April 4, 2024 • 30 mins
In this episode of the Apex Business Advisors Podcast, host Andy Cavanaugh and Doug Hubler chat with Jason Moxness, a seasoned expert on Small Business Association (SBA) loans. They discuss recent changes in the SBA landscape and their impact on business acquisitions, covering updates on loan application processes, criteria, and qualifying factors. The conversation also explores essential advice on loan approval and investment decisions, including rising interest rates and equity requirements for buyers. New opportunities, such as using SBA funds to buy into a business and reduced down payment requirements, are highlighted, along with provisions for business growth through acquisition. The episode ends with a focus on being a "strong borrower" and seizing new provisions to maximize benefits. This resource is invaluable for those navigating SBA loans for business acquisition or expanding existing ventures.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Music.
(00:38):
Back to the Apex Business Advisors podcast. I'm your host, Andy Kavanaugh,
joined once again by Doug Hubler. As always.
As always, except last week. Oh yeah, that's right.
Once again, that makes more sense, actually. Once again, I'm back.
Thank you very much. Yep, sorry. For taking the reins. Yeah, sorry.
Doug and I had some, I'm sorry, our schedules couldn't align last week.
(01:02):
You kept avoiding me.
I do look at the board where you're like, I'm out Wednesday,
Thursday. Oh, really? You're out those days?
Oh, man. Yeah. Well, we have a guest today.
The guest that we're excited. Looks familiar. We're excited to have him back.
One of our most popular topics, that, of course, being the SBA loan program.
(01:26):
Who doesn't love a good podcast on the SBA loan program? Everybody get a cup of coffee.
Introduce our guest. You know, I'm going to say his name in real life, not his former name.
Jason Moxness is our SBA guest.
Expert, preferred lender, the one who keeps us all grounded on this.
(01:49):
And I think one of the things that I think everybody needs to understand with
this, and he can clarify, SBA loans aren't any more difficult to obtain and
probably easier than a regular commercial loan.
So those people who think, oh, I'm just going to get a commercial loan for a
business acquisition, good luck.
(02:13):
It's transaction done. So we welcome Jason here. Thank you for joining us. Always a pleasure.
Jason, welcome back. Good to be here, guys.
Thank you. I'm not giving up the parking spot.
I drive by every day thinking it might be available. We know that the SBA has
(02:34):
gone through some changes just in the last year, a couple of times, little flip-flopping.
So we had you on, I think, about six months ago, and I think it's already already time to update the SOP.
What's going on now?
Well, again, good to be here. The fun thing about SBA is if there is such a
thing is that the SOP, not the SOB, the SOP changes every single year.
(03:00):
So the changes actually went into effect October 1st. So we are well into the
SBA new year, but surprisingly, a lot of people don't realize all the changes that take place.
So if you're you're outside the industry or you're not doing SBA loans every
day, like a lot of us are, it's probably a good little refresher or reminder.
And if you're buying a business and you're just in the starting of the process,
(03:22):
these are some of the things that I talk to new buyers about is what does the SBA look like?
What are the qualifications and what does it take to buy a business?
So maybe that's a great place to start.
Let's say this is a time of year where Doug and I see a lot of new buyers coming in.
And so you have a new buyer that wants to meet with you, wants to sit down with you.
(03:44):
How's that conversation start? How's it go?
Actually, I just had that happen last week. So it was here. You had a new buyer
come in, sat with them in the conference room.
A lot of them are looking for pre-approval letters.
It's more of something you see as you're buying a house, a realtor is going
to want a pre-approval letter.
So they're asking for a pre-approval letter. And there's really no such thing
(04:05):
as a pre-approval letter because every deal is different.
You've got financial qualifications. So you as a buyer, do you have enough money to buy the business?
Yes or no. The other piece of of it is the business itself. Every business is different.
This is where it gets difficult as a bank because we look at not just silly
financial qualifications.
I use the example of, I could give you a loan to buy an airplane,
(04:27):
but if you don't know how to fly, it's not going to do any good.
And kind of use the same thing with buying a business.
What qualifications do you have to buy a business?
What passions do you have around that business? Do you have past experience
that that might help you run that business once you own it. So it's a bit like an interview.
I sit down with a client and just talk about, tell me what you're looking at.
(04:49):
Tell me what type of deals you're seeing.
What is it about that business that you presented today that you really enjoy?
And we just start talking and have that conversation. And it's fairly easy to
pick up on whether they're falling in love with the bottom line.
Some will flat out say, this thing throws off $300,000 a year.
I like that. Matt, I want to buy this business without having the passion and
(05:13):
the ability and the experience to run it.
Others are, I've been looking for a business like this my whole life.
I've been in this industry.
I've always wanted to own a business. This is the business I want to buy.
And those are the types of clients that we'd like to talk to.
Ones that really have a passion for business because that's quite frankly,
one of the most important things as a bank.
(05:34):
I've seen these these deals. I've been doing this for 30 years.
So looking at deals that have not gone so well, I would say the number one thing
that causes, we'll just say business failure, as tough as that is to say,
is the qualifications of the borrower.
They just didn't have the right experience.
When times get tough, if an employee leaves, can you step in?
(05:55):
Can you run it on your own or not?
So that's probably the most important thing that we talk about,
we spend the most time time with is what is it about this business that you
want, that you enjoy, that you think you can grow?
One of the things that I like to tell the buyer is that you can have the money.
To buy the business, but your risk portfolio is also going to be business dependent.
(06:17):
That if you're trying to buy a wood shop and you don't know what a drill press
is, bank's not going to be overly excited to lend you that business.
Now, if you have, as part of your plan, you've got marketing background,
digital marketing, you're going to take this thing online and you've got somebody that can operate.
(06:39):
Yeah, that might be a different different story, but that you matter.
So yeah, it still is a story that we have to tell to somebody,
whether you have a loan committee, you have a loan approval authority.
We still have to write a narrative. We have to write a story.
What makes Andy qualified to buy this business? Absolutely nothing.
But he's got the money. And it might be, we've talked about before,
(07:00):
you know, obviously if there's, if the business is large enough and has managed a management team,
somebody already operating the business, then it's going to be a lot easier
for somebody that didn't have direct experience in that to come in if they have,
like you said, some digital background marketing or sales background to help
grow the business. notes.
Yeah. So the last time that we had you on, we actually didn't get to publish
(07:21):
the episode because it was a little premature that the SOP changes were coming.
