.
The initiative would be funded by the Troubled Asset Relief Program and would need to be approved by federal lawmakers.
“I think that increasing the caps on SBA lending is absolutely the way to go,” said Joe DeHaven, president and CEO of the Indiana Bankers Association. “It’s the correct way to spur small-business loans.”
The credit crunch has severely slowed lending activity, although most bankers contend that capital remains available to clients with a solid credit history. Still, the number of SBA-backed loans in Indiana dropped nearly 30 percent in fiscal 2009 from the previous year.
For the fiscal year ended Sept. 30, 1,035 loans totaling $266.8 million were made through the two SBA programs. That compares with 1,460 loans totaling $307 million in the previous fiscal year.
“We’re still cautious, but I think we are lending to credit-worthy borrowers,” said Scott Burns, vice president of SBA lending at the Indianapolis office of Pittsburgh-based PNC Financial Services Inc. “And you’ll see [lending] starting to step up over the next year.”
Burns thinks Indiana’s large manufacturing base could benefit most from the proposed increase, because a mid-size factory can’t purchase a lot of equipment with a $2 million loan.
The Washington, D.C.-based Independent Community Bankers of America issued a statement supporting the proposal, as did the National Association of Development Companies.
NADCO is the trade association for the nation’s certified development companies that make 504 loans. Jean Wojtowicz, director of the Indiana Statewide Certified Development Corp. in Indianapolis, is chairwoman of Virginia-based NADCO.
“Raising the ceiling on SBA 504 loans to $5 million is a big step toward bringing more job-creation money to Main Street,” Wojtowicz said.
504 loans typically are used to purchase land, buildings and equipment.
The SBA currently guarantees as much as 90 percent of loans it backs through approved financial institutions. The guarantee provides an incentive for banks to lend to small businesses that are more at risk of defaulting.
Monday, November 2, 2009
SBA Announces Maximum Fixed Rate
Historically, SBA has been permitted to publish a maximum allowable fixed rate for its guaranteed loans in the Federal Register, see 13 CFR 120.213(a). However, up to this point, the Agency has not done so. Lenders have been reluctant to make fixed rate loans under the 7a program because they have been restricted to a maximum rate equal to the Prime Rate (or LIBOR Base Rate) plus the maximum rate spreads identified in 13 CFR 120.214 (d) and (e) and 13 CFR 120.215. Currently, this results in a maximum rate of approximately 6.00%, which is not a rate most lenders are willing (or able) to lock in at for a long-term loan.
Yesterday, the SBA published in the Federal Register, its guidelines for calculating fixed rates for long term 7a loans, effective October 1, 2009.
The new guidance establishes a calculation for a "Fixed Base Rate" which is equal to the LIBOR Base Rate plus the average of the 5-year and 10-year LIBOR SWAP Rate (each as established on the first calendar day of the month). The maximum allowable fixed rate for 7(a) loans (excluding SBA Express and Export Express) will be calculated using the Fixed Base Rate plus the same spreads available on variable rate 7a loans, typically between 2.25% and 2.75%. See 13 CFR 120.214 (d) and (e) and 13 CFR 120.215.
Accordingly, the maximum fixed rate for loans with a maturity greater than seven years would be 9.17% using the September, 2009 LIBOR Base Rate (3.26), plus the average 5 and 10 year LIBOR Swap Rates (3.16), plus the maximum spread (2.75).
"This is good news for lenders and borrowers" says Bob Stephan of Coastal Securities, "Borrowers want to take advantage of this low interest rate environment to lock in a fixed rate, but lenders need a rate higher than what was previously allowed, in order to make offering a fixed rate feasible." Additionally, Stephan says that lenders can sell the guaranteed portion of their fixed-rate loans for a premium in the 4 point range and can still retain a 1% servicing fee, thereby reducing their exposure to these fixed rate loans.
Yesterday, the SBA published in the Federal Register, its guidelines for calculating fixed rates for long term 7a loans, effective October 1, 2009.
The new guidance establishes a calculation for a "Fixed Base Rate" which is equal to the LIBOR Base Rate plus the average of the 5-year and 10-year LIBOR SWAP Rate (each as established on the first calendar day of the month). The maximum allowable fixed rate for 7(a) loans (excluding SBA Express and Export Express) will be calculated using the Fixed Base Rate plus the same spreads available on variable rate 7a loans, typically between 2.25% and 2.75%. See 13 CFR 120.214 (d) and (e) and 13 CFR 120.215.
Accordingly, the maximum fixed rate for loans with a maturity greater than seven years would be 9.17% using the September, 2009 LIBOR Base Rate (3.26), plus the average 5 and 10 year LIBOR Swap Rates (3.16), plus the maximum spread (2.75).
"This is good news for lenders and borrowers" says Bob Stephan of Coastal Securities, "Borrowers want to take advantage of this low interest rate environment to lock in a fixed rate, but lenders need a rate higher than what was previously allowed, in order to make offering a fixed rate feasible." Additionally, Stephan says that lenders can sell the guaranteed portion of their fixed-rate loans for a premium in the 4 point range and can still retain a 1% servicing fee, thereby reducing their exposure to these fixed rate loans.
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