Demystifying The SBA Loan Application Process - Defining The Term Retrade Seldom are surprises welcomed when applying for an SBA loan to acquire a business, execute a change of ownership or purchase real estate. In fact, surprises usually mean a change in terms which may affect the loan's outcome or desirability. The official term for this phenomenon is Retrade. The term retrade simply means the practice of renegotiating the terms of a transaction after the initial price and terms have been agreed upon. Unfortunately, SBA lenders are also prone to retrade which may come as a surprise and to the dismay of loan applicants. Let’s explore when and why a Retrade may occur during the loan application process and more importantly how to avoid them. First, we must understand the order of events when applying for an SBA loan. After submitting a complete loan package it is customary for the lender to issue a Term Sheet also called a Letter of Interest. There are three types of Terms Sheets A term sheet printed upon demand by an inexperienced Business Development Officer without any prior due diligence performed A term sheet printed on demand by an experienced Business Development Officer with credibility within organization A Term Sheet approved by a Credit Manager or Chief Credit Officer It’s easy to understand the veracity of a Term Sheet improves and the likelihood of experiencing a retrade diminishes with more due diligence and higher scrutiny. However, take note that Wall Street banks, seen on every corner, are notorious for retrading at any point during the loan application process, even right up to the point of signing loan documents. The reason for this phenomenon may be attributed to inexperienced Business Development Officers, decentralized credit decision making authority and an abundance of obscure lending policies unknown even within the organization until after a loan is formally underwritten and reviewed by a credit manager. As a rule, I require all of my portfolio lenders to perform a minimum acceptable level of due diligence that includes reviewing the Term Sheet with a Credit Manager or when possible a Chief Credit Officer, significantly minimizing the likelihood of a retrade. Further, I require my clients and lenders to speak prior to submitting the loan request to formal underwriting so the lender can confirm the due diligence performed up to that point in an attempt to avoid any surprises including a retrade. I have only experienced three retrade events since founding ThinkSBA in 2019. Two of them by Wall Street banks with a decentralized underwriting center and one due to the need to mitigate unsatisfactory personal liquidity at the time of loan committee. Incidentally, all three loans closed. Listen to more episodes 🎧 ▶ https://mysbaloanpro.com ▶ https://mysba.pro/applepod ▶ https://lnkd.in/gwZj8wnG
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The borrower's contribution and security offered are important aspects of credit risk analysis, particularly for loans where collateral or down payments are required. Here's how these factors contribute to mitigating credit risk: 1. **Borrower's Contribution**: - The borrower's contribution refers to the portion of funds or assets that the borrower contributes towards the transaction, typically in the form of a down payment or equity investment. - For example, in a mortgage loan, the borrower's contribution is the down payment made towards the purchase of the property. In a business loan, it may be the owner's equity investment in the business. - A larger borrower's contribution indicates the borrower's commitment to the transaction and reduces the lender's exposure to risk. It also demonstrates the borrower's financial capacity and willingness to invest in the success of the project or transaction. - Lenders may require borrowers to contribute a minimum percentage of the total transaction value as a down payment to qualify for financing. Higher borrower contributions can improve the terms of the loan, such as lower interest rates or reduced fees. 2. **Security Offered by the Borrowers**: - Security, also known as collateral, is an asset or property that the borrower pledges to the lender to secure a loan. If the borrower defaults on the loan, the lender has the right to seize and sell the collateral to recover the outstanding debt. - Common types of collateral include real estate (such as homes, commercial properties), vehicles (such as cars, trucks), equipment, inventory, accounts receivable, securities, and cash. - The value and quality of the collateral offered by the borrower play a significant role in mitigating credit risk for the lender. Higher-quality collateral with readily ascertainable value reduces the lender's risk exposure in the event of default. - Lenders may require borrowers to provide a specific type and amount of collateral based on the loan amount, borrower's creditworthiness, and the nature of the transaction. The value of the collateral typically exceeds the loan amount to provide a margin of safety for the lender. - Collateral may be required for various types of loans, including secured loans (where collateral secures the loan) and asset-based loans (where the loan is secured by specific assets of the borrower). In summary, the borrower's contribution and security offered are critical components of credit risk mitigation in lending transactions. They provide lenders with additional protection against potential losses and enhance the borrower's commitment to the transaction. Lenders carefully evaluate these factors as part of their credit risk analysis to ensure prudent lending practices and safeguard their financial interests.