I think we recorded with you and then a matter of like two days later,
most of those things were rolled back.
So tell us where we're at current state with some of the major changes that
we may have seen in the last six to 18 months with the SOPs. Okay.
(07:44):
Again, we'll go back to October 1st. That's really when all all the changes took place.
And it's funny you mentioned that because I was just having a conversation with
a broker here and there was a banker at another institution that was giving
false information too. They just hadn't seen it enough.
And I kind of give your broker the information. Here's where it is in the SOP.
And the other bank was like, oh yeah, you're right.
(08:06):
So even as a full-time banker, I'm not going to profess to know the entire SOP
either. So they are that tricky.
And again, if you don't do this on a consistent basis, you're not going to you're
not going to understand all the changes.
So I think I'd just like to highlight a few of them, really the ones that impact
your business, folks that are buying businesses.
There's plenty of other changes that really would be boring if this isn't going
(08:28):
to be boring enough, but hopefully there's some excitement in here and we'll
lay out how the SBA has changed.
And really, for the most part, these are positive changes.
They have made it easier and cheaper than ever to buy a business.
So that's good news. That's good news. something that we want to shout from the top.
So, you know, Doug, you mentioned at the beginning of the podcast that it's
(08:51):
really no different when you're applying for an SBA loan versus commercial loan.
That's very true. Really a loan is a loan is a loan.
No matter what business you're buying or how you're getting your money,
we all want to see tax returns.
We want to see three years tax
returns and current personal financial statements and all of those things.
The difficulty in SBA is it is a government program. So there's some red tape involved.
(09:12):
But typically, if you're working with a preferred lender, we can cut through that red tape.
All that stuff on the backside, you really don't have to necessarily worry about.
There's a couple other forms to fill out. But outside of that,
there's really not much more to getting an SBA loan. and it's not,
doesn't take longer and it shouldn't be more difficult.
Sometimes it is, but you guys are in a tough business. Anytime you're buying
(09:34):
and selling a business, you've got personalities involved.
So you've got a buyer, you've got a seller, all those things that are outside
of a credit approval that you have to work with.
So you've seen deals that have gone for years and that's not because the SBA process takes years.
It's because you've got buyers and sellers who are maybe disagreeing on certain
topics. There are people involved. It's people, right.
(09:55):
So is a complicating factor that the deals that we're selling are based primarily off cashflow.
So a traditional commercial loan, I'm going to have some sort of asset to hold against the loan.
The stuff that we're selling is your ability to generate revenue,
a profit, and a multiple off of that profit is what this is sold on.
(10:18):
But if the buyer comes in and completely runs that into the ground,
takes that revenue from $2 million to $0 million, and that profit down,
now there's really nothing to- Right.
You can't foreclose on a closed business.
There's nothing there. The only source of repayment that we talk about as a bank is cash flow.
That's the only thing you can use to repay the loan is cash flow.
(10:42):
We don't have a building to resell. We don't have anything tangible to resell.
Again, that's why the SBA exists. this. They allow us to provide loans to borrowers
on businesses that don't have collateral. They.
Rolling into, I guess, some of those things, those are the things that have
changed. I mentioned it's cheaper than ever to get an SBA loan.
(11:03):
I guess I'll put an asterisk by that, given the current economic state that we're in.
It is cheaper through the fee structure.
So the SBA has a guarantee fee. They've always had a guarantee fee.
And a guarantee fee is something that they charge every single SBA borrower.
Every bank pays the same fee. fee, but it's a fee that goes into a bucket that
(11:26):
if and when a loan should default, this is how the SBA repays it.
Everybody pays in a little bit. It's almost like PMI insurance in your words.
I was going to say, it's an insurance policy. It's an insurance policy.
So every SBA borrower pays the exact same percentage based on the size of loan
they're buying and it goes into the bucket at the SBA.
So again, if and when a loan should default, and currently that's about 1%,
(11:50):
so it's a a very small rate, a very small percentage.
That's where they go to dip into repayment of that debt.
So currently with the new structure in starting October 1st,
the fee structure is such that loans under a million dollars have no guarantee fee.
That's a big change from before. For a while, there was no guarantee fee under $350,000.
(12:15):
Then the pandemic hit and they raised fees altogether. together.
But historically, there's always been a fee on every SBA loan.
Now, under a million is zero fee.
Over a million, from one to two, that portion of it has also changed to the better.
It's roughly one and a half percent, where it used to be closer to three.
So the SBA is telling us, we like small loans.
(12:38):
We like small businesses. When you get into the upper loan sizes,
they're looking at is, are we really helping the small business owner?
And that's what the SBA is geared geared towards. So loans under 2 million have
seen a substantial decrease in fees.
Loans under 1 million have been erased altogether.
Nice. So it's cheaper, back to my original statement, it's cheaper than ever to get an SBA loan.
(13:00):
The rate environment is completely different. That's outside the control of
the SBA, that's outside the control of the banks and all of us.
So rates, unfortunately, have never been, I shouldn't say never,
but it's been decades since we have seen seen rates at these levels.
Yeah, it's been high, but it's been 20 years or so. Right.
And you know, most SBA rates are based on prime and prime is eight and a half right now.
(13:23):
18 months ago, it was three and a quarter. So that's a substantial increase in rate.
And what that means is your payments go up. And what happens when your payments
go up, that means your cash flow goes down.
So that's what we're seeing right now more than anything is.
Buyers have to readjust their expectations of what they can earn in a business
(13:45):
because they have to pay the loan back first.
And now our loan payments are higher. That means you get less.
That being said- I mean, basically on the same deal. Right, on the same deal.
So the deal structures might have to change or down payment,
or they have to look at a different size business. Right.
At the end of the day, however, if you look at the line item on their P&L called
(14:07):
interest expense, it's not a huge number.
So there's many other levers to pull in a business that can help adjust that.
So costs, for instance, everybody's costs have gone up.
So whatever it is that your business sells, more than likely you've adjusted
your pricing to reflect an increase in costs.
So an increase in interest rates, no different than an increase in the cost
(14:29):
of gas, cost of milk, everything it takes to run your business, that's just an expense.
So bottom line is about the same. You mentioned it's easier to get an SBA loan to qualify.
How has it changed for the buyer as far as their equity injection, their down payments?
(14:49):
What's that change look like? Yeah, I don't know about you, but I have been
doing this for a long time.
