Getting an SBA Loan to Buy, Build or Grow Your Business

 In Buying A Business

Everything You Need to Know About SBA Loans:

An Interview with a Seasoned SBA Lending Loan Officer


Ed Alexander:

Alright Joanne, the first question is:  does the Small Business Administration (SBA) itself make loans?


Joanne Jolin:

The SBA directly does not make loans to businesses. The lenders use the SBA programs to lend. The way they are able to do that is with the government guarantee.


Ed Alexander:

So what exactly does the government guarantee?


Joanne Jolin:

It depends on the size of the loan.  They guarantee up to 85% for loans up to $150,000.  For larger loans (the 7a program) the guarantee is 75%.


Ed Alexander:

If I’ve identified a business, and want to buy it with SBA guaranteed financing, what information do I have to put together to get that financing?


Joanne Jolin:

The information would be the same as any borrower would have to submit to a commercial bank. When you’re buying a business, the buyer has to put together a personal financial statement to see how much cash they have to buy the business. We’re also going to ask for their most recent three years tax returns and three months of bank statements showing the cash that they have available to put down as an equity injection into the business.  Each bank has its own application that must be completed.   That’s the basic information that we need to get started and determine if they can qualify.


Ed Alexander:

I’ve seen listings that say that a business is SBA pre-qualified. What does that mean exactly?


Joanne Jolin:

They shouldn’t even be saying SBA pre-qualified. SBA does not like that. It should say lender pre-qualified. That means a lender looked at it and they recognize they can finance that business for a qualified buyer.   Most SBA lenders like to do that.  Knowing that the business is healthy enough to be financed really helps the broker and the seller find a qualified buyer.


Ed Alexander:  

And so when you examine a business for that pre-qualification process, what are you looking at?


Joanne Jolin: 

I like to get the business listing from the broker, because it breaks out all of the assets that are being sold.  That helps determine the length of the loan.  If there’s real estate involved we can go up to 25 years. If there’s no real estate, we’re looking at 10 years.

We also look at three years of tax returns from the business, as well as interim year to date statements. This way we can run the numbers based on the asking price to make sure it qualifies for that amount and the debt service coverage ratios are adequate.


Joanne Jolin:

Debt service coverage ratio is a marker that we look at to see how much cash is available to cover the loan used to buy the business.  The business being sold usually has little or no debt. So, obviously it’s able to survive. But when a broker comes up with an asking price we need to make sure that it can carry this new debt and still provide a good income for the buyer.  And, because we’re in a rising rate market, we also do a stress test.  If interest rate goes up by 2%  we want to be sure the business can still carry the debt? That’s good, prudent lending to make sure it can carry that.


Ed Alexander:      

In that answer you indicated that the interest rate can change over time.  Tell me a little bit about that.


Joanne Jolin: 

For the typical 7a loan, you’re going to see a quarterly adjustment based on any change in the prime rate.  So when a lender makes an offer of, a financing scenario to a buyer or borrower, they will say prime plus a number of basis points. The maximum that they can charge is 2.75 over prime. That’s still a really good rate.

Most of the SBA 7a loans are variable rate. There are occasions when we can do a 3 or 5 year rate adjustment. That’s usually for loans where there’s real estate involved because those are usually larger transactions and you’ve got good collateral so the lender is more comfortable.


Ed Alexander: 

You mentioned providing tax returns from the business.  Business owners have the ability to exercise discretion over some of the expenses of the business.  The example I always give is if the business needs a pickup truck, you can buy a regular pickup truck or you could buy a Ford Raptor pickup truck. The difference isn’t material to the business, but the owner gets the benefit of driving the Raptor.  Is the lender going to make that kind of distinction, or is it just looking straight at those tax returns?


Joanne Jolin:

We look at the typical add backs first, which are interest expense, depreciation, and amortization and a seller salary.  Then we will look at what the new buyer needs for a salary.  We have a list that we will consider adding back if it can be documented and shown that it’s on the tax return. For example, sometimes family members are drawing a salary and they don’t even work there.  So as long as they can show us the W2, we can add that salary back into net income.


Joanne Jolin:     

But it’s got to be easily documented. Things that we won’t typically add back are cell phones and health insurance, because you know what, the new buyers are going to have those things, too.  Now, I have seen where maybe the owner has her personal car on there and it’s not really needed for the business.  If they can show proof it’s coming out of the business, we can add that back into net income.