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Beyond the Basics: A Deeper Look at the Importance of Credit, Cash Flow, and Collateral for Business Loans While credit, cash flow, and collateral are the core ingredients for acquiring business loans, their significance extends far beyond mere checkpoints. Understanding their individual roles and interconnectedness paints a clearer picture of their crucial impact on loan approval and success. Credit serves as a vital gauge of a business's financial trustworthiness. It reflects the company's past performance in managing debt and adhering to repayment obligations. A strong credit score, built through a history of responsible borrowing and timely payments, signals to lenders that the business is a reliable borrower, deserving of their trust. This translates to better loan terms, including lower interest rates and higher loan amounts. Conversely, a weak credit score raises red flags about the business's financial stability, potentially leading to loan denial or unfavorable loan terms. Cash flow provides a window into the financial lifeblood of a business. It reveals the business's ability to generate income, meet its expenses, and invest in growth. A robust cash flow demonstrates that the business has a sustainable financial engine and can comfortably accommodate loan repayments. This inspires confidence in lenders, leading to favorable loan decisions. Conversely, a weak or erratic cash flow raises concerns about the business's financial stability and its ability to sustain debt burdens. This can significantly hinder loan approval or lead to stricter loan terms, such as higher interest rates or shorter repayment periods. Collateral often overlooked but equally important, acts as a safety net for lenders. It represents an asset that the lender can seize if the business defaults on the loan. The value and liquidity of the collateral directly impact the risk profile of the loan. High-value, readily available collateral like real estate or equipment minimizes the potential loss for the lender, encouraging them to offer better loan terms. Conversely, insufficient or illiquid collateral elevates the perceived risk of the loan, potentially leading to loan denial or stricter terms. These three elements are not independent entities. They are intricately interconnected, influencing and reinforcing each other. For example, a strong credit score can lead to better interest rates, which can free up cash flow for the business. Similarly, a healthy cash flow can help a business maintain a good credit score by facilitating timely debt repayment. Additionally, valuable collateral can compensate for a weaker credit score or a less robust cash flow, reassuring lenders and increasing the chances of loan approval. By understanding the complex interplay between credit, cash flow, and collateral, businesses can proactively strengthen their financial position and increase their chances of securing favorable loan terms.
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Beyond the Basics: A Deeper Look at the Importance of Credit, Cash Flow, and Collateral for Business Loans While credit, cash flow, and collateral are the core ingredients for acquiring business loans, their significance extends far beyond mere checkpoints. Understanding their individual roles and interconnectedness paints a clearer picture of their crucial impact on loan approval and success. **Credit** serves as a vital gauge of a business's financial trustworthiness. It reflects the company's past performance in managing debt and adhering to repayment obligations. A strong credit score, built through a history of responsible borrowing and timely payments, signals to lenders that the business is a reliable borrower, deserving of their trust. This translates to better loan terms, including lower interest rates and higher loan amounts. Conversely, a weak credit score raises red flags about the business's financial stability, potentially leading to loan denial or unfavorable loan terms. **Cash flow** provides a window into the financial lifeblood of a business. It reveals the business's ability to generate income, meet its expenses, and invest in growth. A robust cash flow demonstrates that the business has a sustainable financial engine and can comfortably accommodate loan repayments. This inspires confidence in lenders, leading to favorable loan decisions. Conversely, a weak or erratic cash flow raises concerns about the business's financial stability and its ability to sustain debt burdens. This can significantly hinder loan approval or lead to stricter loan terms, such as higher interest rates or shorter repayment periods. **Collateral**, often overlooked but equally important, acts as a safety net for lenders. It represents an asset that the lender can seize if the business defaults on the loan. The value and liquidity of the collateral directly impact the risk profile of the loan. High-value, readily available collateral like real estate or equipment minimizes the potential loss for the lender, encouraging them to offer better loan terms. Conversely, insufficient or illiquid collateral elevates the perceived risk of the loan, potentially leading to loan denial or stricter terms. These three elements are not independent entities. They are intricately interconnected, influencing and reinforcing each other. For example, a strong credit score can lead to better interest rates, which can free up cash flow for the business. Similarly, a healthy cash flow can help a business maintain a good credit score by facilitating timely debt repayment. Additionally, valuable collateral can compensate for a weaker credit score or a less robust cash flow, reassuring lenders and increasing the chances of loan approval.