It wasn't that long ago, however, that the SBA required 25% down.
We're talking inside the last 10 years for sure. You want to buy a business, it's 25% down.
And people were doing it. I'm going to say five years ago, it went from 25% to 10%.
(15:12):
So substantial change in equity requirements.
It's still 10%. However, now they're lowering it down to the buyer could come
in with as low as 5% if the seller will carry the other 5%, what's called on standby,
meaning if you're willing to hold that 5% until the SBA loans paid off.
Could be 10 years, but it's only a 5% chunk. That would allow a buyer to get in with 5% down.
(15:38):
We don't love to see those deals. I know you don't love to see those deals,
but we are seeing those deals. It happens, and we're getting them approved with that structure.
So you can now come in with less money down. You're holding more on the sidelines.
You can invest that in different ways.
So again, there's ways to mitigate interest rate expense, but getting more people
into more more businesses is really what it's all about.
(15:59):
The other substantial change that's taken place is that for the first time in
the history of the SBA, you can now use SBA funds to buy into a business.
That's never been allowed before.
Typically, if I want to buy a business from Doug, I've got to buy 100% of Doug's
business. And Doug has to exit the business within 12 months.
(16:20):
Now I could buy 85% of Doug's business and Doug could retain 15% ownership and
either stay in the business, stay in a consulting role, or stay in an ownership role.
So having the ability, that's a lot of flexibility as you're trying to find ways to buy a business.
Technically, you could get in with almost no money in those cases.
(16:40):
If you've got a buyer and a seller that will work well together,
they form a partnership and you can buy into a business without having Having that former owner exit.
Would you see that use case maybe in a parent-child situation where child's
buying into the business?
That would be a good example and one that I have done in the last six months.
(17:00):
Dad wants to sell the son. We've got a second generation. Dad's been running
it for 25 years. Here's a way to team up.
Where we've also seen at work is in instances where there's a licensing requirement.
So let's just use an electrician, for example. example, you've got to have a
master, master electrical license to run that electrical business.
I, as a new buyer, don't have that. I could get it, but it could take a number of years.
(17:24):
Well, how can I buy a business back to the, how do I buy an airplane, but I can't fly it?
This is a way you can buy an airplane without having to fly it because you're
keeping the pilot on board.
So I want to buy the electrical business. The guy that runs the electrical business
is ready to retire, but he may be want to stay in the business part-time.
He's the one that carries the license. We need an owner at the time of closing that has a license.
(17:49):
If that's how the business operates, we have to ensure that the business can't
go out of business because we don't have a license.
So that's the other vertical where I've seen it work is when it does take a
specific license to run the business and the new owner does not have it.
Oh, sorry. That's a big change, really, for however many years we've been in this.
(18:12):
The owner-seller has always had to exit.
We were always talking about why that was the case. There have probably been
some cases of fraud or who knows. Now, all of a sudden, yeah, it's okay.
Any indication about why they've decided to do that or allow it?
I'd like to say common sense, but that rarely prevails when we're talking about
(18:33):
government. Yeah, a government agency.
But maybe there's enough of us bankers and other people that said,
hey, it makes sense to allow the owner to stay in place. It makes the business stronger.
You know, the moment. Yeah. The moment the current owner leaves,
you know, you could have attrition with employees.
You could have some clients that also leave. We've always wanted a strong transition.
(18:55):
Right. Right. And sometimes when it's 100% cash out, the seller doesn't have
any motivation really to stay in and stay on, you know, stay involved through
a, you know, three-month transition or something.
Right. And so this kind of keeps them in and they would have to be interested in doing that too.
Yeah. It just makes that baton hand off that much tighter. tighter.
(19:18):
When you don't fully change owners, he's going to stay involved,
she's going to stay involved for a number of months, or it could be a number
of years. We feel it just makes the deal better.
Their thought process of making the owner go away is that they didn't want owners
to pull all their chips off the table. Basically, it's cash out, refinance.
Doug wants to sell his business. I buy it. Doug gets all his money,
but Doug's still running the business.
(19:41):
Now Jason has has all the responsibility and the liability and Doug's got,
you know, full cash in his pocket.
So the intention was we don't want to just cash out owners and let them stay involved.
So this, I think is a really good compromise and a big change and one that just
took place October 1st. What about bolt-ons?
(20:02):
Buying a business in the same or an adjacent NAICS, is that updated as well?
Yeah, that is new too. So that is a good point. So when it comes to putting
money down, and this is this too is a great change so let's say andy owns a
commercial cleaning company,
And you're successful at it. And you want to grow through acquisition.
(20:23):
You don't want to grow slowly through organic methods.
So it would make sense for Andy to want to go out and buy a competitor,
want to go buy another business in the same NAICS code or the same industry.
And we would allow you, the SBA would allow you to do what's called a bolt-on
and buy that business with no additional cash injection.
(20:44):
So you already own a successful business. You're going to buy another one, roll it up underneath.
You're existing and you can do that with no additional cash outlay.
And that too is opening up a lot of doors. Is the requirements,
the six digit, or is it just the NAICS are broke down into the two digits.
And as you get to the six digit, it's very, very granular, right?
(21:04):
So is it the two digit, four digit or six digit? Yep.
Sounds like some flexibility in there. Well, flexibility, but it really is bank dependent.
Yeah. There are some banks that hold right to. you've got to have a full matching six digit.
We're going to go commercial cleaner to commercial cleaner.
(21:24):
Others might be a little bit more flexible and it could be, well,
it's a commercial cleaner.
We do commercial cleaning of offices and we're, we're going to now buy a window
company. We want to buy a window cleaning company. All they do is windows.
All we do is interior commercial cleaning. Well, they're cleaning the windows
of the business and buildings that we're cleaning.
(21:45):
So yes, Yes. We're bolting on that service to add one more additional item that
we don't currently have.
And some banks will look at that as, yeah, they're doing a business expansion.
All they're doing is adding a product line that they naturally could have and
will be okay with that. But not every bank will.
That they could naturally sell to their existing customer base.
(22:05):
Yeah. So it's one of those things, if it makes sense, I would say we would look at it.
Others Others are, no, it's got to be in the exact matching six-digit NAICS
code, commercial cleaner to commercial cleaner, no ancillary businesses.
Gotcha. No, no. What other changes should we know about?
(22:26):
Let's see. So partial ownership buyouts, the big one. Down payment requirements have gone down.
