Archive for category: Banking

While we’ve talked about some basics the SBA considers when looking at your application, it’s important to know that not all SBA lenders are created equal, and that your choice of an SBA Preferred Lender Provider (PLP) can get you to a decision 3-6 weeks faster than a standard SBA lender. So, what does it take to become a PLP?

Do the Work

Lenders can’t get a PLP certification just by asking for it. SBA is going to want to see a track record. Proof that lenders have the ability to:

• Process, close, service, and liquidate loans
• Develop and analyze complete loan packages
• Demonstrate knowledge of SBA policies and procedures

Additionally, they have to process a certain loan volume and to have done so with a satisfactory performance history.

Once there is an established track record of successfully processing and servicing SBA-guaranteed loans, there’s a good shot at becoming a PLP.

Nomination

A potential PLP can be nominated by an SBA field office or can ask that field office to be nominated. The lender then goes through an application process and if they are approved, they receive PLP designation for a maximum of two years.

During that two-year period, the SBA will audit loans, policies, and procedures as part of a possible recertification.

A lender can be recertified for the maximum two-year term, for a lesser period, or not at all. While this may seem like a burden on the lender, it also ensures that the SBA is working off the most current information, especially considering the special privileges PLPs receive.

PLP Advantage

Apart from having more loan options and configurations to offer clients, a PLP also has the authority to underwrite their own loans and make a final credit decision. That is what drives the time discrepancy between a PLP and a standard lender, who has to send in a completed package to the SBA and wait on an answer, which can vary significantly depending on the time of the year and market conditions.

In exchange, the PLP agrees, in the case of a default, to liquidate all business assets before asking the SBA to honor its guarantee, often 75% of the originated loan value. This is something the SBA would ask to be done anyway, so this once again underlines the speed component of a PLP relationship: a focus on wrapping up a failed loan with the same efficiency as approving a new one.

Not Just a Label

We’ve dealt with thousands of loans over the years across countless lenders and we don’t only work with PLPs. But we do tend to always have good experiences with PLPs. This is because the PLP label isn’t what made them great lenders. Great lenders have characteristics like:

• Fantastic communication
• Constant professionalism
• Speed in dealing with paperwork
• Empathy in dealing with challenging situations

Those traits are what led to them becoming PLPs, hence when they got their designation, we often already had a great relationship with them. We don’t only work with PLPs, but we definitely prefer them (and have names to share should you need them!).

Can’t get enough SBA knowledge? Check out this recent podcast with guest Jason Moxness that deals with myths about SBA lending. Or you can always give us a call.

One of the final acts of the outgoing administration in Washington was the signing of a bill that had $284B allocated for a second round of the Paycheck Protection Program (PPP).  The program is set to last until March 31, 2021 or when all the allocated funds have been assigned, whichever comes first.  The pool of those eligible for this round is significantly larger than last time, and in even better news for some, those who already received a first PPP loan and had it forgiven are eligible to receive a second one.  

Eligibility

First-time borrowers must have a business of under 500 employees, and that business must have been operating since February 15th, 2020 (and must still be operating).  Gross receipts in the first three quarters of 2020 must have been reduced by at least 25% from the corresponding quarters in 2019.  The loan amounts are capped at $10M.

Second-time borrowers must have a business under 300 employees, and must have used or allocated all of the funding they received under the first round of PPP.  Their loan amounts are capped at $2M.

How to Calculate

There are two ways to calculate your loan amount.  You can take either:

• Average monthly payroll in 2019 or
• Average monthly payroll in the year prior to the start of the loan

That number is then multiplied by 2.5 for most businesses, or 3.5 for hospitality businesses.  It’s just one of many boxes on a standard government form.

What Expenses are Eligible?

In round 1, the eligible expenses were narrowly defined: rent, mortgage interest, payroll, and utilities.  This round took account of several other costs:

1. Property Damage.  If your business was the recipient of vandalism, looting, etc. that was not covered by insurance or other compensation, repairs are covered.
2. Operations Expenditures.  If your business had to get new digital infrastructure to enable remote working, for example, such as software or cloud services, those costs are covered.
3. Supplier costs.  If you had payments to suppliers whose products/services were essential to you at the time of payment (or are now), those payments are covered.
4. Worker protection.  If you have had to make changes to your work environment, such as construction of barriers, expansion of the premises for social distancing needs, installation of filtration or ventilation systems, or ongoing costs like masks or gel, those costs are also covered.

