Posted: 02/21/2012 10:11 am
Lenders are concerned that President Barack Obama’s proposed 2013 budget and the political scuffling in Congress may leave the U.S. Small Business Administration and U.S. Department of Agriculture with inadequate loan-guarantee authority to satisfy the needs of small-businesses owners. If that happens, and “guarantee coffers are low, the borrower needs to worry if their loan will be approved before the program runs out of money,” says Mike Rozman, co-president and chief strategy officer of BoeFly.com. The New York City-based company matches borrowers with lenders online. Of further concern, he notes that “there is still limited conventional financing for start-ups.”
Before the financial meltdown and the Great Recession, start-ups were able to get financing when the applicant had related experience, invested approximately 20-percent equity into the venture and pledged collateral. That has changed drastically and fledgling entrepreneurs are left with few, if any alternatives. For more mature companies, however, “we’ve seen an increase in conventional lending over the past six months for existing profitable businesses seeking to expand or refinance debt,” Rozman says.
Kraig Kramers, a management consultant and consummate entrepreneur who turned around such Fortune 500 Companies as Snapper-brand lawn mowers, has advice for surviving economic turmoil and a possible tightening of credit. “Stay close to lenders and prospective investors long before you need them,” Moreover he says, “You must have prior happy relationships with those who will provide the cash timely when you really need it.”
He also coaches business owners to drill down “into cash management with tools you can introduce into your business to accelerate incoming cash.” Additionally, “Delegate these tools to those managers and employees who can do the best with them.”
Borrowing an idea from “a Fortune 500 company,” he says, “Look at a detailed balance sheet, yes, to the penny.” As a result, “we found a half-million-dollar stock certificate that had been forgotten.” But the technique is not just for large corporations. Kramers also found “recapturable deposits in several smaller businesses this way.”
Equally as important, cleaning up your financial statements, footnoting the most important line items and highlighting key financial ratios, prepares you for making a loan application. Furthermore, include an extensive discussion telling the loan officer and her committee how you arrived at the forecast for the next 12-month’s proforma.
Rozman adds that if customers get the cold shoulder from their exiting bank, the borrowers will need to be “aggressively seeking alternatives.” BoeFly’s 1,500 participating lenders pay subscription fees in order to view applications from entrepreneurs seeking financing. In addition to conventional loans, some of the lenders make loans that are partially guaranteed by SBA and USDA and may consider start-ups — especially for franchises.
SBA’s 7(a) loans are suitable to finance real estate, equipment, machinery, working capital, and to purchase an existing business. The agency’s 504 program is for fixed assets and most suitable to build, expand or purchase real estate. More recently, SBA initiated a temporary 504 program to “rescue” borrowers who have existing loans with balloon balances coming due and find that take-out lenders are scarce.
The basic 504 program requires job creation or retention and does not include working capital. But the temporary refinancing program waives the job-creating requirement. And it also allows some working capital for projected operating expenses.
USDA’s Business and Industry Loan Program is similar to SBA’s 7(a) but the businesses must be in rural locations. Sometimes, sparsely populated locations on the fringe of urban areas are approved. Unlike SBA’s loan limits of $5 million for 7(a) and approximately $10 million for 504, USDA’s B&I program tops out at $25 million under certain circumstances. And the loans may go up to $40 million for rural cooperative organizations that “process value-added agricultural commodities,” according to USDA’s web site.
Small-business owners are holding their collective breaths as the Obama Administration’s proposed budget wends its way through the politically-charged Congress. It is as much the chief executive’s opening salvo, as it is his wish list. But if the budget that survives includes large reductions of SBA and USDA guaranteed loans, you need to be prepared.
To test the water, talk to your bank’s loan officer about your chances of getting financing. It is better to see if your loan officer tap dances and stutters now than before crunch time. And if you don’t get a positive reply, start looking for other funding alternatives.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at http://www.Twitter.com/JerryChautin
Copyright © 2012 Jerry Chautin — All rights reserved
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Thirty percent: It’s a terrible score on a school exam, but a rather nice figure for the relative humidity outside in this balmy fall weather. It’s also the amount of household income devoted to housing costs which the federal government uses as the“affordability threshold.” In other words, anyone devoting 30 % or more of their income to housing is considered to be living in “unaffordable housing.” This figure applies not only to those who own their homes but also to those who rent.
Recent reports would indicate that the number of both owners and renters living in unaffordable housing has increased. Consider this report: “The share of renters paying 30% or more of their household income on housing costs — the government threshold to determine if housing is unaffordable — rose to 53% last year from 51.5% in 2009 and about 50% in 2008, according to 2010 Census data released today.
While median rents remained stable last year at $855 a month, median national household incomes, adjusted for inflation, fell 2.2% — putting the squeeze on renter budgets. Last year, 38% of homeowners with a mortgage paid 30% or more for housing, up from 37.6% in 2009.
Yet, the fact that percentage rose at all shows that many homeowners haven’t been able to refinance mortgages, despite near record low interest rates. The US Census Bureau’s definition of housing costs includes mortgage payments, insurance, taxes and utilities. (Source: USA Today)
Living in a home remains the ultimate American Dream. For all of our country’s history the dream of land and homeownership has been an important motivating force for individuals and families. That desire drove the early pioneers from east coast to west coast and south; drove homesteading, especially in the west; and today continues to motivate individuals and families who want a home of their own. But there are obstacles to the dream.
In a perfect world, everyone who earns a salary should be able to buy a home of his or her own. However, the impact of the economic recession has clearly taken its toll on the ability of many people to purchase a home of their own. The rental market is very hot, as would be expected in times such as these with a slow residential real estate market, but there too we find obstacles for many individuals.
Mortgage lenders generally are not lending money today to many creditworthy individuals, but interest rates are rock bottom right now. Also, various municipal, state and federal government programs have been designed to expand homeownership. Some help is still there for home purchase – as long as you can make the numbers work.
Clearly it’s a challenge for everyone. CIN’s editors recognize the importance of homeownership, and we maintain a special section on affordable housing designed to provide information to prospective homebuyers, their counselors and advisors, lenders, developers, and others focused on the critical issues surrounding affordable housing.
- Rising rents lessen the affordability of housing (usatoday.com)
- You: Private rents unaffordable for families in most English boroughs (guardian.co.uk)
- Truth and Nonsense About Mortgage Lending, the Housing Collapse and Homeownership (scoppcanton.wordpress.com)
- Census: Housing bust worst since Great Depression (seattletimes.nwsource.com)
- National Survey of Homeowners and Renters Reports Increased Interest in Homebuying (prweb.com)