Speaker 1:
As a bank that focuses on business, we work with business leaders all day, every day. We have a front-row seat to what's working and what has potential. The First Business Bank Podcast is dedicated to sharing insights to help you work better, smarter, and faster to achieve your goals. Let's get into the show.

Mark Meloy:
Hello, I'm Mark Meloy, CEO of First Business Bank. Welcome to the First Business Bank Podcast. Today we're talking about growing your business with SBA loans. Many people have preconceived thoughts about SBA loans, and SBA stands for Small Business Administration, an agency of the federal government that was established in 1953. Critics will often say there's too much paper, the process is cumbersome and very time consuming, or the rules and regulations are difficult to work with. Well, today we're going to offer clarity and a level of understanding about the program. I'm joined by one of our experts from First Business Bank who will offer thoughtful insight regarding SBA loans as a solution for all businesses. Caesar, I'll have you introduce yourself before we get the conversation started.

Cesar Jimenez:
Good morning, Mark. Thanks for having me on. Again, my name is Cesar Jimenez. I cover the South Florida area, I work out of Coral Springs, Florida, and I look forward to this time that I'm spending with you, Mark.

Mark Meloy:
Well, let's get started with how do SBA loans and SBA lending, how does it work?

Cesar Jimenez:
You know, a lot of people have their concerns. Every time you say the letters SBA, everyone kind of gets concerned and some people even cringe. And it's understandable because sometimes there's a lot of paperwork, sometimes there's a lot of things that need to be addressed. But the bottom line is, is at the end of the day, the SBA with their partner bank will make loans happen that, at the conventional level, just wouldn't take place.

Mark Meloy:
Yeah. That seems to be kind of a basic tenant, right? Is that the borrower can't get this kind of financing at any bank, that there's circumstances that exist that prohibit that, right? And so the SBA loan comes into play here, that makes it work better. So what are maybe some of those characteristics that a SBA lending bank would be able to make a loan in that, in that way?

Cesar Jimenez:
Well, I, we hit them up almost every day. It's not too often that you find that that quintessential borrower that has everything lined up perfectly, that's going to make the process run smoothly. There's always seems to be things that we need to overcome. So, what's one of the things we need to deal with? Collateral, sometimes there just isn't sufficient collateral to cover the loan amount that's being requested. The SBA has specific guidelines that allow for collateral shortfalls, depending on SBA guidelines, combined with the partner bank and their lending policy as well. So collateral is one of the issues. Another issue could be that perhaps over the last three years, you didn't have that, what in the industry we call debt service coverage, which is a sufficient amount of income to cover the debt that you're requesting. In the SBA environment, you can have shortfalls of debt service coverage in past periods. And if you've had it in the past period where you are debt servicing, we can even use projections that make sense with what's going on with the business model to make the deal happen.

Mark Meloy:
Got it. What about length of amortization, in other words, the amount of years that the loan would be paid back over? It seems to me that that's an option also under the SBA program, that we're able to, banks were able to extend that a little bit.

Cesar Jimenez:
Absolutely. Many times, for example, a customer might have, let's call it a manufacturing customer, might have existing debt with leases on machines and things of that nature. And they happened to be looking for a commercial real estate loan, they want to replace the rent that they're paying right now to the landlord because the landlord said, you know what? You can buy my building. So one of the criteria under that particular umbrella is, we'll allow the borrower to place 10% down as opposed to a conventional lender wanting 25, maybe even 30% down. But we'll look at the balance sheet, and we'll see that there's debt on the books that has equipment, for example, being amortized over five or seven years. And those cases, we can take the entire debt and perhaps amortize it anywhere between 10 to 25 years, which would be an exceptional cashflow savings to the borrower.

Mark Meloy:
Yeah, that's a great example. Thanks, thanks for that. So talk about deal size, how small is too small? How big can these loans typically be? What's... In kind of what situations work?

Cesar Jimenez:
Some partners out there can do microloans as small as $50,000, $10,000, $15,000. But here at First Business Bank, we prefer for the loan size to start in the neighborhood of $350,000 and go up to a typical $5 million range on the 7(A) program. If there's a 504 involved, which factors into commercial real estate, heavy equipment and things of that nature, perhaps we can exceed the $5 million dollar mark, depending on how we structure the first and the second mortgage, and the whole deal comes together.

Mark Meloy:
Got it. So what types of businesses use SBA loans? Are there industries that don't work with SBA or anything like that, that we should be aware of?