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Beyond the Basics: A Deeper Look at the Importance of Credit, Cash Flow, and Collateral for Business Loans While credit, cash flow, and collateral are the core ingredients for acquiring business loans, their significance extends far beyond mere checkpoints. Understanding their individual roles and interconnectedness paints a clearer picture of their crucial impact on loan approval and success. Credit serves as a vital gauge of a business's financial trustworthiness. It reflects the company's past performance in managing debt and adhering to repayment obligations. A strong credit score, built through a history of responsible borrowing and timely payments, signals to lenders that the business is a reliable borrower, deserving of their trust. This translates to better loan terms, including lower interest rates and higher loan amounts. Conversely, a weak credit score raises red flags about the business's financial stability, potentially leading to loan denial or unfavorable loan terms. Cash flow provides a window into the financial lifeblood of a business. It reveals the business's ability to generate income, meet its expenses, and invest in growth. A robust cash flow demonstrates that the business has a sustainable financial engine and can comfortably accommodate loan repayments. This inspires confidence in lenders, leading to favorable loan decisions. Conversely, a weak or erratic cash flow raises concerns about the business's financial stability and its ability to sustain debt burdens. This can significantly hinder loan approval or lead to stricter loan terms, such as higher interest rates or shorter repayment periods. Collateral often overlooked but equally important, acts as a safety net for lenders. It represents an asset that the lender can seize if the business defaults on the loan. The value and liquidity of the collateral directly impact the risk profile of the loan. High-value, readily available collateral like real estate or equipment minimizes the potential loss for the lender, encouraging them to offer better loan terms. Conversely, insufficient or illiquid collateral elevates the perceived risk of the loan, potentially leading to loan denial or stricter terms. These three elements are not independent entities. They are intricately interconnected, influencing and reinforcing each other. For example, a strong credit score can lead to better interest rates, which can free up cash flow for the business. Similarly, a healthy cash flow can help a business maintain a good credit score by facilitating timely debt repayment. Additionally, valuable collateral can compensate for a weaker credit score or a less robust cash flow, reassuring lenders and increasing the chances of loan approval. By understanding the complex interplay between credit, cash flow, and collateral, businesses can proactively strengthen their financial position and increase their chances of securing favorable loan terms.
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Your bank wouldn’t give you a $100,000 loan without collateral. So why are YOU giving your customers unsecured loans without any protection? You offer your customers open credit terms (i.e. 30,60 days to pay after providing services) in order to be competitive. When you do this, however, you’re giving your customers a short-term loan. Just like a bank! Offering credit is the best way for you and your customers to grow quickly. But doing this means that you may be taking a risk you may not realize. When you sell on open credit terms, in most cases, you’re an unsecured creditor. This means that if you customer goes bankrupt and can’t pay your invoices, you’re left with few options that would lead you to think you’ll get the money they owe you back. After your customer goes bankrupt it can take years to see any of the money you’re owed get paid. And if the business had little or no assets, it can mean you may only get pennies on the dollar back. Add this to the costs of legal and collection fees, and the customer you were so excited to have may have cost you more than you ever made from having them. The alternative to this might be to try to obtain some security from your customer, but this is extremely cumbersome and restrictive. Most customers would rather find another supplier that doesn’t require this of them, so you’ll end up losing business. You don’t want to get burned again, so now you might start to become much more conservative with how much credit you offer to customers. In some cases, you might start asking for cash in advance or, if you do extend credit, you may give extremely low credit limits for months or years, until your credit department feels “comfortable” with the customer. This approach is restrictive and makes it hard for your customers to buy from you. Restricting or limiting credit has a disastrous effect on your growth and profit. Operating from a place of fear means you’ll miss taking on customers that can help you grow, meeting your top and bottom line goals. There are ways to offer open credit terms without putting all the risk on your shoulders. You can offer new and existing customers more credit (meaning they’ll buy more) by using the right tools which will allow you to quickly evaluate risk up front, while being protected from potential bankruptcy and slow pay losses on the back end. Get out of the Sales Prevention business and into the Sales Acceleration business!