Ed Alexander:

What happens with cash taken out of the till?


Joanne Jolin: 

So you’re talking about like distributions or just cash out?


Ed Alexander:  

Just like, hey I didn’t report the income.


Joanne Jolin: 

I have a saying. You can’t get paid twice. If you’re taking it out of the till, you know, we can’t add it back, so you’ve hurt your ability to sell the business based on a higher profit.


Ed Alexander:  

One of the things you said you need is a personal financial statement.   Is there a form for that?


Joanne Jolin:

There is an SBA form, called SBA form 413. That’s the personal financial statement. It’s very detailed and it helps us really see the assets the borrower has, any contingent liabilities, and it covers a lot of things that we need. We prefer borrowers to use that. It’s not mandatory, but I highly encourage them to use it.  And one of the things I’ll tell you is that it’s very rare to get a personal financial statement that’s filled out correctly. And so I tell them to fill it out to the best of their ability and then I go over it with them and we correct anything. Like life insurance, you know, it says cash value, they’ll put face value there and things like that.


Ed Alexander: 

One of the other things you said was needed was three months bank statements to determine the buyer’s cash. Is it possible for a lender seeking an SBA guarantee lend 100% of the purchase price of the business?


Joanne Jolin: 

The short answer to that is no.  But on occasion it can happen. It depends on the situation. On a partner buy out, I have done that. I have done 100% financing and the reason being, they already have equity in the business. Typically, from an arms-length transaction, no you wouldn’t want to do that.


Ed Alexander:  

So a buyer coming in, buying the assets of an existing business, who’s never been a partner to that business, is not going to get 100% financing?


Joanne Jolin: 

No, it’s not going to happen.  The reason is that you want the buyer to have something at risk.  That’s really the whole purpose behind it. Somebody’s going to work harder if their money is at risk. I think the minimal amount that I have done is when somebody’s been working in the company.  An employee buying the business.  I have done as little as 5% down in that situation.


Ed Alexander: 

What if the cash from the buyer comes from a home equity loan?


Joanne Jolin: 

That’s a question that comes up quite frequently.  If the home equity loan is used for your equity injection, you have to have outside income, outside of the business, that can make the monthly payments.  Those payments cannot come from the business being purchased.


Ed Alexander:  

So if a spouse is working and that salary can cover the mortgage payment, then that’s acceptable and considered equity in the business?


Joanne Jolin: 

Yes. It is.


Ed Alexander:  

Is a seller note, that is in addition to that 5%, down payment from the buyer, required for that type of transaction?


Joanne Jolin:   

Lenders may require a seller note depending on how much goodwill there is in the business.  Goodwill in amounts of $500,000 or more require 25% buyer equity for the loan.  But, that can be achieved with the buyer’s equity or a seller note.  Most lenders like to see at least 10% coming from the buyer.  That leaves 15% that can come from a seller note.  That note does have to be on full standby, and subordinated to the banks loan.


Ed Alexander: 

Let’s talk about what those terms mean.  What does full standby mean?


Joanne Jolin: 

Full standby means absolutely no payments of interest or principle until the loan is paid in full.


Ed Alexander: 

Okay, what does subordinated mean?


Joanne Jolin: 

That means the seller’s note is behind the bank loan and the SBA guarantee.


Ed Alexander: 

So if the seller takes a security interest- a lien on the assets of the business – the buyer goes into default, the lender and the SBA get their money out first. If there’s anything left over, it goes to the seller.


Joanne Jolin:

That’s correct.


Ed Alexander:

Is the seller able to step in and take over the SBA loan if the buyer defaults?


Joanne Jolin:

It would have to be approved by the lender and the SBA. So if things did not go well and that buyer is not able to perform, that’s something that the bank would take a look at and could look at maybe allowing that seller to come back in and assume that loan to repay it.


Ed Alexander:

I’ve heard people saying:  “Oh my gosh. It’s going to take forever to get an SBA loan. I don’t want to go through that. It could take six months or more.” Is that true?


Joanne Jolin: 

Well, it depends on the lender. Generally, SBA loans are a little more labor intensive than a typical commercial loan; however, good SBA lenders can get those loans closed within 30 to 45 days after approval, if there’s no real estate involved. Now, getting to approval is a lot of paper work, so a lot of borrowers think from the day that they meet you, you should be able to close in 30 days. Ultimately, it’s how quickly you’re able to respond and work with your lender. We’re going to move as fast as you do and the quicker you help us get the information that we ask for, the quicker we can close. They’ll say:  “We can do an evaluation quickly, but you’ve got to get us the documents.”  That’s where things bog down.


