Draw your own conclusions, but act quickly.  Adele and I are here to pre-qualify any deals that you are currently working on.

As reported on the SBA website.

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 (the “Small Business Jobs Act”). This legislation provided an additional $505 million to the Small Business Administration to support as much as $14 billion in lending to small businesses. These funds are available to provide fee relief for new 7(a) and 504 loans under Sections 501 and 502 of the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”). In addition, this legislation extends the authority for SBA to provide a higher guaranty on eligible 7(a) loans to December 31, 2010. On December 22, 2010 the agency released SBA Information Notice 5000-1190 to announce the further extension of this authority through March 4, 2011, as part of HR 3082, the Continuing Appropriations Act, 2011, and to provide related information.

In SBA Information Notice 5000-1188 (effective date December 9, 2010), SBA announced deadlines for submitting Small Business Jobs Act loan applications of December 15, 2010 (for loans submitted under non-delegated authority) and December 31, 2010 (for loans submitted under delegated authority). These deadlines were set assuming that SBA’s authority to make Small Business Jobs Act loans would expire, as scheduled, on December 31, 2010.

Since that announcement, SBA has seen an unprecedented increase in loan applications and approvals. During the week of December 12, SBA approved almost $1.5 billion in Small Business Jobs Act loans—the highest weekly volume since the agency began tracking weekly loan data, representing more loans approved in a single week than in an average month under the previously implemented Jobs Act loan enhancements.

As a result, the Transition Phase Indicator is now Yellow indicating the shrinking availability of funds and that the loan queue will be operational when funding runs out . Soon after the current funds are exhausted, the Transition Phase Indicator will be switched to Red indicating that no new applications are being accepted in the Loan Queues and loans already in the Loan Queues will be funded (as evidenced by receipt of an SBA loan number) as funds become available through cancellations of previously approved Small Business Jobs Act loans as long as authority remains to do so. The queue will change to Red when no new applications are being accepted under the Small Business Jobs Act.

The information on this web page and the links it contains will provide you with the information you will need to make an informed decision as to whether you want your loan application to remain in the SBA Loan Queue awaiting the possibility of funds becoming available as a result funding or you want to withdraw your application and re-submit it as a non- Small Business Jobs Act loan with all applicable fees and lower guaranty levels.

As reported in the Christian Scientist Monitor The NFIB Index of Small Business Optimism rose slightly in November.  However, the index is still at a recession-level reading. Any improvement that we have seen in this index this year is the weakest of all “recovery” periods since 1973, the start of the NFIB surveys.

While some are calling this a weak recovery, I see no evidence that any appreciable recovery is taking place. The NFIB survey bears me out on this.

Employment improvement in small businesses continues to be anemic. The average gain in employment for November was 0.01 workers per firm. Up from 0.0 in October. Small businesses aggressively shed jobs for the first two years of the recession. Those businesses that have survived are operating at lean staffing levels right now.

Those businesses that have survived are beginning to invest in the future. While capital spending has been very low for the past two years, November saw some improvement. About half of all firms reported capital outlays over the past six months. However, spending is not on those things we would expect during a recovery. Most of the expenditures was on things that need to be replaced to maintain operations. Of those who spent money on capital items, 35 percent spent on new equipment, 19 percent acquired vehicles (up three points), and 12 percent improved or expanded facilities. Only 4% acquired new buildings or land for expansion, which is what will signal new growth in the economy.

So what does this mean to you and me.  Borrowing is going to become very specific to the existing needs of a business, not their future needs.  Which can be a good thing, providing of course that their present financials are strong enough to meet the the stringent underwriting requirements of today’s financial institutions.  Many of our clients are looking for marketing dollars to be able to “beef up” for future potential projects, which would mean that the lenders would be looking at projections,  which many lenders are not doing as of yet.  So borrowing to improve one’s current situation to replace machinery that is obsolete, or needs repair may be an easier loan for a bank to finance.

So continue to watch the economic borrowing pattersn of America to determine where we REALLY stand or sit in this case as to the current recovery.  For more information on SBA Loans or commercial Lending contact us.

We lost in prospective approved deals more than we made for the entire year, and I know that we were not alone in this phenomenon.  But WHY?

I blame not the economy but the talking “heads” - pundits about the economy.  They have provided many people a false sense of security that we are over this economic wave, and that only better times (which translate to better deals) are ahead.  Nothing  in my mind can be further than the truth.  We are still in this economic sea of turmoil.  Lenders are not opening up the spicket so to say and lending everyone who needs capital money yet.  There is a false sense of security as to the lending community,  so please if you have an approved loan - TAKE IT, as there may not be a loan waiting for you in the months to come with better terms.  Lenders are still being very restrictive on their lending criteria.