Cesar Jimenez:
The answer is yes and no. The, some banks consider a particular industry or a particular type of collateral acceptable, and some banks consider it not to be acceptable. Some banks may prefer to do hotels, some banks may prefer just to do doctors, urgent care facilities, veterinarian clinics, et cetera, and things of that nature. But the fact of the matter is, I don't think any entrepreneur should consider themselves unworthy. A really well-rounded SBA lender that can try and advise them and guide them in the right direction.

Mark Meloy:
Are there particular situations or reasons why an SBA loan works better than conventional financing?

Cesar Jimenez:
Oh God, yes. I mean, for example, I had a national CPA firm come to me, about a year ago, and we did get the deal done here at First Business Bank, but he tried to get this deal done at least five other banks, two or three were conventional lenders and a few of them were SBA lenders. The fact of the matter is, is we wound up taking about $5.5 million worth of debt, and doing what's called a 7(a)/504 combo. In doing so, we were able to take about $3.3 million of unsecured debt, we were able to take about $1.4 million of commercial real estate plus improvements under the 504 umbrella, and we were also able to include the acquisition of an office condo, and offer him a $250,000 line of credit. So at the end of the day, the loan closed at somewhere close to $5.5 million and we got it done where it wasn't getting done anywhere else.

Mark Meloy:
Well, that's a great story. Cesar, talk a little bit about common misunderstandings about SBA loans and how you respond to those when they come up in conversation.

Cesar Jimenez:
Okay, so there's a few things to look at here. Number one, if you have a business that's doing great, you may think you're doing too well to be able to qualify for an SBA loan. Or on the other side of the spectrum, you have a business that's not doing so well and that particular business owner thinks they don't qualify for any loan, let alone an SBA loan. So what my advice is, is let's not ever get into a situation where you think you don't qualify for something, because the best thing to do is again, try to find that SBA lender or that lender or professional that knows what they're talking about, evaluate your balance sheet, and your P and L's, and your tax returns, and then says, "you know what? I think this is what we can do." That's the best approach.

Mark Meloy:
Right. You know, I have a great memory of my entry into the banking industry, and I was with an organization that did a lot of SBA loans, that was a long time ago, but one of the things that we always talked about there in terms of why SBA was that it provides the borrower staying power. And by that is meant that because there's a guarantee, there's a government guarantee that goes with the loan, the lending bank has a greater certainty of collectability on the vast majority of the loan, right? And we've also seen where the government in times of broader economic stress, like we've seen through the pandemic, which was seen in the great recession 12, 13 years ago, where the SBA steps up and makes enhancements to the program, whether it's higher guarantee rates, reduced fees, makes payments for a period of time. You know? So there's some extraordinary measures that the government, through the SBA program, has provided to borrowers in that program. So there is some nuances, I think, that sort of go unappreciated or sometimes quickly forgotten, especially when we're in times of economic boom. Any thoughts or comments to that?

Cesar Jimenez:
Yeah, yeah. You've made me think of a family that I had known for many years, and it was a printing company that had been around for about 20, 25 years. And mom and dad were ready to move on, they wanted to ride off into the sunset in their RV and travel the country. Their son was with the business for about 20 years, so we began to look at the entire situation and we realized that based upon the entire situation and picture of the business, that this just wasn't going to go conventional. So I knew that the SBA was the avenue to take this business succession deal and make it happen.

Cesar Jimenez:
There were some collateral shortfalls, there were items that we needed to overcome, and the process took a few months. But at the end of the day, there was a $4.2 million 7(a) loan closed, mom and dad were able to move on, they walked away from closing with about $1.2 million of cash in the bank, from the sale of the business to their son, and their son was able to assume total control of the company, and 28 employees and families that worked for that institution were able to keep their jobs and continue to move forward. These are the types of things that I look at as an SBA lender that right now I'm getting goosebumps just talking about it, that I know not only did I help mom and dad, not only that we help the borrower and the owner of the new business, we helped all the families connected to that business. And it's just a wonderful feeling, knowing that you're having that type of impact, and the SBA makes this possible.

Mark Meloy:
Yeah, that's a great story. And that's, I think something that is for all of us in the banking industry, what kind of gets me up in the morning and is so energizing about what we do, and that is the impact that the work that we do,

Cesar Jimenez:
Mm-hmm (affirmative).

Mark Meloy:
in particular through the SBA program, for organizations, for entrepreneurs and their employees, and frankly, their customers and their suppliers.

Cesar Jimenez:
Mm-hmm (affirmative). mm-hmm (affirmative).