Ed Alexander:

Answer the questions, get us the documents, and we’ll be on our way.


Joanne Jolin: 

I have closed loans in less than 30 days and I’ve had some of them that take four months. Things do come up and the most complex transaction is a business acquisition.  And if it’s franchised and there’s partners, you just have all these layers of people that can make it harder to close.


Ed Alexander:

Let’s talk about guarantees.


Joanne Jolin: 

Okay.


Ed Alexander: 

Does an SBA backed loan require a guarantee?


Joanne Jolin:

Yes, it does.


Ed Alexander: 

From who?


Joanne Jolin:

Anybody that has 20% or more ownership must provide a guarantee.  And if there are spousal owners, let’s say you’ve got a wife and she owns 5% and the husband owns 15%, individually that’s not 20%. But, SBA says, you know what, they’re married that’s 20%.


Ed Alexander:

So for a related party, you combine the interests of related parties to get the total, and if that pops over 20% then you need a guarantee.


Joanne Jolin:

Right. I’ve actually seen a transaction where there are ten owners, individuals, that aren’t related.  At least one of them had to step up and be a guarantor.


Ed Alexander: 

Does the SBA also take a lien on the personal residence or other assets of the guarantor?


Joanne Jolin: 

The SBA requires lenders to look and take liens on all available collateral of the business first. If we’re not full collateralized, then we do have to look at the personal assets of the principles and place liens, if available.  They’re fairly clear on what that is. The personal residence, if there’s 25% or more equity in the home, we must put a lien on it.  If there’s less, it’s up to the lender. So case by case, each lender has their own internal policy whether they want to take it or not.


Ed Alexander:

So what happens if an owner says:  “I don’t want to provide a personal guarantee because you have the SBA guarantee?”


Joanne Jolin: 

If they won’t provide a guarantee, we can’t do that loan.


Ed Alexander:

Let’s go back to the application and the tax return and all of that. What does the bank look at when they’re approving or declining a loan?


Joanne Jolin:

It’s the basic five C’s of credit and we’re going to look at their character.  The SBA requires us to do that.


Ed Alexander:

How do you look at character?


Joanne Jolin:

It encompasses a lot of things, quite honestly. You look at their credit. We have a questionnaire that they must fill out, asking if they’ve ever been arrested. If they have, it’s not necessarily a deal killer, but there’s more things that we have to do. So character is looked at very strongly, because that should be an indicator of whether we want to do that loan. The government is putting a guarantee on it, and it’s very important, because we’re using tax payer dollars for those guarantees.


Joanne Jolin:

We look at collateral. We look at credit. Capacity, how much cash they have.


Ed Alexander:

Cash they have and then the cash flow from the business as we talked about before.


Joanne Jolin:

Yes.


Ed Alexander:

Okay. So let’s talk about credit. Are SBA loans for people with bad credit?


Joanne Jolin:

No. That’s a misconception. Some people think that that’s what the programs for and it’s not for that at all. It’s really to help people to get financing when they can’t get it through conventional sources.


Ed Alexander:

But that they’re otherwise qualified?


Joanne Jolin:

Yeah, they’re otherwise qualified. And the things, the three benefits that make it easier to approve somebody through SBA, that they likely couldn’t conventionally is collateral short fall. You know, most banks want to be fully collateralized.


Ed Alexander:

So 100 plus percent of the loan, have actual hard assets, whether it’s real estate or some equipment, that type of thing?


Joanne Jolin:

Right. And also the longer repayment terms. In my opinion, the biggest benefit.


Ed Alexander:

So you would go from what would be on a normal commercial loan, one time period for the repayment?


Joanne Jolin:

Yeah. So for buying equipment, the borrower might get a repayment term of three to five years for a conventional loan.  For an SBA loan I can go ten years. Sometimes more if it’s a heavy piece of equipment like manufacturing. The life of that equipment can be 15, even 20 years.


Ed Alexander: 

And so you can lend up to the life of that piece of equipment?


Joanne Jolin:

Yes. And we can have an evaluation done by a professional who would tell us the life span of that equipment.


Ed Alexander:

Please tell me the difference between a 7a loan and a 504 loan.


