I was visiting with a potential client this week who had applied for an SBA loan, he was excited about the possibility especially in light of the increase of the SBA guaranty from 75% to 90% and the waiver of the guaranty fee. He then went on to say that putting up only 10% of the loan amount for collateral was the real exciting part of the deal.
At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.
I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.
Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).
The SBA and the bank never intended for the guaranty to replace collateral and neither should you.
Comments or Questions?
Thursday, March 11, 2010
Thursday, March 4, 2010
OK Your banker said it's annual review time. Now what?
A couple of articles ago, I answered the question "why the bank asks for three years financial statements" The answer is they look at business trends that occur based on three year increments. One year is a place in time, two years is a coincidence, but three years is a trend.
If your banker has just asked for your most recent year end financial statement and updated personal financial statement. They may be starting their annual review process for your line of credit or loan.
You might cringe, because last year wasn't too good. However, you give your banker the financials and he/she will be comparing this year with the last two years and looking for trends. Changes in leverage or liquidity due to profits or losses, changes in profitability either gross profit or net profit and changes in activity meaning a slower or faster payment period in receivables or payables. It is likely the bank will ask you, the business owner for an updated personal financial statement to look for similar changes in liquidity or leverage and your cash flow.
Because you live in your business daily, you have probably already reacted to the changes in your business. However, if you haven't given your banker information regularly, he/she has not.
The annual review process gives you the opportunity to discuss with your banker, the changes that have occurred in your business, positive or negative. The flip side of that is it also gives your banker the opportunity to assess any change in the level of risk in loaning money to your company. All banks are required to assign a risk rating to your loan annually. If your company made a $1 million in profit, the risk changed. If you lost $1 million, the risk changed.
I would welcome any constructive comments from bankers and business owners out there on this topic.
If your banker has just asked for your most recent year end financial statement and updated personal financial statement. They may be starting their annual review process for your line of credit or loan.
You might cringe, because last year wasn't too good. However, you give your banker the financials and he/she will be comparing this year with the last two years and looking for trends. Changes in leverage or liquidity due to profits or losses, changes in profitability either gross profit or net profit and changes in activity meaning a slower or faster payment period in receivables or payables. It is likely the bank will ask you, the business owner for an updated personal financial statement to look for similar changes in liquidity or leverage and your cash flow.
Because you live in your business daily, you have probably already reacted to the changes in your business. However, if you haven't given your banker information regularly, he/she has not.
The annual review process gives you the opportunity to discuss with your banker, the changes that have occurred in your business, positive or negative. The flip side of that is it also gives your banker the opportunity to assess any change in the level of risk in loaning money to your company. All banks are required to assign a risk rating to your loan annually. If your company made a $1 million in profit, the risk changed. If you lost $1 million, the risk changed.
I would welcome any constructive comments from bankers and business owners out there on this topic.
Wednesday, March 3, 2010
Did my Business Just get Super Sized?
I talked to an advisor today who called me to get advice on a client's business. (I was flattered) The company has been in business for several years and occupies space in the healthcare industry, specifically pediatric healthcare.
The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?
Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.
Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.
When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.
Your thoughts?
The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?
Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.
Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.
When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.
Your thoughts?
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