The other big one is, and this too is brand new in the history of the SBA,
which actually came out in 1953 for all you history buffs.
It's been around a while. Big day. Big day. Big day.
We have always limited borrowers to a maximum $5 million loan.
(22:48):
So, Andy, you can only get $5 million from the SBA.
To have your loan guaranteed by the SBA. Even if Andy and Doug were partners,
it's not 5,000 and 5,000.
If the two of you are partners, you are limited to a $5 million aggregate amount.
It doesn't mean that you have a one $5 million loan.
You can come to us for five loans, totaling $5 million.
(23:11):
But forever, the line has been drawn as saying that 5 million is the maximum
that we will allow you guys to borrow because that's what we're comfortable guaranteeing.
Now the SBA is saying, the two of
you can buy the commercial cleaner this is gonna
blow your mind too why why we do it this way but if
you want to buy something in a completely different next code completely unrelated
(23:32):
to commercial cleaning now you want to buy a restaurant you want to buy the
restaurant there you've been cleaning you can get another five million dollar
guarantee it has to be outside of the next code for this one to work that one
leaves me a little bit confused but you know i I would think if you're going
to go above and beyond $5 million,
wouldn't you want them to stay in the same general field?
(23:56):
But this one is, if you're going to go outside the make scale and buy something
completely different, we'll give you a fresh clock.
It's almost like they want the diversification. Yeah. They want to diversify
the risk, get out of that industry. Yeah. That's interesting. Yeah.
You know, that too, it's going to take a strong borrower. You know,
if you're, if a borrower's already has, you know, $5 million loan with the SBA
(24:18):
and they want to go get more, chances are they're pretty strong.
Before we get out of here, why don't you, so when you say the term strong borrower,
what, what are the characteristics of, uh, characteristics and traits of a, a strong borrower?
A borrower in general, I like to see with some diversification,
some net worth is really, there's, there's not a, if you're going to borrow
(24:38):
500,000, you've got to have a net worth of X.
It's a gray area, but most borrowers should have cash on their balance sheet
and showing 10% should be a minimum requirement.
We need to see you've got 10%. Even if we don't require 10%,
if you're going to buy a million-dollar business, you need to have $100,000
liquid somewhere just to- Even if you're not going to use it all.
(25:02):
Right. You should have it. You should have it. That just kind of goes without
saying. It kind of makes sense. Right.
You also should have something else. If that's all you have,
you have $100,000 and you have no other assets and you want to buy a million
dollar business, even though you qualify, you've got 10% down,
but post closing, you have nothing that probably won't work either.
So there are no set guidelines around that. So I know everyone would love to
(25:26):
say, if I want this, I need to show this.
That's just not the case. But having 10% cash sitting there,
having something set aside for retirement. So an IRA, a 401k of some sort with
something in it would be helpful.
Stocks, bonds, mutual funds, those types of things are additional savings accounts.
That's nice to see. Home equity is always a big one.
(25:50):
We're not saying that you can't borrow money through the SBA without being a
homeowner. That's not true.
We've done it all the time. You can rent. You can not own a home.
But having home equity is nice.
And that is one of the things we haven't talked about yet. But the SBA has always
required one and unlimited personal guarantee.
So if you're personally guaranteeing something, we need to show that your personal
(26:11):
financial statement is worth something. Is it worth?
Does Doug have the qualification to sign a signature that says,
I'm guaranteeing this million loan when you have nothing, those kinds of things.
You have an unlimited personal guarantee.
And the SBA, if you've got 25% equity in your house, they want you to pledge
the remaining equity that you have towards the loan.
(26:32):
So you've got some skin in the game, you've got some cash, you've got a little bit of equity.
But at the end of the day, there's not a better program than the SBA to maximize your buying power.
It replaces private equity for the most part. We're funding funding 90% of the deal.
As you're going through this criteria, and I think, how does that compare to a commercial lender?
You're still way better than trying to get a commercial loan.
(26:55):
You think when you say unlimited guarantee, do you think a bank's going to loan
you money, a non-SBA lender, without unlimited guarantee, everything that you
own, and if it's not completely collateralized, you're not going to get the loan.
So the SBA is going to finance you if it's mostly goodwill in the business and
(27:15):
you don't own a home, but you still have some money, you can still get an SBA loan.
Right. Well, and I know that I said before we get out here, but I do have one more question for you.
And tell me the difference between, so every bank, you've told me this in the
past, that about every bank charter in our city can do an SBA loan.
(27:35):
However, I'll let you finish that thought.
That's a good one. Thank you. Every bank has the ability to use the SBA program
to loan money to their clients with an SBA guarantee.
It's just, that's what the government allows.
However, most banks don't want to mess with the program. They don't have anybody
(27:56):
knowledgeable enough to run the program.
They're nervous that if they miss something in the origination of the SBA loan,
that they don't have a guarantee.
All of those are valid concerns. That's all truthful. So banks should either
be in the SBA and have dedicated people focus on the SBA or not do it at all.
And I'm not being facetious. I'm just saying it's safer for the bank if you
(28:19):
don't understand the program, which many don't want to.
And it is true. If you do something wrong, wrong. This is a government program.
So I make a loan to Doug, loan goes bad.
SBA comes to me and says, why'd you make the loan to Doug? And I have to show
them everything, every step that we took, every I that's dotted and every T that's crossed.
And we did it right. And we say, see, we did everything right.
(28:39):
We followed the rules and it still went bad. And they're like,
okay, you did the right thing.
Here's your 75% guarantee. But if we did something inaccurate.
The SBA would say, you didn't follow the rules. You don't have a guarantee.
Too bad. So that's why most banks decide not to.
So in the 150 bank charters, just in the Kansas city Metro, I would narrow it
(29:01):
down to 10, 10 do more than a couple of months, a couple of months a month.
And you could probably narrow it even further to the top five.
And many of those top five are just smaller community. I I shouldn't say just,
I'm a small community bank.
Community banks that you might not even know, but they do SBA really well.
They do it at high volume.
So when I'm talking with clients, I guess that's my stick is if you're going
(29:24):
in for LASIK surgery, wouldn't you want to go to a surgeon who does this every
single day, all day long?
Or do you want to go to a surgeon who does this once a month and just take your chances?
Yeah. So your experience at the end of the day is going to be better.