Joanne Jolin:

Okay. A 7a loan is for virtually any loan purpose. It can be for working capital, buying a business, starting a business, equipment, even real estate. So look at it as one all encompassing loan.

A 504 loan, on the other hand, is strictly for fixed assets. That can be heavy equipment company, like manufacturing, and real estate. Those are 50% financing in a first mortgage conventionally, a second mortgage usually 35-40% depending on if it’s a startup or an existing business, and then between 10% and 20% from the borrower.  It depends on that specific circumstance. So you’re going to end up having two loans with a 504 and possibly a companion loan, 7a, for working capital and other purposes that you cannot put into the 504 loan.


Ed Alexander: 

And so the 50% loan is the loan that’s guaranteed by the SBA?


Joanne Jolin: 

No, that’s the conventional loan.


Ed Alexander: 

And the 30-40% is the loan?


Joanne Jolin:

SBA guaranteed.


Ed Alexander: 

So those are actually two separate loans.  With a 7a loan, you have a 75% or an 85% guarantee of the whole loan.


Joanne Jolin: 

Correct.


Ed Alexander: 

What are the limits on a 7a loan?


Joanne Jolin:

It can go up to five million dollars and then, you know, you can have multiple SBA loans. I’ve had clients come to me for financing and they’ll say they’re opening up franchises and so they open up their first location and it’s less than a million dollars. Let’s say it’s a $700,000 loan. Then three years down the road, they want to open their second location, you know, they’ve got plenty of guarantee left. 75% of that $700,000, you know, if you take five million and deduct that, that’s how much of a guarantee they still have remaining.


Ed Alexander:

I see. So basically what you’re saying is that you, the SBA will guarantee up to five million dollars worth of loans on the 7a program.


Joanne Jolin:

Yes.


Ed Alexander:

So if you get a million dollar loan, it’s going to be 75% SBA guaranteed, so there’s $750,000.  Can that borrower then get loans where the guarantee of the SBA is up to an additional 4.25 million dollars before they cap out on the 7a program?


Joanne Jolin: 

The maximum guarantee is really $3,750,000, but that is right.


Ed Alexander:

Okay.


Joanne Jolin: 

Now there is an interesting program out there. I’ll just tell you, if it’s real estate, there’s a green program under the 504 program and if they make a building or build a building that conserves energy, there’s no limit, there’s no cap at all. So when I see somebody that’s got big growth plans, that’s what I encourage them to do:  use the 504 on those locations and make sure that they get it LEED certified and energy efficient.  Then they can continue growing.


Ed Alexander:

Do borrower’s have to provide a business plan and business projections in connection with their application?


Joanne Jolin: 

Yes, in three circumstances.  If it’s a startup, we must have a business plan and projections. Three years minimal, the first two years need to be on a month to month basis. If it’s a business acquisition, SBA requires that as well, because they consider that as almost like a startup, because a new owner is taking it over. Also, if a business is expanding we’ll need a business plan to show how they’re going to transition and handle additional locations.


Ed Alexander:

So, that’s a requirement you can’t get out of it no matter what? You’ve got to put that thing together.


Joanne Jolin:

Yes.


Ed Alexander: 

Now, business plan means so many different things to so many different people. What generally are you looking for in a good business plan for an acquisition in particular?


Joanne Jolin:

It’s funny, everybody always asks that. Less is more, is how we like it. I don’t want a 50-page business plan with a lot of fluff in it. I want the borrower to tell me what they need, who’s involved in the business, their equity injection, where their money is coming from, and what is it being used for.  It’s kind of like the who, what, where, when and why.


Ed Alexander:

How about the financial projections? What level of detail are you looking for there?


Joanne Jolin: 

It needs to be detailed enough that we know how the money is being spent and how they see the revenues coming in. It needs to be pretty detailed.  And assumptions?


Ed Alexander: 

In terms of revenue coming in, you’re really talking about a good cash flow statement, right?


Joanne Jolin:

Yes.


Ed Alexander: 

That’s an area where I think people end up falling down. I don’t know what your experience is in it, but thinking that things are going to ramp up when there’s typically a 30 or a 45-day collection period and then they have revenues going up the first month. You haven’t even gotten through the collection period let alone began working. So what can a borrower do to make sure their loan is approved?


Joanne Jolin:

Okay. The biggest thing to do in my opinion is they need to really understand their business. And they need to have some kind of background into what they’re going in to. That’s critical. We like to see a minimal of two years experience in whatever they’re looking to do.