So if you are not the cream of the crop, and you are fortunate to get a real Letter of Commitment - then pull the trigger and go for it.  I believe in the long run you will be very pleased that you did, as long as you made a smart buying opinion.

2010 did see one major change,  The SBA 7A loan which was capped at 2,000,0000 (two million dollars) has been raised to 5,000,0000 (five million dollars).

Lastly be aware that now for the first time SBA Loans can be applied to Self Storage Loans as well as Mobile Home Park loans.  What that means is that a qualified buyer can now buy a self storage facility anywhere in the US for as little as 15% down or in some instance may be even as little as 10% down.

With the cost of real estate still plummeting this is a great way to get an increased ROI or IRR by purchasing a cash flowing property with 10%  to 15%  down you are almost guaranteed a positive cash flow from day one.  At the least it is a GREAT DEAL.

The words “Down Payment” conjure up a lot of images, as well as lots of misconceptions.

100% financing – no down payment, pay latter terms, etc, sounds like an infomercial for a furniture salesroom.

Bank loans to real borrowers could not be anything further from what those infomercial advertisements would have you believe.

First of all let me state categorically there is no 100% financing for any bank loan in the market place. Even the lenders that profess that they have 100% financing do not. As a borrower you will have to put down money to buy a property whether it’s a business or a piece of commercial real estate.

“I have to have a down payment but how much?”

Well that is a very interesting question and one that cannot be answered specifically but rather generally. Each lender will have their requirement for a down payment. For example an SBA lender, using the SBA504 Program, will only require 10%, while a commercial investment piece of property depending on the CAP Rate may require at least 35%, or anywhere between the two. Land financing if you can locate a straight land lender will usually require 50% down.

Let’s look at the above example of 50% down; we will use 50% for ease of mathematical formula. Assume a property is selling for $300,000.00, no interest carry, no points, fees etc. The loan is for 50% of 300,000 or $150,000, as the borrower brings to the table $150,000 or 50% Down.

But the above scenario is not realistic. What lender is going to do a loan with no points no fees etc? Also if development is involved there will be interest carry for the loan, so the project cost is no longer $300,000.00 but maybe $350,000.00 so a 50% Down would now be half of $350,000.00, not $300,000.00. Some lenders may split the difference by not charging the points directly and putting them in the loan, while in the loan they may not be subject to 50% for the down payment.

Read GET Your Loan Closed! to find those important questions to ask your lender, and to view actual loan sizing models.

Loan to value is the amount of money of your down payment as compared to the loan amount borrowed. Notice it is not compared to the purchase price but as compared to the loan amount. For example 25,000 down against a $100,000 loan will yield a 75% Loan To value.

The only thing you should be aware of is that a lender who states they will loan at 75% loan to value, may not actually lend at 75% because if the property does not cash flow at the appropriate debt service ratio, the lender will not lend the value they stated but will reduce their loan to value to meet cash flow requirements. So in essence you have to look at all the factors of the loan, cash flow as well as debt service to determine what the actual loan to value will be that the lender is comfortable with. For a complete example of how this works please refer to our book GET Your Loan Closed From the clients perspective this is probably the most misunderstood area of commercial financing.

It is vital to understand how all these factors interrelate and that they cannot be taken individually but must rather be looked at collectively.

Next week we wrap up the FREE White reports with Putting it all Together in the Loan Package. Make sure you order the Book GET Your Loan Closed to get in depth knowledge of all ten of these reports at only $62.00 for the hard cover or $37.00 for the pdf version.  Order Now! GET Your Loan Closed

Today, more than ever, Experience is being required for all Loans!

Before, if you ran any type of business, it would have been considered sufficient experience in order for a person to purchase a business. If you had owned a home then you were qualified as an apartment owner, if you owned any property as a landlord that was good enough to buy a hotel or a motel. NO MORE!

Experience is now so very important, in every area of lending, no matter what the type of property you are trying to acquire.

Now that I have told you the facts, let’s start with some basic details about experience. Again, we will use the same two scenarios that we used in the last White Report, one for the sale of a business the other for a sale or purchase of a commercial investment.

SBA Loans made by SBA Lenders are the predominant type of loan for the purchase of a business; these lenders now want direct experience in the industry in which the new business will reside, as well as previous ownership in the same field.