Tax Implications

The forgiveness guidance given for the first round of loans is the same in this round, but with more explicit financial and tax guidance.  Points worth noting include:

• The loans have a five year maturity, and are pegged to a 1% non adjustable, not compounding interest rate
• No prepayment penalties may be levied by lenders
• The covered period (the period in which the loan must be used in order to be considered forgivable) can be between 8-24 weeks, and can be chosen by the borrower

The SBA has a tool to help you find a lender in your area (as well as a PDF defending themselves from accusations of abuse from the first round of PPP).  There are even some nonbank lenders getting in on this, including Square (known for its point-of-sale and credit card processing business) and Fintech player Kabbage.

Clarification was also given that PPP forgiven funds would not be taxed as income, and any normally-deductible expenses paid for by PPP funds would remain deductible.

Should You Take the Money?

At the risk of sounding like an accountant, “it depends.”  If you really need the money and are eligible, there’s already precedent in place for loan forgiveness so there’s virtually none of the uncertainty that existed last year when the first round of PPP came out.  

If you are considering selling your business, talk it over with a business broker (we know a few) as to whether this is something that should be done before putting your business on the market.  

However, if you don’t really need the money, then you probably shouldn’t take it.  There’s not an unlimited pool of funds, and there are businesses out there that could really use those funds to not just “get by,” but simply survive.  If we are going to make it through these months and years together, we are going to have to (continue to) think of others even as we make highly personal business decisions.

One of the new skill sets we picked up in 2020 was learning the sorts of questions banks contemplating a buy/sell business transaction are asking when Covid-19 and PPP are in the mix.  To learn more, feel free to give us a call.

We are still watching deals happen during this unique year in our history. What we’ve begun to notice more and more is that banks are asking more questions. With an overall feeling of caution in the air, an industry already known for its caution in “normal” times has become even more cautious.

We wanted to share some of the questions banks are asking our clients as they pursue traditional financing.

Strategic Questions

How has the business been affected by Covid-19?
This doesn’t just concern finances, but the status of your lease, the state of your employees, and the general state of your industry (this includes general forecasting on the future). There will be more specific questions to follow, but this is an “executive summary” answer.

Did the business shut down? If so, for how long, and why?
Obviously, a bank will be happy to see a simple “No” here, but well-answered “Yes” and “Why” responses are also helpful.

Did the seller pivot and does the buyer have to change anything about the operations or model in the near future?
This is the asterisk that banks are going to put on your older financials. They want to know what things look like now that you’ve made adjustments (if you did) and what the buyer will have to do (if anything) in the months ahead.

Are there growth opportunities because of the crisis?
While there is much doom and gloom in some parts of the market, those in transportation and manufacturing have had banner years. Some pivots have also yielded great results for businesses.

PPP/EIDL Questions

Did the business receive a PPP loan or an EIDL loan?
This is fairly obvious and part of the financial snapshot of the company anyway.

Does the business expect the PPP loan to be forgiven?
Well, this is slightly more complicated as it’s not entirely in the hands of the seller. We’ve written about this already, but we expect more clarity in the months ahead to assist sellers in answering this question.

Will the PPP loan be paid off by the seller prior to the sale of the company?
This hasn’t been a deal breaker, but if it’s a yes, it has seemed to have provided some comfort to the banks. Understandably, if a seller is hoping for loan forgiveness, they might choose to wait rather than pay off a loan that would have been forgiven, especially if it’s a large amount.

Supply Chain Questions

Has your production or supply chain been disrupted? Please explain in the context of pre-Covid vs. post-Covid.
One unexpected side effect of the sudden demand for Plexiglas is that it’s doubled and tripled in price. Businesses that you wouldn’t immediately think had anything to do with that material on a day-to-day basis are seeing the price of it go through the roof. There can be delays measured in weeks to obtain Plexiglas at the new price.

How does this affect margins?
In the Plexiglas example above, obviously without a severe (and understandable) change in price to the customer, margins are going to get chewed up. This will need to be explained across every product/service in your business.

Projections

The big question: What are your detailed projections for the next 2-3 years?
We’re seeing banks ask for forensic level detail here as we’ve never seen before: they want month by month breakdowns. We know that these are educated guesses at best, but this is what we’re seeing creep into diligence at this moment.

We don’t want to overwhelm you with all of the questions, so we’ll save more for a future article on this subject. In the meantime, if you don’t want to deal with the bank on your own, give us a call. We’re happy to help!