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📢 Why Lenders Consider Credit Scores When Approving Loans Business lenders will continue to prioritize good credit scores when approving loan applications as Historically, higher credit scores correlate with consistent repayment behavior. But it's not the only factor they look at. It’s not just about your score, but about your overall financial growth. Credit History: Your credit score is a number that predicts your likelihood of repaying the money you have borrowed. However, lenders also scrutinize your credit reports from major bureaus. They check for delinquent accounts, unpaid collections, past bankruptcies, foreclosures, and recent credit applications. This is what impacts on your interest rate. Income and Expenses: From a lender's perspective, having a good income makes you less risky. If you can comfortably meet your obligations every month, they're most likely to approve your application. However, a high income won’t help your application if your fixed expenses (like rent or mortgage) are too high. For example: When applying for an FHA mortgage, your total debt-to-income ratio must be 43% or lower. 🔗 Here’s how you can improve your credit score:
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M&A from the plane…the bank changed my jet purchase financing right at closing. Last week, I posted about some changes to the SBA loan program after I spoke to Mark Nichols at First National Bank in Palm Harbor, FL. Today, again after speaking with Mark, I wanted to let those considering using the SBA for both their business acquisition loan and for a CRE loan (Commercial Real Estate) used in conjunction with the overall acquisition about some additional changes. Within the recent SBA SOP updates, there are a few points that must be considered. The SBA SOP regulations, as of November 15, 2023, reintroduced the 51% Commercial Real Estate (CRE) requirement in mixed-purpose loans (those not involving a change of ownership). This reintroduction hinges on the 'use of proceeds' language found in the SOP on page 101. This provision allows for a 25-year amortization period and provides flexibility through a weighted average calculation when the 51% CRE threshold is unmet. This is not new. However, it's worth noting that the regulations related to Change of Ownership in 51% of CRE transactions have taken a different path. Initially, many of us believed the following diversion was an oversight or mistake that would be corrected back to the description above, but it has remained unchanged. The critical difference lies in how Change of Ownership in CRE transactions is determined – it's based on the CRE contract price rather than the use of loan proceeds. If the CRE contract price constitutes 51% or more of the loan, you can proceed with a 25-year amortization schedule without any issues. However, if the CRE portion falls short of the 51% mark, the only available option is a 10-year amortization without the option for a weighted average term. This is something I did not notice at first and needs to be recognized during deal structuring due to the negative impact on cash flow calculations. The situation becomes more complex when considering the response received from SBA 7a Questions. Their response also indicated that the option to structure two separate loans – one for Business Acquisition and another for the CRE purchase – to provide the most favorable terms for the borrower would not be allowed. Unfortunately, this response did not clarify whether this restriction applies solely to 7a loans or if it extends to 504 loans as well. If it does not, doing a 504/7a combo would seemingly be a viable workaround. If you are seriously considering an SBA loan, I highly recommend contacting Mark. His email address is NicholsMar@fnb-corp.com.
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Your Money Hero & Business Credit Expert! When banks say no, I say YES! Turn your entity into a financial asset. Obtain credit lines (cash too) not tied to your SSN. There are funding options you may not know exist.