Find out about exceptions to this requirement in GET Your Loan Closed!.

Does management experience in the same industry qualify as experience?

Today probably not, Ownership interest is drastically different than management experience. As a manager all you need to do is run the day to day business. As an owner you have to handle all of the management as well as the ownership responsibilities such as paying taxes, filing financial reports, hiring and firing employees and making decisions that are directly related to the overall financial status of the business.

If you have been a manager in the same type of industry and you have owned other businesses in the past that may get you very close to experience. For example, we just closed a sale of a liquor store where the owner had no previous experience owning a liquor store. However when he was younger he worked in one for a while, he also has owned previous businesses outside of the liquor industry. So together when the lender looked at the “whole” picture they qualified him based on his varying work experiences accumulated over a lifetime of employment.

We provide at least six ways to combat this problem  GET Your Loan Closed!.

What about for the purchase of an investment piece of property?

For example can anyone buy a hotel?

Well, What about self-storage facilities where I will just over see the project and there is a full time manger?

Across the board, experience is playing a major role. The larger the loan the more direct experience is required. Again the lenders are trying to limit their potential exposure to a loss by requiring direct experience in the area that the loan would fund.

Experience by itself will not prevent you from getting a loan for an investment piece of property but it may well prevent you from getting a loan for a business acquisition loan where the SBA requires direct experience to fund the loan. For more details on SBA Financing check out our book  GET Your Loan Closed!.

Today collateral it’s more important than ever!

Six months ago collateral was something the banks were glad to have, today it is mandatory. More and more of our lenders are becoming cash flow as well as collateral based lenders.

What does that mean to you?

It means that not only do you have to make sure that you can support the debt service of your project, the subject property (if this is a real estate transaction) has to appraise at the purchase price, but oftentimes banks are now asking for additional collateral.

So now that we know that additional collateral is needed, let’s look at collateral in light of three types of common transactions. The first transaction would be for the purchase of a business that does not include any real estate. The second scenario is for the purchase of a business that also includes real estate. In a third example we will look at the acquisition of a commercial investment property.

For the Business Acquisition there is no real estate collateral from the inception, the business is being sold as a leasehold estate for the remainder of the existing lease. Today more than ever the lenders are going to WANT collateral to secure their lending position. All of the business assets will be pledged for the loan at the fair market liquidation value as the first form of collateral.

If for example the business being sold is one that is industrial based then there will be manufacturing equipment which could be used to support the needed collateral. Know that even if the equipment is not sufficient to support the loan by itself the lenders are going to have a lien against all the FFE (Furniture Fixtures and Equipment) that the business has. The lien they file is a UCC1 Filing Statement… more about this in our book GET Your Loan Closed!.

Read our book GET Your Loan Closed!. to find out answers to solving the above question regarding no-collateral

Our second scenario… business with real estate

The lender will appraise the property and if the appraisal of the property comes in at the sales price there will not be a need for any additional collateral for the purchase of the real estate. However, because the business is being sold, as well, there may be additional collateral for the business purchase. Most likely the FFE can cover this as well as the real estate building. However in today’s economic arena some lenders, not all, are asking for almost 100% collateral coverage and then additional collateral for the business acquisition purchase would be needed.

Find out about all the misconceptions about purchase versus appraisal as it relates to collateral in GET Your Loan Closed!.

Commercial investments are looked at differently; they are based on the CAP rate or the capitalization rate, as well as the debt service coverage ratio as discussed in previous white reports. Most commercial investments will not require any additional collateral, unless the debt service is not being covered. In this case a lender may offer the potential borrower the ability to cross-collateralize the property with another one they may already own. The cross-collateralization protects the lender in case of default they now have two properties which together should be worth what the property would be sold at on the open market.

Lately lenders are getting away from cross-collateralization because they want to see deals stand on their own merits.

Now that you’re aware of collateral requirements how do you meet them?

First and foremost for scenarios one and two, a lender will hire an appraiser of the real estate assets as well as an appraiser of the business assets to determine the exposure of the borrower. If the borrower has a good steady income and low debt service obligations that may be sufficient without the need for additional collateral. But the more the borrower gets away from being the perfect applicant the more the lenders are going to want to secure their investment with additional collateral.

More on ways of meeting collateral requirements in GET Your Loan Closed!.

What does the Appraisal process have to do with loan approval?

Everything…ESPECIALLY TODAY!