We're not just a preferred lender. There's lots of preferred lenders,
but a lender that does this every single day and they focus on the program, they do it right.
And from a borrower standpoint, you just have a much better experience.
(29:48):
Well, it's good to have you back. It's good to have this knowledge four doors down from me.
So appreciate you coming on and sharing with our audience. We're going to have
an abbreviated close here. Go to our website.
If you're looking at buying or selling a business, we got you, fam.
Music.
(00:38):
Back to the Apex Business Advisors podcast. I'm your host, Andy Kavanaugh,
joined once again by Doug Hubler. As always.
As always, except last week. Oh yeah, that's right.
Once again, that makes more sense, actually. Once again, I'm back.
Thank you very much. Yep, sorry. For taking the reins. Yeah, sorry.
Doug and I had some, I'm sorry, our schedules couldn't align last week.
(01:02):
You kept avoiding me.
I do look at the board where you're like, I'm out Wednesday,
Thursday. Oh, really? You're out those days?
Oh, man. Yeah. Well, we have a guest today.
The guest that we're excited. Looks familiar. We're excited to have him back.
One of our most popular topics, that, of course, being the SBA loan program.
(01:26):
Who doesn't love a good podcast on the SBA loan program? Everybody get a cup of coffee.
Introduce our guest. You know, I'm going to say his name in real life, not his former name.
Jason Moxness is our SBA guest.
Expert, preferred lender, the one who keeps us all grounded on this.
(01:49):
And I think one of the things that I think everybody needs to understand with
this, and he can clarify, SBA loans aren't any more difficult to obtain and
probably easier than a regular commercial loan.
So those people who think, oh, I'm just going to get a commercial loan for a
business acquisition, good luck.
(02:13):
It's transaction done. So we welcome Jason here. Thank you for joining us. Always a pleasure.
Jason, welcome back. Good to be here, guys.
Thank you. I'm not giving up the parking spot.
I drive by every day thinking it might be available. We know that the SBA has
(02:34):
gone through some changes just in the last year, a couple of times, little flip-flopping.
So we had you on, I think, about six months ago, and I think it's already already time to update the SOP.
What's going on now?
Well, again, good to be here. The fun thing about SBA is if there is such a
thing is that the SOP, not the SOB, the SOP changes every single year.
(03:00):
So the changes actually went into effect October 1st. So we are well into the
SBA new year, but surprisingly, a lot of people don't realize all the changes that take place.
So if you're you're outside the industry or you're not doing SBA loans every
day, like a lot of us are, it's probably a good little refresher or reminder.
And if you're buying a business and you're just in the starting of the process,
(03:22):
these are some of the things that I talk to new buyers about is what does the SBA look like?
What are the qualifications and what does it take to buy a business?
So maybe that's a great place to start.
Let's say this is a time of year where Doug and I see a lot of new buyers coming in.
And so you have a new buyer that wants to meet with you, wants to sit down with you.
(03:44):
How's that conversation start? How's it go?
Actually, I just had that happen last week. So it was here. You had a new buyer
come in, sat with them in the conference room.
A lot of them are looking for pre-approval letters.
It's more of something you see as you're buying a house, a realtor is going
to want a pre-approval letter.
So they're asking for a pre-approval letter. And there's really no such thing
(04:05):
as a pre-approval letter because every deal is different.
You've got financial qualifications. So you as a buyer, do you have enough money to buy the business?
Yes or no. The other piece of of it is the business itself. Every business is different.
This is where it gets difficult as a bank because we look at not just silly
financial qualifications.
I use the example of, I could give you a loan to buy an airplane,
(04:27):
but if you don't know how to fly, it's not going to do any good.
And kind of use the same thing with buying a business.
What qualifications do you have to buy a business?
What passions do you have around that business? Do you have past experience
that that might help you run that business once you own it. So it's a bit like an interview.
I sit down with a client and just talk about, tell me what you're looking at.
(04:49):
Tell me what type of deals you're seeing.
What is it about that business that you presented today that you really enjoy?
And we just start talking and have that conversation. And it's fairly easy to
pick up on whether they're falling in love with the bottom line.
Some will flat out say, this thing throws off $300,000 a year.
I like that. Matt, I want to buy this business without having the passion and
(05:13):
the ability and the experience to run it.
Others are, I've been looking for a business like this my whole life.
I've been in this industry.
I've always wanted to own a business. This is the business I want to buy.
And those are the types of clients that we'd like to talk to.
Ones that really have a passion for business because that's quite frankly,
one of the most important things as a bank.
(05:34):
I've seen these these deals. I've been doing this for 30 years.
So looking at deals that have not gone so well, I would say the number one thing
that causes, we'll just say business failure, as tough as that is to say,
is the qualifications of the borrower.
They just didn't have the right experience.
When times get tough, if an employee leaves, can you step in?
(05:55):
Can you run it on your own or not?
So that's probably the most important thing that we talk about,
we spend the most time time with is what is it about this business that you
want, that you enjoy, that you think you can grow?
One of the things that I like to tell the buyer is that you can have the money.
To buy the business, but your risk portfolio is also going to be business dependent.
(06:17):
That if you're trying to buy a wood shop and you don't know what a drill press
is, bank's not going to be overly excited to lend you that business.
Now, if you have, as part of your plan, you've got marketing background,
digital marketing, you're going to take this thing online and you've got somebody that can operate.
(06:39):
Yeah, that might be a different different story, but that you matter.
So yeah, it still is a story that we have to tell to somebody,
whether you have a loan committee, you have a loan approval authority.
We still have to write a narrative. We have to write a story.
What makes Andy qualified to buy this business? Absolutely nothing.
But he's got the money. And it might be, we've talked about before,
(07:00):
you know, obviously if there's, if the business is large enough and has managed a management team,
somebody already operating the business, then it's going to be a lot easier
for somebody that didn't have direct experience in that to come in if they have,
like you said, some digital background marketing or sales background to help
grow the business. notes.
Yeah. So the last time that we had you on, we actually didn't get to publish
(07:21):
the episode because it was a little premature that the SOP changes were coming.
I think we recorded with you and then a matter of like two days later,
most of those things were rolled back.
So tell us where we're at current state with some of the major changes that
we may have seen in the last six to 18 months with the SOPs. Okay.
(07:44):
Again, we'll go back to October 1st. That's really when all all the changes took place.