What is The Minimum Credit Score I need For a Loan? For most all credit applications, you want to find yourself in the low-risk category. Keep in mind the various business credit bureaus may have different scoring systems. Every lender chooses its own standards. So, there may be variations in scoring levels. However, the U.S. Federal Reserve Bank lays out the general rule for the small business lending industry: Low credit risk: 80–100 business credit score/720+ personal credit score. Medium credit risk: 50–79 business credit score/620–719 personal credit score. High credit risk: 1–49 business credit score/less than 620 personal credit score. Lenders will look at both your personal credit and your business credit as well as your business revenue when making a lending decision. Remember, a personal credit score and a business credit score are completely different things. They use different scoring systems. Even the credit bureaus are different. Some, like Experian, report both types of scores. Dun & Bradstreet is strictly business credit reports. A FICO score is a personal score. A Paydex score is a business score. Borrowers who are low credit risks get the most choices of loan products and the best terms. Borrowers who are high risk have few choices and will pay the most. Getting even a small loan for business can be tough for high-risk borrowers but not impossible. Can I Get a Business Loan with an under 600 Credit Score? Business owners often want to know: can I get a business loan with a 600-credit score? Or with some other number such as a 500-credit score? The answer is, yes, but it’s going to be hard. If you have high risk business credit score and/or high-risk personal credit score, the loan amount will be based on your revenue. If your revenue is less than $10,000 per month, you’ll be able to secure 25%-75% of your monthly revenue. If your revenue is more than $15,000 per month, you’ll be able to secure 100%-200% of your monthly revenue. If your need for money isn’t urgent, try to improve your credit score enough to get out of the high-risk category. That’s the best long-term option.
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Your Money Hero & Business Credit Expert! When banks say no, I say YES! Turn your entity into a financial asset. Obtain credit lines (cash too) not tied to your SSN. There are funding options you may not know exist.
What is The Minimum Credit Score I need For a Loan? For most all credit applications, you want to find yourself in the low-risk category. Keep in mind the various business credit bureaus may have different scoring systems. Every lender chooses its own standards. So, there may be variations in scoring levels. However, the U.S. Federal Reserve Bank lays out the general rule for the small business lending industry: Low credit risk: 80–100 business credit score/720+ personal credit score. Medium credit risk: 50–79 business credit score/620–719 personal credit score. High credit risk: 1–49 business credit score/less than 620 personal credit score. Lenders will look at both your personal credit and your business credit as well as your business revenue when making a lending decision. Remember, a personal credit score and a business credit score are completely different things. They use different scoring systems. Even the credit bureaus are different. Some, like Experian, report both types of scores. Dun & Bradstreet is strictly business credit reports. A FICO score is a personal score. Borrowers who are low credit risks get the most choices of loan products and the best terms. Borrowers who are high risk have few choices and will pay the most. Getting even a small loan for business can be tough for high-risk borrowers but not impossible. Can I Get a Business Loan with an under 600 Credit Score? Business owners often want to know: can I get a business loan with a 600-credit score? Or with some other number such as a 500-credit score? The answer is, yes, but it’s going to be hard. If you have high risk business credit score and/or high-risk personal credit score, the loan amount will be based on your revenue. If your revenue is less than $10,000 per month, you’ll be able to secure 25%-75% of your monthly revenue. If your revenue is more than $15,000 per month, you’ll be able to secure 100%-200% of your monthly revenue. If your need for money isn’t urgent, try to improve your credit score enough to get out of the high-risk category. That’s the best long-term option. We offer a free personal credit enhancement eBook if you are interested in improving your personal credit quickly. Just send us an email requesting one.
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As I have demonstrated, the most effective way to avoid a retrade is to require a minimum acceptable level of due diligence and scrutiny and knowing which lenders have a higher or lower propensity to change terms after issuing a Term Sheet. Good news for my clients is that I consider avoiding surprises and or retrades as my job. Therefore, I take pride in the thoroughness of my process and never take my clients' desired outcome for granted. Remember, I’m with my clients from start to funding.