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The 504 Process…. Or “A Peak Behind the Curtain.”

10/20/2013

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Wizard of Oz: [speaking with a booming  voice into a microphone] I AM THE GREAT AND POWERFUL... [then, he  realizes that the curtain has been ripped open, his secret is out and it is useless to continue the masquerade.  The wizard moves away from microphone allowing his shoulders to sink and speaks in a normal voice]. ... Wizard of Oz. 

Sometimes commercial lending and borrowing, especially when using an SBA program, can seem like a hocus pocus magic trick.  It can be complicated when the curtain is closed, but we strive to make sure we are more “Oscar Zoroaster Phadrig Isaac Norman Henkel Emmannuel Ambroise Diggs,” (the wizard’s actual name…notice that the first letters of his first two names spell OZ.  The first letters of the remaining names spell P-I-N-H-E-A-D… kind of funny, actually) than the mysterious Wizard.  Let’s hope this blog pulls the curtain back and gives a peak into the process of 504 lending.

 In a perfect environment, it takes approximately 70 days to fund a project from the time the application is approved by SBA. It is important to remember that the 504 loan does not fund a project until all construction has been completed. This, however, does not mean that projects have to wait 70 days to get started.   The bank partner provides the interim financing once the 504 application has been approved by SBA.  Interim financing can be thought of as short-term financing issued in anticipation of longer-term financing.  It acts as the financial “bridge” from project start to project completion. The banking partner and the borrower are alerted that the loan has been approved (everyone celebrates and toasts each other). The bank puts the interim loan in place and the project starts (this may be the part where toasting each other dries up and the “Oh no, what have I done” feelings start. Don’t worry; those feelings go away pretty quickly).

 The project has gone well and no major cost overruns or construction hiccups have taken place (this is Oz, I can put as much outlandish stuff in my stories as I want).  The next step is the closing.  A pile of documents need to be signed   including the note, the servicing agent agreement and guarantees. The loan package is then shipped off to the attorneys (yours, Enterprises’ and SBA’s). This seems odd, right?  We have already gone through the closing, but it is just now getting sent to the attorney?  Remember, this is Oz. There are still a lot of holes to fill in, including the interest rate, the pool date and the bond sale.  This is where the 504 process diverges from conventional financing and follows the “yellow brick road” that leads to the bond market.  After the attorneys “perfect” the package, ensuring that all of the necessary information is included, the loan is forwarded to the underwriters to be pooled with other 504 loans and sold as  debentures. A debenture can be thought of as a promissory note secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. 504 loans from all over the country are “pooled” together and sold on the bond market with a full government guaranty.  This is why it is so important for SBA and their 504 partners to do as much due diligence as possible. These bonds are sold based on the SBA’s ability to ensure that the borrower has a solid business and will more than likely pay on time and in full.

 We are closing in on the end of our journey.  The final two steps are the pricing date and the funding date.  The pricing date is a fixed date, which is always the Thursday of the first full week in the month. This is the date when the fixed interest rate for your 504 loan is set.  The funding date is the first Wednesday after the pricing date. The funding date is exactly what it sounds like. The funds are wired to the participating lender and the bank is reimbursed for the 504 lender’s portion of the loan (up to 40%). The fixed interest rates are set, the final loan structure is in place and our journey is complete and we become friends for the next 10 to 20 years.
 
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The Shutdown

10/16/2013

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As of 10/16/13, the government is shutdown.  All non-essential employees have been furloughed.  Only those deemed essential, such as Federal Aviation Administration personnel (air traffic controllers) and the standing military, are at their  jobs. We are often asked, “Does the shutdown affect you and are you guys still working?”  Let’s tackle both of those questions, beginning with the last one.

We are still plugging away. Enterprise Development is not a government agency.  It is a not-for-profit organization that has to operate like any small, entrepreneurial business.  The company must make payroll, pay expenses and earn money.  No furlough here at 910 E. Broadway.  To the contrary, if you stop by you will see a flurry of activity as we prepare to provide fixed rate lending to more approved businesses and get ready for what we think will be a booming  2014.

