The following is an interview with SBA loan broker Craig G. Francis.
In a letter dated Dec 14th, 2009, Sen. Robert Menendez urged President Obama and House Majority Leader Harry Reid to support a bill that would allow the SBA to provide $20 billion in direct lending to credit worthy businesses. This would supplement a plan to provide TARP funds to local banks for lending. That letter can be reviewed here.
David Kamatoy: There has been a lot of noise lately regarding small business lending because the banks are afraid of making "bad loans," and so they are not lending with the same frequency. The challenge is that the economy needs jobs, and jobs are predominately created by small businesses. Especially at a time when large companies are essentially "streamlining" their businesses in order to be profitable. What is your initial impression of Sen. Robert Menendez's letter?
Craig G. Francis: I think the senator is well meaning but, being a liberal, he thinks that giveaways are the answer. Grants and direct loans, a form of fiscal welfare, generally results in little gain and frequently result in a loss to the lender or grantor. SBA's history is full of direct loans and their terrible payment record. I have heard numbers ranging up to 40-50% in loan losses.
David Kamatoy: How important is the creation of jobs by small businesses?
Craig G. Francis: There is nothing more important than Small Business (SB) job creation. If we don't have jobs, WHAT DO WE HAVE???? A 3,000,0000 sq mile piece of land populated by 300,000,000 homeless people.
David Kamatoy: The administration seems to be running focus groups with the wrong people, that is Big Business rather than Small Business. How do they reach out to the small businesses?
Craig G. Francis: Focus groups do absolutely nothing. Even with the right people giving you the answers you want, you can't lead by polls and focus groups. The marketplace will tell you what is going wrong or right. If the politicians don't understand the problems, focus groups will not help. Unless you are trying to create a SPECIAL OLYMPICS for ill-informed politicians who don't have a clue but want a gold medal for doing nothing, focus groups are a self-serving waste of time.
David Kamatoy: I think a lot of people think that the SBA is already a direct lender. Explain the difference between an SBA Guaranteed Loan vs. Direct Lending?
Craig G. Francis: An SBA loan is a bank loan guaranteed by the SBA. It is somewhat similar to FHA and VA loans. A direct loan from the SBA is funding directly from that division of the federal government to borrowers, usually in the form of a disaster loan. The SBA used to make loans directly to businesses in the 1960 and 1970 time period. The repayment of those loans was very poor, so the SBA got out of direct lending.
David Kamatoy: What are the pros and cons of the SBA doing direct lending?
Craig G. Francis: There are no pros for direct SBA lending. It is a loser from the start since the SBA is not set up to provide direct loans, and it would be a disaster to ask them to do this when their main mandate for the last 30 years has been to underwrite and guaranty bank loans. Imagine the fallout and blowback if the SBA started down this path. People would be lined up down the street for this welfare loan. Who gets the loan? Who is declined? What credit standards are used? For 30 years SBA has relied on the banks to do the underwriting, trusting banks to the point that the lender could approved SBA loans without direct oversight through the PLP (preferred lender program). The SBA is more of an advocacy plan with some internal loan approvals that have been thoroughly vetted and underwritten by the submitting banks.
David Kamatoy: The other Catch 22 is that SBA loans seem to work best with established businesses vs. new businesses. So a lot of new or "forced entrepreneurs" are not likely to look at an SBA Loan. What are the options for a new business?
Craig G. Francis: There are many options for startup businesses. Cash, Bank of Mom/Dad, investors, partners, and, potentially, an SBA loan are good sources of funds for start ups. The banks are quite restrictive in startup loans, as the economy is poor for this type of enterprise when businesses are closing by the thousands due to lack of sales. Drive down any commercial street or walk through a mall to see empty stores and more coming.
While it may seem counterintuitive to start a business in a very depressed economy, the intrepid entrepreneur can find a niche and fill it -- but only if they do substantive research into the business model and careful construction on plans and projections. This planning makes it possible for the startup to enter a business field when others are leaving a business vacuum. I've done several startups this year, but they have had extremely solid underpinnings. This economy is very different from past recessions, and I would not suggest that someone start a business without a lot of capital and a very well-researched business plan. Another way to look at it is this: Would you go out and play Tiddly Winks in a free-fire zone.
David Kamatoy: What is the ideal established business that should be looking at an SBA Loan?
Craig G. Francis: I would not exclude any business, including restaurants, hotels, construction and other types of high-risk business, from expansion today. There is no single industry that is most favored, and there is no single industry that is excluded from financing -- if the circumstances are right for that business.