And it's funny you mentioned that because I was just having a conversation with
a broker here and there was a banker at another institution that was giving
false information too. They just hadn't seen it enough.
And I kind of give your broker the information. Here's where it is in the SOP.
And the other bank was like, oh yeah, you're right.
(08:06):
So even as a full-time banker, I'm not going to profess to know the entire SOP
either. So they are that tricky.
And again, if you don't do this on a consistent basis, you're not going to you're
not going to understand all the changes.
So I think I'd just like to highlight a few of them, really the ones that impact
your business, folks that are buying businesses.
There's plenty of other changes that really would be boring if this isn't going
(08:28):
to be boring enough, but hopefully there's some excitement in here and we'll
lay out how the SBA has changed.
And really, for the most part, these are positive changes.
They have made it easier and cheaper than ever to buy a business.
So that's good news. That's good news. something that we want to shout from the top.
So, you know, Doug, you mentioned at the beginning of the podcast that it's
(08:51):
really no different when you're applying for an SBA loan versus commercial loan.
That's very true. Really a loan is a loan is a loan.
No matter what business you're buying or how you're getting your money,
we all want to see tax returns.
We want to see three years tax
returns and current personal financial statements and all of those things.
The difficulty in SBA is it is a government program. So there's some red tape involved.
(09:12):
But typically, if you're working with a preferred lender, we can cut through that red tape.
All that stuff on the backside, you really don't have to necessarily worry about.
There's a couple other forms to fill out. But outside of that,
there's really not much more to getting an SBA loan. and it's not,
doesn't take longer and it shouldn't be more difficult.
Sometimes it is, but you guys are in a tough business. Anytime you're buying
(09:34):
and selling a business, you've got personalities involved.
So you've got a buyer, you've got a seller, all those things that are outside
of a credit approval that you have to work with.
So you've seen deals that have gone for years and that's not because the SBA process takes years.
It's because you've got buyers and sellers who are maybe disagreeing on certain
topics. There are people involved. It's people, right.
(09:55):
So is a complicating factor that the deals that we're selling are based primarily off cashflow.
So a traditional commercial loan, I'm going to have some sort of asset to hold against the loan.
The stuff that we're selling is your ability to generate revenue,
a profit, and a multiple off of that profit is what this is sold on.
(10:18):
But if the buyer comes in and completely runs that into the ground,
takes that revenue from $2 million to $0 million, and that profit down,
now there's really nothing to- Right.
You can't foreclose on a closed business.
There's nothing there. The only source of repayment that we talk about as a bank is cash flow.
That's the only thing you can use to repay the loan is cash flow.
(10:42):
We don't have a building to resell. We don't have anything tangible to resell.
Again, that's why the SBA exists. this. They allow us to provide loans to borrowers
on businesses that don't have collateral. They.
Rolling into, I guess, some of those things, those are the things that have
changed. I mentioned it's cheaper than ever to get an SBA loan.
(11:03):
I guess I'll put an asterisk by that, given the current economic state that we're in.
It is cheaper through the fee structure.
So the SBA has a guarantee fee. They've always had a guarantee fee.
And a guarantee fee is something that they charge every single SBA borrower.
Every bank pays the same fee. fee, but it's a fee that goes into a bucket that
(11:26):
if and when a loan should default, this is how the SBA repays it.
Everybody pays in a little bit. It's almost like PMI insurance in your words.
I was going to say, it's an insurance policy. It's an insurance policy.
So every SBA borrower pays the exact same percentage based on the size of loan
they're buying and it goes into the bucket at the SBA.
So again, if and when a loan should default, and currently that's about 1%,
(11:50):
so it's a a very small rate, a very small percentage.
That's where they go to dip into repayment of that debt.
So currently with the new structure in starting October 1st,
the fee structure is such that loans under a million dollars have no guarantee fee.
That's a big change from before. For a while, there was no guarantee fee under $350,000.
(12:15):
Then the pandemic hit and they raised fees altogether. together.
But historically, there's always been a fee on every SBA loan.
Now, under a million is zero fee.
Over a million, from one to two, that portion of it has also changed to the better.
It's roughly one and a half percent, where it used to be closer to three.
So the SBA is telling us, we like small loans.
(12:38):
We like small businesses. When you get into the upper loan sizes,
they're looking at is, are we really helping the small business owner?
And that's what the SBA is geared geared towards. So loans under 2 million have
seen a substantial decrease in fees.
Loans under 1 million have been erased altogether.
Nice. So it's cheaper, back to my original statement, it's cheaper than ever to get an SBA loan.
(13:00):
The rate environment is completely different. That's outside the control of
the SBA, that's outside the control of the banks and all of us.
So rates, unfortunately, have never been, I shouldn't say never,
but it's been decades since we have seen seen rates at these levels.
Yeah, it's been high, but it's been 20 years or so. Right.
And you know, most SBA rates are based on prime and prime is eight and a half right now.
(13:23):
18 months ago, it was three and a quarter. So that's a substantial increase in rate.
And what that means is your payments go up. And what happens when your payments
go up, that means your cash flow goes down.
So that's what we're seeing right now more than anything is.
Buyers have to readjust their expectations of what they can earn in a business
(13:45):
because they have to pay the loan back first.
And now our loan payments are higher. That means you get less.
That being said- I mean, basically on the same deal. Right, on the same deal.
So the deal structures might have to change or down payment,
or they have to look at a different size business. Right.
At the end of the day, however, if you look at the line item on their P&L called
(14:07):
interest expense, it's not a huge number.
So there's many other levers to pull in a business that can help adjust that.
So costs, for instance, everybody's costs have gone up.
So whatever it is that your business sells, more than likely you've adjusted
your pricing to reflect an increase in costs.
So an increase in interest rates, no different than an increase in the cost
(14:29):
of gas, cost of milk, everything it takes to run your business, that's just an expense.
So bottom line is about the same. You mentioned it's easier to get an SBA loan to qualify.
How has it changed for the buyer as far as their equity injection, their down payments?
(14:49):
What's that change look like? Yeah, I don't know about you, but I have been
doing this for a long time.
It wasn't that long ago, however, that the SBA required 25% down.
We're talking inside the last 10 years for sure. You want to buy a business, it's 25% down.
And people were doing it. I'm going to say five years ago, it went from 25% to 10%.
(15:12):
So substantial change in equity requirements.