The other question is “Does the shutdown affect you?”  You bet it does.  In coming blog posts, I am going to give a very detailed account about the process that the bank, a certified 504 lender and the borrower go through to get a loan. For the sake of brevity in this post, it is safe to assume it is a multi-step process that requires government action during critical steps.  Since SBA employees are furloughed, no loans are currently getting approved.  This not only affects loan applications now, but it also affects fundings that are scheduled for November.  It is kind of like getting to the airport early and waiting for your flight, and then finding it has been delayed.  This delay not only affects your travel plans, but might also cause problems with the travel plans of everyone else over the entire day.   

This issue seems obvious, but there is another potentially bigger problem that most do not consider. The SBA 504 loan's fixed rate lending structure is tied to Treasury bill interest rates.  Since T-bills are a traded commodity, the shutdown and looming debt crisis might cause more interest rate fluctuations and volatility.  Thus, it becomes impossible for us to predict what interest rates might be when the loans are funded.  And, of course, if the shutdown goes on too long, and US debt service is questioned, interest rates may start to climb.  504 loan rates then must necessarily increase, causing potential problems across the entire lending spectrum.  From a small business standpoint, let’s hope our leaders find the wisdom to solve the problem in a timely and prudent manner.

Mike Schrader
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Me Myself and Fi (-nancial Statements)

10/8/2013

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  There are so many things that affect a business. Some directly impact the day to day operations, like customer service, production or selling.  These are the activities that drive the business and all are critical for success. However, from a consultant’s and lender’s point of view, nothing gives more confidence and assurance than the financial statements.

Financial statements tell a tale and the numbers and categories are the illustrations.  When I look at cost of goods I hear so many stories. They can tell me that the company is doing a great job at controlling costs.  They also might be giving you a tip that someone is “borrowing items” from  inventory.  A year over year revenue increase might shout that the sales and customer service team is  doing a great job.  A sales decline might whisper with dread that new competition has entered the market. If the accounts payable cycle increases, your storybook might be warning you that an underlying cash flow problem might be occurring.  Of course the picture might also indicate that the payables department has gotten more favorable terms and are simply hanging on to cash a little longer. Aging receivables might be waving their arms and screaming "BE CAREFUL! YOUR CUSTOMER MIGHT BE HAVING CASH FLOW PROBLEMS AND YOU ARE GOING TO GET STIFFED!"  They are the possibilities that make the plot interesting and understanding essential.
 
One of the first things I ask a business owner is “what do the financials look like?”  When that owner confidently explains them to me and can answer my questions, I gain so much confidence in them and their ability to manage.  When financials are a mess, that company is usually not functioning as well as it could. 
 
Understand your financials. They tell the best stories ever.... My review is "A ripping good yarn.  5 out 5 dollar signs."


Mike Schrader
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Hello

10/2/2013

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Hi I am Mike Schrader and I am here to help.  

Sometimes I hear those words from people and I get excited and other times it makes me very nervous.  In  this case I really am here to help.  I should probably tell you a little about myself and then let you be the  judge.

I started working with Donna Hamilton and Enterprise Development on October 1, 2013.  I had done a lot of contract work with the them in the past and was always amazed at Donna’s professionalism, knowledge, grace and calmness. I also was really interested in commercial lending.  When Donna asked if I would join the team, I did not hesitate.  I knew I would learn the in’s and out’s of 504 lending and get the opportunity to work with really great people.

Though I am new to the fine points of business lending, I have been “juggling” around its periphery for a long time.  I have been a management coach for 17 years and have owned two businesses over the past 8 years.  One is a  medical technology business and the other is a consulting company.  Both are still moving forward and (knock on wood… spit through your fingers…) still gaining momentum.  I also teach a consulting class in the University of Missouri's MBA program.  I am fervent (borderline fanatical) about entrepreneurship and the value of small business as the economic engine for a thriving economy.

Away from work, I am passionate about my family and soccer.  Most Saturday and Sunday mornings I can either be found at a soccer field with my family or in front of the television watching the English Premier League. 

Give me a call to discuss a lending option, or the merits of the 4-4-2 versus 3-5-2 formation.  I would love to help 
with either one.
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