As lenders become more and more cautious about lending their depositors dollars they are looking for more and more security. Security translates to collateral, collateral translates to security, and they are now one and the same.

An appraisal will be needed to guarantee the bank that the borrower will provide the bank with adequate collateral/security.

The appraisal can be for the subject property, or the appraisal can be for the collateral, or for both. As the appraisals for subject properties are coming in lower than the purchase prices even real estate deals are still requiring additional collateral.

How can that be?

The answer is because of bank foreclosures, short sales, and the sub-prime debacle.

What does that have to do with a good solid deal? EVERYTHING!

Since the banks may have to in the future take back the property as mentioned in the last white report, the bank needs to know they have enough security behind the deal.

With this report we are not going to delve into the different types of appraisal methods, such as the three ways of appraising property: comparables, market approach and the income approach. We are also not going to discuss the highest and best use rule other than to say that a property should be appraised for its ultimate use, not necessarily the use that it is today.

For example a lot that can be approved for neighborhood commercial real estate should be appraised for commercial usage rather than as a residential lot if the property can be re-zoned. More on the process in GET Your Loan Closed!.

The appraisal process is a very complicated science with lots of moving variables. Appraisers find comparable properties then either add or deduct value as the subject property is evaluated to the comparables. The appraiser based on what the market is dictating determines the value added or deducted. If the market is stronger then the additions will be higher, if the market is tending to be lower then the additions will not be as high, or maybe not at all. In a declining market properties that are not as strong and the comparables will have even higher deductions as well.

The appraiser will look at all plans and drawings to determine what the future use of the property is for clients that are going through the construction process.

As I am not an expert in the appraisal process this white report will be cut short, the purpose of this report was to identify potential issues and to point you in the right direction as it relates to the process.

Most importantly for a commercial loan do not order the appraisal yourself! If you need to have a value before you enter into a purchase agreement there are two approaches you can take.

1. Hire an appraiser to do a simple appraisal to get a value, do not get the full blown report as it will cost you thousands for a commercial appraisal, and the likelihood that the bank will accept the appraisal is not very high.

2. For the second point download a copy of our book today or order at hard copy at GET Your Loan Closed!.

For more on the different types of appraisal and more comprehensive examples order our book GET Your Loan Closed!.

Our next concept that needs to be understood is cash flow.

NO matter what your credit score, no matter what experience you have running the same business or investment piece of property, no matter how much money you have to put down for the purchase, no matter how many liquid assets you control, no matter how much collateral you can muster, it all means NOTHING if there is no supporting cash flow from the project to meet the expected debt service for the acquisition in question.

Today more than ever lenders are looking for supporting cash flow from the project. When cash flow is lacking it becomes extremely difficult to finance the new acquisition; even with income coming from additional properties lenders are still reluctant to lend.

Why is this, the case?

If the lender has to take a property back they want to be damn sure that the property is going to pay for itself. They don’t want another non-performing asset on their books. When a lender takes back a property it is classified as performing or non-performing. It remains non-performing until the borrower can support the debt service and starts paying on the mortgage again. The other option is that the cash flow from the rents and all auxiliary income collected can adequately cover the loan payments.

So we are back to the same position, that of cash flow.

What is cash flow?

Cash flow is defined differently depending on what you are acquiring. For example if you are buying a business the cash flow is more aptly called Sellers Discretionary Earnings (money which is left at the end of the month for the seller after all debt service and other expenditures are covered). Actually, business brokers use SDE to determine the selling price of a business, but more about that latter.

Our book, GET Your Loan Closed! spends about half a chapter on the valuation of a business as it relates to Sellers Discretionary Cash Flow. Get it here (insert link)

If you are purchasing a piece of real estate, then cash flow is that money which is left over after you deduct all your debt service and operating expenses for the property. Once that net amount is determined the lender will allow you a certain percentage of the available cash flow for the new loan. The total dollars that you are lent is ascertained by the calculation known as debt service coverage ratio.

Debt service Coverage ratio is the new loan’s expected annual debt service divided by the current yearly net cash flow. Today more than ever lenders want to know if you have more cash available then is projected to meet your debt obligation.

Another point to ask yourself is…

WHY WOULD YOU BUY A PROPERTY THAT IS NOT CASH FLOWING?

Much more on ROI including examples and calculations in our 95 page color book GET Your Loan Closed!

Order it today.

We are currently working with a client that is purchasing a piece of property knowing today that it is currently a poor investment, but they have information a major thoroughfare will be built through the town, so they are betting on the future value of the property even though today the economics don’t make sense.