David Kamatoy: What are the best uses by a business of an SBA Loan?
a. New Location
b. Buy Property
c. Expand operations
Craig G. Francis: Any situation that demands funding is the 'right' use of funds. Loan types range from startups and expansion to capital for inventory, labor, material, equipment and leaseholds, and business purchases. If the specific business situation demands it, these capital uses are the right funds for the business. Even buying commercial owner/user real estate, particularly at depressed values purchased with the lowest cost funds we have experienced in 50 years, is frequently a wise use of capital.
David Kamatoy: It seems to me that the lending of money to small businesses via a bank is still the way to go. How do we get the message out to the business owners, and how do we convince banks to lend the money?
Craig G. Francis: The question can't be answered easily. Banks are whipsawed by the worst economic and fiscal situation of the last 80 years. Banks loan losses are causing bank takeovers on a daily basis. Banks that are still lending are cherry picking to conserve capital and make sure loans are solid and sound. Many banks are prohibited from lending regardless of the quality of the deals, since they are under cease and desist orders from the FDIC. Banks are completely and extremely aware of the dire economic situation that faces business owners. They are very reluctant to make bets with bank funds to small businesses, the most vulnerable of borrowers. And the Feds are making it abundantly clear that the banks are NOT to take undo risks in light of capital requirements imposed by the new regulatory rules, such as marking assets and loans to market.
Notwithstanding Obama's jawboning and attempted moral suasion to goad banks to make more loans, banks will not sign a suicide pact with the government to make unsafe loans. They did plenty of those loans for the last 30 years under the Community Reinvestment Act and other government regulations designed to compel banks to make loans to unqualified people and businesses. The banks are making a stand against this now.
The business community is very aware of the lack of borrowing and loans today, simply by the fact that they read the papers and magazines about this subject. If they are borrowing, and that element of the business financing is down substantially, they know the road is bumpy and often impossible to pass. If the firm is not in first-class condition, the request will be turned down. This is a vicious cycle and a self fulfilling prophecy, because the banks are being hammered from all directions -- as is the SB community. I think this cycle is going to have to work itself out in time, coupled with the slow upward progression of economic activity. It is like a winter thaw. It will come, but slowly.
David Kamatoy: You have actually been successful in the recent tight economy in placing SBA loans for your clients. How different is it?
Craig G. Francis: I can place loans for clients who have solid credentials such as a good cash flow, a solid business plan, better than average FICO score, primary and secondary collateral in abundance, lack of excess debt, and good personal and business capital balances. These businesses are not as commonplace as they used to be since the home values have dropped, sales are down, and profits are impacted by rising costs and shrinking revenues. This is a Depression by any other name and could have been as bad as the 1929 crash if it was not for the $1,000,000,000,000 of federal funding dumped into the banking system and economy to help staunch the blood letting. We are not a healthy economy by any means, since unemployment ranges as high as 18%. Until employment and SB hiring resume, we will be in this rough patch for a few more years. The consumer and SB community are not healthy and won't be for a while.
David Kamatoy: How do you work with business owners that want to apply for SBA Loans?
Craig G. Francis: I am a loan processor and loan broker, with all that the process implies It is a simple and workable model. I work with the applicant to find out their loans needs, help them package and process the loan, and then target banks I think will fund this loan.
David Kamatoy: Do you have any other thoughts or advice to small business owners during these challenging economic times?
Craig G. Francis: If a person has a day job, keep it!! If you have a business, keep it!!!
If you want to start a business, BE ABSOLUTELY SURE the business will survive these lean times and thrive in good times. If a person spends 4 years to get a college degree, then for heaven's sake, the proto-entrepreneur should spend AL LEAST 1-2 years studying their intended field, involving themselves in the specific skills sets of that industry and business ownership, accumulating equity down payment, bringing in their personal brain trust, and making sure they START THE FINANCING process before they commit funds to the actual startup, signing leases, or spending large amounts of funds prepaying franchise fees and other prepaid expenses.
There is a classic statement that typifies a business owner: READY, FIRE, AIM! That is the usual modus operandi of a AAA-type entrepreneur. This is not the time for that reflexive action.
Ask yourself how Warren Buffet would approach the business. He has a $20,000,000,000 checking account. He does his homework before he writes the check. And he is one of the wealthiest men in the world. Want to make a small fortune in this life? Don't start with a large one and blow it. Do your homework!!!
Make haste slowly
David Kamatoy: Thank you, Craig.
Craig G. Francis: A pleasure, David.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.
-Editor Stephen Prendergast