Ed Alexander:

So does that apply in all cases? What if I went into a franchise?


Joanne Jolin:

A franchise is a little different. We can give a leeway on that, because you’ve got a partner there. The franchise is the partner and as a lender, we consider ourselves a financial partner.  With the franchise, you’re going to get that support, the training. They’re going to be there for you. You’ve got other franchisees you can call.  The franchise is going to provide comfort. Every lender is a little different. I’ll share some information. We do look to see how strong that franchise is. We have ways to do that. There’s a franchise registry, FRANdata, and they have a lot of information on performance of franchises, but at a minimum we like to see a franchise that’s been franchising for at least five years and have at least 50 locations.


Ed Alexander:

Is there a list that a perspective franchisee can look at to see what the SBA is approved for franchises?


Joanne Jolin:

Lenders have a list. I don’t know if they can really check that out. I’d be glad to share if somebody is interested in a franchise. I would let them know what I know. I’m sure they could probably get that from their lender too.


Ed Alexander:

What else can a borrower do to make sure their loan is approved?


Joanne Jolin: 

Another thing is just to make sure that they are well prepared to sit down and have a conversation with a lender.


Ed Alexander: 

What’s the lender going to want to know during the conversation?


Joanne Jolin: 

I want to hear what made them decide to do this,  what their background is, how they came to that conclusion that they think that they can run this business or buy this business and run it. They’ve got to convince me, because I’m their advocate to go to the bank and they’ve got to show me that they really do understand what they’re getting into.  I’m there to help them because you want them to be successful.  They’re putting their hard earned money into it, so I want to make sure they really understand what they’re getting in to.


Ed Alexander:

You mentioned a way of looking at a lender that I want to delve into a little bit further. You used the term, “financial partner”.  What does that mean in this context?


Joanne Jolin:

It’s interesting, because I’ve been financing SBA for a long time, but it finally clicked with me in this last lender that I worked with that a financial partner is really who we are. We’re not just a bank, because we are investing in them. They’re putting money into buying a business and we’re their biggest investor, because we’re lending. Not the SBA.


Ed Alexander:

Right.


Joanne Jolin: 

I think this makes them realize our role. We’re there to help them. And if I believe in that person and submit a loan application package for them for an approval, I want them to know that we really are their partner and we want to be there to help them be successful and grow to their second, third, fourth location if that’s what they’re looking to do.


Ed Alexander:

If somebody is providing you with an application, but they know they’ve got a problem- they were convicted of something or they had a bankruptcy four years ago or something like that – are you able to help them if they disclose that in advance?


Joanne Jolin: 

You know what, that’s one of the first things I do.  When somebody calls me and says, “Hey, I want to come meet you.” And I go, “Well, do you have time to have a conversation right now?” I take them through what I call the hurdles, to get to even applying for a loan. Those are:  have you ever been arrested?  If they say, “no”, I check that off. Tell me about your credit, is your credit good? And most people under estimate their credit.


Ed Alexander:

Underestimate?


Joanne Jolin:

Yeah. They’re harder on themselves.  “Oh, my credit is just okay. It’s like 700.” And I’m like, “That’s great!” Even 650.  Every lender is different with their minimal threshold, but that’s it. Have you had any short sales or foreclosures? Those can be a problem for the lender. It’s not an SBA thing. It’s the lender. The other thing is taxes. Are you delinquent on your taxes? Because that’s a bad one. Uncle Sam and the IRS are cousins. You’ve got to make sure that they’re paid their taxes. Those are the big things to get through. Another thing is, are you a US citizen? Do you have a green card?


Ed Alexander: 

So you have to have that to get the SBA guarantee?


Joanne Jolin:

Well, there are some EB5 visas.  Those are qualified. I’ve never done one, but we have the expertise to do it.


Ed Alexander:

So you must either have an EB5 visa, or a green card, or be a US citizen. Those are the three categories of people who can apply?


Joanne Jolin: 

Yes. And in fact, I’ve got one I’m working on right now where the son does not have his green card (he’s applied for it) and he’s going through the process. His mother has it, so she’s going to be on the loan with him to make it eligible.


Ed Alexander:

So only one of the borrowers needs to meet one of those three criteria?


Joanne Jolin:

Correct.