It's still 10%. However, now they're lowering it down to the buyer could come
in with as low as 5% if the seller will carry the other 5%, what's called on standby,
meaning if you're willing to hold that 5% until the SBA loans paid off.
Could be 10 years, but it's only a 5% chunk. That would allow a buyer to get in with 5% down.
(15:38):
We don't love to see those deals. I know you don't love to see those deals,
but we are seeing those deals. It happens, and we're getting them approved with that structure.
So you can now come in with less money down. You're holding more on the sidelines.
You can invest that in different ways.
So again, there's ways to mitigate interest rate expense, but getting more people
into more more businesses is really what it's all about.
(15:59):
The other substantial change that's taken place is that for the first time in
the history of the SBA, you can now use SBA funds to buy into a business.
That's never been allowed before.
Typically, if I want to buy a business from Doug, I've got to buy 100% of Doug's
business. And Doug has to exit the business within 12 months.
(16:20):
Now I could buy 85% of Doug's business and Doug could retain 15% ownership and
either stay in the business, stay in a consulting role, or stay in an ownership role.
So having the ability, that's a lot of flexibility as you're trying to find ways to buy a business.
Technically, you could get in with almost no money in those cases.
(16:40):
If you've got a buyer and a seller that will work well together,
they form a partnership and you can buy into a business without having Having that former owner exit.
Would you see that use case maybe in a parent-child situation where child's
buying into the business?
That would be a good example and one that I have done in the last six months.
(17:00):
Dad wants to sell the son. We've got a second generation. Dad's been running
it for 25 years. Here's a way to team up.
Where we've also seen at work is in instances where there's a licensing requirement.
So let's just use an electrician, for example. example, you've got to have a
master, master electrical license to run that electrical business.
I, as a new buyer, don't have that. I could get it, but it could take a number of years.
(17:24):
Well, how can I buy a business back to the, how do I buy an airplane, but I can't fly it?
This is a way you can buy an airplane without having to fly it because you're
keeping the pilot on board.
So I want to buy the electrical business. The guy that runs the electrical business
is ready to retire, but he may be want to stay in the business part-time.
He's the one that carries the license. We need an owner at the time of closing that has a license.
(17:49):
If that's how the business operates, we have to ensure that the business can't
go out of business because we don't have a license.
So that's the other vertical where I've seen it work is when it does take a
specific license to run the business and the new owner does not have it.
Oh, sorry. That's a big change, really, for however many years we've been in this.
(18:12):
The owner-seller has always had to exit.
We were always talking about why that was the case. There have probably been
some cases of fraud or who knows. Now, all of a sudden, yeah, it's okay.
Any indication about why they've decided to do that or allow it?
I'd like to say common sense, but that rarely prevails when we're talking about
(18:33):
government. Yeah, a government agency.
But maybe there's enough of us bankers and other people that said,
hey, it makes sense to allow the owner to stay in place. It makes the business stronger.
You know, the moment. Yeah. The moment the current owner leaves,
you know, you could have attrition with employees.
You could have some clients that also leave. We've always wanted a strong transition.
(18:55):
Right. Right. And sometimes when it's 100% cash out, the seller doesn't have
any motivation really to stay in and stay on, you know, stay involved through
a, you know, three-month transition or something.
Right. And so this kind of keeps them in and they would have to be interested in doing that too.
Yeah. It just makes that baton hand off that much tighter. tighter.
(19:18):
When you don't fully change owners, he's going to stay involved,
she's going to stay involved for a number of months, or it could be a number
of years. We feel it just makes the deal better.
Their thought process of making the owner go away is that they didn't want owners
to pull all their chips off the table. Basically, it's cash out, refinance.
Doug wants to sell his business. I buy it. Doug gets all his money,
but Doug's still running the business.
(19:41):
Now Jason has has all the responsibility and the liability and Doug's got,
you know, full cash in his pocket.
So the intention was we don't want to just cash out owners and let them stay involved.
So this, I think is a really good compromise and a big change and one that just
took place October 1st. What about bolt-ons?
(20:02):
Buying a business in the same or an adjacent NAICS, is that updated as well?
Yeah, that is new too. So that is a good point. So when it comes to putting
money down, and this is this too is a great change so let's say andy owns a
commercial cleaning company,
And you're successful at it. And you want to grow through acquisition.
(20:23):
You don't want to grow slowly through organic methods.
So it would make sense for Andy to want to go out and buy a competitor,
want to go buy another business in the same NAICS code or the same industry.
And we would allow you, the SBA would allow you to do what's called a bolt-on
and buy that business with no additional cash injection.
(20:44):
So you already own a successful business. You're going to buy another one, roll it up underneath.
You're existing and you can do that with no additional cash outlay.
And that too is opening up a lot of doors. Is the requirements,
the six digit, or is it just the NAICS are broke down into the two digits.
And as you get to the six digit, it's very, very granular, right?
(21:04):
So is it the two digit, four digit or six digit? Yep.
Sounds like some flexibility in there. Well, flexibility, but it really is bank dependent.
Yeah. There are some banks that hold right to. you've got to have a full matching six digit.
We're going to go commercial cleaner to commercial cleaner.
(21:24):
Others might be a little bit more flexible and it could be, well,
it's a commercial cleaner.
We do commercial cleaning of offices and we're, we're going to now buy a window
company. We want to buy a window cleaning company. All they do is windows.
All we do is interior commercial cleaning. Well, they're cleaning the windows
of the business and buildings that we're cleaning.
(21:45):
So yes, Yes. We're bolting on that service to add one more additional item that
we don't currently have.
And some banks will look at that as, yeah, they're doing a business expansion.
All they're doing is adding a product line that they naturally could have and
will be okay with that. But not every bank will.
That they could naturally sell to their existing customer base.
(22:05):
Yeah. So it's one of those things, if it makes sense, I would say we would look at it.
Others Others are, no, it's got to be in the exact matching six-digit NAICS
code, commercial cleaner to commercial cleaner, no ancillary businesses.
Gotcha. No, no. What other changes should we know about?
(22:26):
Let's see. So partial ownership buyouts, the big one. Down payment requirements have gone down.
The other big one is, and this too is brand new in the history of the SBA,
which actually came out in 1953 for all you history buffs.
It's been around a while. Big day. Big day. Big day.
We have always limited borrowers to a maximum $5 million loan.
(22:48):
So, Andy, you can only get $5 million from the SBA.
