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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When Congress was on the brink of pushing through legislation that Internet advocates opposed, over four million online signatures were gathered quickly. Congress relented.
Today, millions of American households are poised to benefit directly from the opportunity to reduce mortgage payments, avoid foreclosure, build up some savings, or have a few thousand dollars to spend a little more freely. Yet while even conservative economists believe that easier refinancings will boost the economy and help millions more families — a major part of Congress is ready to say a big, “No, let’s not even try.”
Not a day elapsed after President Obama outlined a more ambitious set of proposals to let average families take advantage of the same low interest rates that have benefited upper income households and large corporations before Speaker Boehner among others declared the idea dead on arrival.
“All [the refinancing plan] does is delay the clearing of the market,” Speaker Boehner told reporters. “As soon as the market clears and we understand where the prices really are — [that] will be the most important thing we can do in order to improve home values around the country.”
Saying millions of families should wait until the “market clears” is the modern equivalent of “let them eat cake.” Clearing the market is an economist’s term for letting the tidal wave of foreclosures continue. But unchecked foreclosures drag down everyone’s home values, let vacant homes pile up in neighborhoods, and force families to choose between struggling to make needlessly high mortgage payments or become another default statistic with ruined credit.
It is time to ask lenders and investors to shoulder some of the burden, and Congress should be taking the lead on this, not finding objections. As my colleagues at the Center for American Progress and I explain in detail, the principles of accountability to avoid more foreclosures — especially for families who haven’t missed payments — is at the core of the administration’s expanded proposal for making refinancing easier.
Families with mortgages, however, are not an easily organized constituency. Unlike the protesters most engaged in social media who were the bulwark of those moved to criticize SOPA and PIPA, borrowers are not necessarily the internet generation nor an easily reached interest group.
But given the politics of “embrace the opposite of what Obama proposes,” homeowners struggling to keep making payments could use a Wiki dark day of their own. And so could the tens of millions of others who live next door, as no neighborhood really wants another foreclosure.
- From Bad To Worse: Nevada Foreclosures Only Half Way Done (scoppcanton.wordpress.com)
- Should the Government Help Homeowners With Underwater Mortgages? (usnews.com)
The last 18 months have been rough for Dana. Sad to say, in the midst of the continuing Great Recession, she and her husband of three years have parted company. He’s not willing to help her at all, so she now has full responsibility for raising two toddlers and maintaining her job as a restaurant manager, while also paying the mortgage on their modest two-story home each month. There have been months when money has been so tight she’s had to ask her Mom to help out. Still, through all the adversity, Dana has managed to make her monthly mortgage payments on time. She’s never missed a payment, nor even been late.
Unfortunately, the value of her home has plunged from what it was when she purchased it in 2007, so she now finds herself in the same position as many other homeowners do today: upside down with a mortgage rate much higher than today’s going rates. Until now, there has been no way she could refinance or modify her mortgage loan to relieve some of the fiscal pressure she faces every month. However, there are signs that maybe — finally – there could be light at the end of the tunnel for Dana and millions of other Americans in the same boat underwater:
“Theis launching yet another high-profile campaign to shore up the housing market — and with it, the economy — by making it easier for some struggling homeowners to refinance underwater mortgage loans at today’s ultra-low interest rates.
The federal government’s new rules will encourage borrowers to secure new loans no matter how much value their homes have lost during the nation’s housing crisis, with the hitch that they can’t have missed any mortgage payments for the last six months.
The plan could help 1 million to 2 million people get significantly lower monthly payments in hopes of stabilizing the real estate market. On top of that, it would boost the economy by putting about $2,500 more in a typical homeowner’s pocket each year, administration officials said. The plan amounts to a sweeping overhaul of the 2½-year-old Home Affordable Refinance Program, easing rules and reducing fees to allow many more homeowners potentially to take advantage of historically low mortgage rates.
The revisions include lifting a ceiling that barred participation by borrowers who owed more than 125% of the value of their homes, and using a controversial modeling method to replace costly appraisals that are among the fees that have kept some homeowners from refinancing. About 14.6 million mortgages nationwide were underwater at the end of the first quarter, about 29% of the nearly 51 million residential mortgages nationwide, according to Moody’s Analytics and Equifax.” (Source: Los Angeles Times)
Will these steps help? Stay tuned. Buying and maintaining a home can be a very emotional process for families. This is the largest purchase most individuals will make — and one with long-lasting effects. The home purchase process can also be confusing, and the terms of the loans offered are not always understandable for most of us (remember all the pages at closing!). It’s especially crucial in today’s economy that homeowners be aware of all the options available to them, and to avoid those deals that “sound too good to be true.” The results of the Obama Executive Orders will be seen in the weeks ahead.
Meantime, there are millions of homeowners today in desperate need of assistance with their housing issues. The CIN editors are watching many developments for you.
CIN’s Housing Section is a dependable reference tool for current and prospective homeowners. Information is updated on a daily basis. We offer details on various bank mortgage lending programs and mortgage banking programs to help borrowers understand the process they are entering as they select a home for purchase, or ways to maintain/refinance their home after purchase. It seems hardly a day goes by without another dramatic development. Consider these recent examples:
Mortgage refinancing to get easier under revised U.S. program
(Source: Los Angeles Times) New rules being implemented by the federal government will encourage borrowers to secure new loans no matter how much value their homes have lost during the nation’s housing crisis.
Obama looks to bypass Congress with help for homeowners, students
(Christian Science Monitor) President Obama is bypassing Congress and using executive powers to enact change. Strapped homeowners and indebted students are first in line under his relief plan.
SHRA to expand program to buy, rehab and resell foreclosed properties
(Source: Sacramento Press) The Sacramento Housing and Redevelopment Agency can now grant developers a first look at foreclosed properties for rehab and resale in Sacramento’s low- and moderate-income neighborhoods – before the properties are put on the open market. Through the new program developers can purchase vacant, foreclosed properties at discounted prices and then rehabilitate and resell those properties.
Cost of Fannie & Freddie bailouts trimmed
(Source: CNN Money) The cost to taxpayers for bailing out mortgage finance giants Fannie Mae and Freddie Mac won’t be quite as bad as previous estimates.
The FHA now estimates that the net cost of the bailouts through 2014 will be about $124 billion, down about 19% from an estimate of $154 billion a year ago.
Reverse Mortgages to be Scrutinized
(Source: Mortgage Loan.com) Older borrowers are getting a new resource to assist them with reverse mortgages and other financial matters, courtesy of the new Consumer Financial Protection Bureau (CFPB). The Office of Financial Protection for Older Americans is one of several entities being established under the new bureau, with the goal of promoting financial literacy among Americans age 62 and over, and protecting them from unfair and abusive practices regarding financial decisions.
Senate Adopts Measure to Increase Fannie, Freddie Loan Limits
(Source: Bloomberg) The U.S. Senate has adopted a measure that would raise the maximum size of a home loan backed by mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration to $729,750. The measure was approved less than a month after the limit on so-called conforming loans was automatically reduced to $625,500.
- The Pros & Cons of Reverse Mortgages (orangecountymortgage.co)
- National Mortgage Complaint Center Warns Homeowners About Mortgage Refinance Scams & Explains How Homeowners About To Refinance Can Save Money (prweb.com)
- Freddie Mac seeks $6 billion more in aid (bottomline.msnbc.msn.com)