Ed Alexander: 

I’ve often heard a broker justifying the asking price based on it being “SBA pre- qualified”.  Do you have any thoughts on that issue?  For example, they might say: “The offering price of $500,000 must be a valid price, because we got a lender pre-approval.”  Does a lender go through and do an analysis in the same way that a buyer should go through on the pricing of a business?


Joanne Jolin:

We look at it from a cash flow standpoint. It’s got to cash flow that debt. Okay. So, obviously that’s one of the markers that anybody that’s doing an evaluation is going to look at. Usually, it’s fair, we have an internal evaluation that we put it through. The loan, we plug in their information and it will tell us what it’s really worth based on that information, but on loans $350,000 and up, they still require a third-party evaluation.


Ed Alexander:

Are you looking for a full-blown 100% evaluation with analysis of the economic circumstances and the industry that they’re in and all of those types of things?


Joanne Jolin:

Yes. We get the full-blown analysis. And they talk with the seller and they really get to understand that business, so it should provide some comfort to that buyer. But they still should do their own due diligence.  Say for example, there’s a lot of equipment involved. The evaluation doesn’t go in and take a hard look at the equipment and the health of it.  So they still need to do that kind of due diligence, because I have seen in my past, where the equipment wasn’t in as good of shape as what they expected and it can cost a lot of money. So both the lender and the borrower are having to face those things down the road, so they still need to have somebody take a look at those things.


Ed Alexander:

You brought up a great point:  due diligence of a business is different than pricing a business.


Joanne Jolin:

Correct. It is.


Ed Alexander: 

And so you’re trying to figure out as a buyer the risk factors that could lead to this business doing something different after the seller leaves and from a lender perspective, you want to see a history of cash flow that is consistent throughout.  You’re not looking to see what the man is doing behind the curtain to keep that cash flow going and that’s part of what the due diligence process would do?


Joanne Jolin: 

Correct. Yes.


Ed Alexander:

Good. All right, so I think we’re covered a lot of ground here, so did you have any other things that maybe you wanted to add?


Joanne Jolin:

One of the questions I hear is:  Are all SBA lenders the same?

The SBA is out there and encourages more and more banks to get involved because of the guarantee. It does really help them and it helps the community to grow when new businesses open and businesses transition. There’s more and more baby boomers retiring and selling their businesses and things like that and some of them are buying businesses. The small businesses are 90% of our economy and so the transition of those businesses need to happen to buyers, because otherwise there are three ways to exit. You can sell the business, shut it down, or die at your desk.

There’s only one that’s really good, one option. Hopefully you want to see that business continue if it’s a good viable business. The SBA lenders use the programs to help get those businesses transitioned. They work with an SBA program, but they also have their internal credit criteria they have to follow, so my bank is going to be different than every other bank out there. Everybody’s different in what their appetite is. So even if it’s somebody that I can’t, we encourage that borrower to talk to another one.


Ed Alexander:

So you will put somebody in touch with a lender who has an appetite for that type of loan.


Joanne Jolin:

Right.


Ed Alexander: 

So if they have a law practice, you’ll know who is going to be doing law practices regularly and who understands that business?


Joanne Jolin:

Yes.  At my bank for example, we like attorneys. We will provide 100% financing for attorneys and some other professionals.


Ed Alexander:

So doctors, accountants, lawyers.


Joanne Jolin: 

Yes.


Ed Alexander: 

Those are the primary ones, right?


Joanne Jolin:

Yeah.


Ed Alexander: 

Tell me a little bit about your background, how you came into SBA lending, who you work for and how people can get in touch with you if they have questions.


Joanne Jolin:

I work for Customers Bank. It’s headquartered out of Wyomissing, Pennsylvania. Our operations are in Phoenixville, Pennsylvania. I’ve been with them just a little under a year, but the bank has been around seven years.  We’re a little over 10.4 billion dollars in assets and our SBA division is growing rapidly.  Nationwide we have BDO’s throughout, remote BDO’s. We just hired somebody in Chicago.


Ed Alexander: 

BDO?


Joanne Jolin: 

Business development officers. I’m terrible at using these acronyms. But anyway, we lend nationwide. We like franchises, hotels, attorneys, professionals, day care centers, and the main thing that I will tell you why I like this bank is they really are cash flow lenders.  Collateral is secondary and it’s nice, but not necessary, is what we say.  Because collateral does not repay your loan and they understand that. The way that I got into SBA lending is quite interesting. Early in my career, I had been in commercial lending for a long, long time. The bank that I was working for, Orange Bank, wanted to learn or get into SBA lending, so they sent two of us up to Jacksonville for a three-day training. We came back and we started doing SBA loans.