To have your loan guaranteed by the SBA. Even if Andy and Doug were partners,
it's not 5,000 and 5,000.
If the two of you are partners, you are limited to a $5 million aggregate amount.
It doesn't mean that you have a one $5 million loan.
You can come to us for five loans, totaling $5 million.
(23:11):
But forever, the line has been drawn as saying that 5 million is the maximum
that we will allow you guys to borrow because that's what we're comfortable guaranteeing.
Now the SBA is saying, the two of
you can buy the commercial cleaner this is gonna
blow your mind too why why we do it this way but if
you want to buy something in a completely different next code completely unrelated
(23:32):
to commercial cleaning now you want to buy a restaurant you want to buy the
restaurant there you've been cleaning you can get another five million dollar
guarantee it has to be outside of the next code for this one to work that one
leaves me a little bit confused but you know i I would think if you're going
to go above and beyond $5 million,
wouldn't you want them to stay in the same general field?
(23:56):
But this one is, if you're going to go outside the make scale and buy something
completely different, we'll give you a fresh clock.
It's almost like they want the diversification. Yeah. They want to diversify
the risk, get out of that industry. Yeah. That's interesting. Yeah.
You know, that too, it's going to take a strong borrower. You know,
if you're, if a borrower's already has, you know, $5 million loan with the SBA
(24:18):
and they want to go get more, chances are they're pretty strong.
Before we get out of here, why don't you, so when you say the term strong borrower,
what, what are the characteristics of, uh, characteristics and traits of a, a strong borrower?
A borrower in general, I like to see with some diversification,
some net worth is really, there's, there's not a, if you're going to borrow
(24:38):
500,000, you've got to have a net worth of X.
It's a gray area, but most borrowers should have cash on their balance sheet
and showing 10% should be a minimum requirement.
We need to see you've got 10%. Even if we don't require 10%,
if you're going to buy a million-dollar business, you need to have $100,000
liquid somewhere just to- Even if you're not going to use it all.
(25:02):
Right. You should have it. You should have it. That just kind of goes without
saying. It kind of makes sense. Right.
You also should have something else. If that's all you have,
you have $100,000 and you have no other assets and you want to buy a million
dollar business, even though you qualify, you've got 10% down,
but post closing, you have nothing that probably won't work either.
So there are no set guidelines around that. So I know everyone would love to
(25:26):
say, if I want this, I need to show this.
That's just not the case. But having 10% cash sitting there,
having something set aside for retirement. So an IRA, a 401k of some sort with
something in it would be helpful.
Stocks, bonds, mutual funds, those types of things are additional savings accounts.
That's nice to see. Home equity is always a big one.
(25:50):
We're not saying that you can't borrow money through the SBA without being a
homeowner. That's not true.
We've done it all the time. You can rent. You can not own a home.
But having home equity is nice.
And that is one of the things we haven't talked about yet. But the SBA has always
required one and unlimited personal guarantee.
So if you're personally guaranteeing something, we need to show that your personal
(26:11):
financial statement is worth something. Is it worth?
Does Doug have the qualification to sign a signature that says,
I'm guaranteeing this million loan when you have nothing, those kinds of things.
You have an unlimited personal guarantee.
And the SBA, if you've got 25% equity in your house, they want you to pledge
the remaining equity that you have towards the loan.
(26:32):
So you've got some skin in the game, you've got some cash, you've got a little bit of equity.
But at the end of the day, there's not a better program than the SBA to maximize your buying power.
It replaces private equity for the most part. We're funding funding 90% of the deal.
As you're going through this criteria, and I think, how does that compare to a commercial lender?
You're still way better than trying to get a commercial loan.
(26:55):
You think when you say unlimited guarantee, do you think a bank's going to loan
you money, a non-SBA lender, without unlimited guarantee, everything that you
own, and if it's not completely collateralized, you're not going to get the loan.
So the SBA is going to finance you if it's mostly goodwill in the business and
(27:15):
you don't own a home, but you still have some money, you can still get an SBA loan.
Right. Well, and I know that I said before we get out here, but I do have one more question for you.
And tell me the difference between, so every bank, you've told me this in the
past, that about every bank charter in our city can do an SBA loan.
(27:35):
However, I'll let you finish that thought.
That's a good one. Thank you. Every bank has the ability to use the SBA program
to loan money to their clients with an SBA guarantee.
It's just, that's what the government allows.
However, most banks don't want to mess with the program. They don't have anybody
(27:56):
knowledgeable enough to run the program.
They're nervous that if they miss something in the origination of the SBA loan,
that they don't have a guarantee.
All of those are valid concerns. That's all truthful. So banks should either
be in the SBA and have dedicated people focus on the SBA or not do it at all.
And I'm not being facetious. I'm just saying it's safer for the bank if you
(28:19):
don't understand the program, which many don't want to.
And it is true. If you do something wrong, wrong. This is a government program.
So I make a loan to Doug, loan goes bad.
SBA comes to me and says, why'd you make the loan to Doug? And I have to show
them everything, every step that we took, every I that's dotted and every T that's crossed.
And we did it right. And we say, see, we did everything right.
(28:39):
We followed the rules and it still went bad. And they're like,
okay, you did the right thing.
Here's your 75% guarantee. But if we did something inaccurate.
The SBA would say, you didn't follow the rules. You don't have a guarantee.
Too bad. So that's why most banks decide not to.
So in the 150 bank charters, just in the Kansas city Metro, I would narrow it
(29:01):
down to 10, 10 do more than a couple of months, a couple of months a month.
And you could probably narrow it even further to the top five.
And many of those top five are just smaller community. I I shouldn't say just,
I'm a small community bank.
Community banks that you might not even know, but they do SBA really well.
They do it at high volume.
So when I'm talking with clients, I guess that's my stick is if you're going
(29:24):
in for LASIK surgery, wouldn't you want to go to a surgeon who does this every
single day, all day long?
Or do you want to go to a surgeon who does this once a month and just take your chances?
Yeah. So your experience at the end of the day is going to be better.
We're not just a preferred lender. There's lots of preferred lenders,
but a lender that does this every single day and they focus on the program, they do it right.
And from a borrower standpoint, you just have a much better experience.
(29:48):
Well, it's good to have you back. It's good to have this knowledge four doors down from me.
So appreciate you coming on and sharing with our audience. We're going to have
an abbreviated close here. Go to our website.
If you're looking at buying or selling a business, we got you, fam.
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