So how is cash flow really calculated from the lenders point of view? The lender will calculate cash flow very differently than the prospective borrower. I cannot tell you how many times I have a client demonstrate to me that the project is cash flowing at a 1:1.25 ratio, and the lender comes back with their calculations at 1:105, or even less.

Why such a discrepancy? Who is Right?

The reason for the discrepancy is the lender will add in all expenditures and apply them to the bottom line. The key term in the last sentence is all. All means expenses that don’t appear today on the seller’s cash flow analysis, income and expense statement or even in tax returns.

How can these expenses be applied when they do not appear anywhere?

Again the reason is lenders always look at the worst-case scenario, which is, they have to take the property back due to foreclosure. If the lender has to take the property back they will have marketing, leasing and management expenses to run the property. Most borrowers will reduce or totally eliminate these costs. The buyer’s rational is they are going to do the leasing, and marketing of the property. Borrowers also assert they can perform these duties for a lot less than the cost of a professional manager or management company. Expenses are thoroughly analyzed in , GET Your Loan Closed!!

I’m not telling you this to scare you, but to prepare you.

As I mentioned previously Cash Flow is King, We want to make sure that you are accounting for all expenditures. By the way any extraordinary expenses such as a new roof or one time only equipment purchases are not deducted against cash flow as they are one-time non-recurring expenses.

So in conclusion to this white report, you must understand the entire cash flow picture. In our book, GET Your Loan Closed! we delve into different cash flow models with much greater detail and we also offer examples of calculations, tax returns, rent rolls etc, all to make you a more knowledgeable buyer of property and borrower of funds.

Numbers, Numbers, Numbers, what do they all mean?

Your credit score, as you are most likely aware, will be a very important factor during the underwriting process and ultimate approval for your loan. But once again we are ahead of ourselves.

So let’s examine first what is your credit score and how it is calculated. Then we will determine what, if any control you have of improving your score. For a much more in-depth study on credit scoring please refer to our book GET Your Loan Closed! which you can download now.

Fair Isaac or FICO scores are the key to the lock that must be opened before any bank will entertain a loan for you. Before the bank decides on what the loan terms are (which they base on their “risk”), lenders want to know two important things about you. “Do you have the financial capacity monthly to make payments on the loan and what is your willingness to repay the bank during the term of the loan?”

For the first question, the bank calculates your income-to-debt obligation ratio; more on this ratio in an upcoming white report.

For your willingness to pay back the loan your credit report and score is consulted.

What is credit scoring?

Credit scoring is a system creditors use to help determine whether or not to extend you credit.

Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the opening date of the extension of credit is collected. All this information and more is gathered from reviewing your loan application and verified by the contents of your credit report. Much much more in GET Your Loan Closed!

Why is credit scoring used?

Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. The credit process treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and will vary when applied by different individuals and institutions.

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they’re named after their inventor!). Your FICO score is between 350 (high risk to lender) and 850 (low risk to lender).

Credit scores only consider the data and information contained in the credit profile. They do not take into consideration other factors such as a borrower’s income, savings, down payment amount, or even demographic factors like gender, race, nationality or marital status. Credit scoring was developed as a way to consider only what was relevant to somebody’s willingness to repay the loan.

With a client’s credit score, the challenge from a lenders point of view is that it is always changing. The problem then becomes that you “pull” your credit and feel comfortable when the score shown is over 650, the minimum for many lenders to grant SBA loan approval, and the lender get a different score when they “pull” it. The reason for this divergence may be as simple as the lenders credit report is different than the “free” one you can “pull” on the internet, or there could be actual changes due to other institutions updating information to the three main credit reporting agencies; Experian, Trans Union, and Equifax. Most agencies will report credit delinquencies every thirty days. For more on reading and understanding about your credit report, download our 95 page color book, GET Your Loan Closed!

Credit analysis and the credit decision process are done in-house by the underwriter assigned to your loan by the Financial Institution. The lender is required to use appropriate and generally accepted credit analysis processes and procedures, and they must be applied consistently. Acceptable analytical measures include “credit scoring,” if the lender uses credit scoring More on the scoring in ,GET Your Loan Closed!

The one thing a lender does not want is to be surprised. I cannot stress this enough, surprises are not good for the banker or for you! They will significantly affect your likelihood of approval.

For more ideas on fixing your credit score read our 95 color page book, GET Your Loan Closed!

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