Ed Alexander:

Wow. I’m assuming the SBA walked you through that.


Joanne Jolin:

They did. And you know what, it’s a never-ending learning process. You learn something new with every loan because they’re so unique and that’s why I love it. Every loan is literally, you know, structured specifically for that individual business and you know, because no two businesses are the same, the way that they run.


Ed Alexander: 

That’s great. How can people get in touch with you?


Joanne Jolin:

They can contact me by my cell phone, 407-761-4114 or by my website, or my email address: JJolin@customersbank.com.


Ed Alexander:

Most businesses today are not hard asset heavy. We have a lot of business services, we have a lot of software, and that is all intellectual property, intangible property, good-will, all of those things.  So is there a difference in the way that your bank evaluates a business that has a significant amount of good-will rather than hard assets?


Joanne Jolin:

We’re going to analyze that industry and the cash flow. I personally like service industry businesses. They do well. The goodwill portion is really what lenders look at. That’s where their exposure is, even with the guarantee.  Our appetite for those goodwill business loans is around a million and a half. I’ve actually had larger loans approved with that amount of goodwill. A million six, even two million.


Ed Alexander:

So overall good will versus hard assets?


Joanne Jolin:

Yes.


Ed Alexander:

Or is that the maximum amount of good will in the deal?


Joanne Jolin:

What do you mean?


Ed Alexander:

That’s not collateralized.


Joanne Jolin:

That’s not collateralized. Yeah.


Ed Alexander: 

So basically if you’re buying a two million dollar business and you’ve got $500,000 of hard assets and 1.5 million is goodwill, you would still be able to do that loan?


Joanne Jolin:

Absolutely. Yes.


Ed Alexander:

Because the collateral overlaps, so if the collateral happens to be the buyers home, that’s no problem?


Joanne Jolin: 

It’s a case by case basis. You have to look at everything. The strength of the borrower. Their liquidity. And I want to touch on liquidity. Personal liquidity is very important.

We’re looking at their personal financial statement, so if somebody is buying a business and let’s say the business is a million dollars and they’ve got half a million dollars cash, I mean, they’re strong. And we’re going to require them to put 25% down, so that’ll leave them substantial liquidity post-closing. That’s what we’re looking for.  Otherwise, we will build working capital in the loan, because we don’t want them to fail. We actually will do a working capital analysis and determine how much cash they need and services, depends on, let’s say they’re collecting from an insurance company. It takes 30 days or 45 days to get paid. We will give them a line of credit as well as permanent working capital and we see that’s very important. We don’t want them to come back to us in six months. If that happens we did a bad job. We missed it. So let’s say a heavy capital expenditure business is another thing you have to build in and see what their annual expenses are to keep their equipment running and to keep buying equipment.


Ed Alexander:

So you said liquidity and I just want to delve into what liquidity means, because most people who have a half million dollars don’t just leave it in their bank account. They have a brokerage account and have all sorts of investments and what not. What constitutes readily accessible liquid capital for purposes of a loan?


Joanne Jolin:

We look at cash in the bank. If it’s in a retirement account, we don’t necessarily count that, because you can’t really get to it. If it’s just in an investment account, I mean, they can access that. Another thing that’s nice that SBA changed, they used to have a personal liquidity test. If it was that they had too much money, SBA had said, you don’t need to come to us, you can pay cash out of your own funds, but that rule is gone. It’s funny, that’s something that maybe is circling back as a topic this next year, we’re hearing, but hopefully not.


Ed Alexander:

Hopefully not.


Joanne Jolin:

To me, I was glad that they took it away, because it didn’t put people on the same level playing field.  Just because you have money doesn’t mean you should spend every penny of it first.


Joanne Jolin: 

There’s so many things you could talk about. We could probably do this for a week.


Ed Alexander: 

Absolutely. Thank you so much.  I really appreciate it.


Joanne Jolin, Vice President of Customers Bank Government Guaranteed Lending division provides SBA financing to businesses in the Southeast U.S. as well as Nationwide.  Her 30 plus years in commercial banking background includes an in-depth knowledge of the entire loan process from application to closing and servicing. For the past 20 years, Joanne has specialized in SBA lending where she served the Central Florida community her entire banking career with Regional and Community Banks as well as large National SBA Lenders.

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