Mark Meloy:
They make work that might not otherwise happen.

Cesar Jimenez:
Absolutely.

Mark Meloy:
And it's a great program, and it works well when done right. You know, the one thing I wanted to talk about in today's conversation too, was the importance of that application process, and going through underwriting. And this thinking out there, that the process takes a really long time, but there is just like for one's home mortgage, there's a great deal of work and expectation that the applicant borrower has to take on in the process. Can you talk about that a little bit?

Cesar Jimenez:
Yeah, and I can't help but smile because, once we begin the process moving forward, that's when the rubber hits the road. We really need to get focused with the client, we need to explain exactly what's going on with the specific forms, and what we need to do to get everything done, whether it has to be a wet signature, whether it's a digital signature, whether we need bank statements, whatever the case may be, we get a checklist that helps us get through the process and get to the closing table.

Cesar Jimenez:
I oftentimes explain the process to many of the borrowers and business owners that I work with as a pregnancy. We get pregnant, mom and dad are doing everything they need to do to get through the pregnancy, we find out whether it's a boy or girl, we get happy, there's some morning sickness, we don't feel so great. We get into labor, that's a big, stressful situation, but the minute we have the baby slash closed a loan, we're ready to do it all over again. And that's kind of what an SBA process is like, it's got its ups and downs, but once you get to that closing table and it gets done, you're happy, and you move forward to trying to get everything that you had initially thought would happen with the loan, you start implementing.

Mark Meloy:
Yeah. And it seems it's really important that that applicant slash borrower has to be engaged in the process. A lot of times they're dealing with things that they don't like to do, right? It's financial information, personal information, tax returns, all the things that you listed, kind of thing, and that's taking them away, it's taking their attention away from what's most important and that's the business or their job or whatever kind of thing that they do every day, all day long. But it does take that time, and it takes that concentration of effort to make a successful process, that's for sure.

Cesar Jimenez:
Yeah, and we need to be involved in that. We need to be able to explain to the client exactly what's going on with the forms, we need to be able to communicate with their professionals, with their CPAs, with their architects, whatever the case may be with regards to the specific project, to getting things done. I'm happy that I happen to have an accounting background, so whenever it's time to speak to the CPA firms, we talk the same language and we really do well together. So in that respect, I'm really happy when in that particular avenue presents itself.

Mark Meloy:
Mm-hmm (affirmative). I want to go back to something we talked about before, the types of loans. So you gave a great example about kind of an ownership transition, I think that's a common one. You gave another example about kind of a debt refinance with the acquisition of some real estate, so there's kind of two things in there. What are some of the other applications of SBA loan opportunities that you're familiar with, or that are most common?

Cesar Jimenez:
Sure. Well, let's, first-hand experience is usually the best way to go. The bottom line is, I have another client that I've known for many years, that has a gas station, has some investment properties, and in his gas stations he has car washes. So he saw the cash making opportunity with the carwash. So he contracted to buy a piece of land in South Broward.

Cesar Jimenez:
With the SBA 7(a) program, we assisted him in buying the land, setting up the construction, getting the construction done, converting the construction loan to a permanent loan, and also giving him capital for the equipment, the construction, and working capital for post-closing. That was about a 3.3, $3.4 million project. Today, that particular carwash is doing so well that that particular client is looking for another land, and we just approved him, pre-qualified him for another project of about $4.3 million. So here we have a situation where we had someone build doing ground-up construction, 10% down based upon the equity in his own personal streams of income and personal strength. Yes, it's a good borrower and he was able to get it done and he's ready to do it again. And he should, and I'm really excited to be helping him with that particular endeavor.

Mark Meloy:
Great, great stuff. Are there any geographic restrictions with SBA loans?

Cesar Jimenez:
That's a great thing about working at this bank and working with the SBA, currently in my pipeline, obviously I'm working on deals in south Florida but since I'm originally from New Jersey, I also get references for deals in New Jersey. Currently, I'm working on a franchise deal in Las Vegas. I've gotten referrals from friends of mine in Oregon. So long story short is, we can pretty much do a loan anywhere in the Continental United States and even territories, some banks even go out to Puerto Rico and some of the Virgin Islands. So the SBA acknowledges that we can pretty much go anywhere in the U.S. and territories, and we try to keep up with that pace.

Mark Meloy:
Why is First Business Bank a good choice for an SBA loan?

Cesar Jimenez:
Great question. You know, I've learned at this juncture in my life that the people you work with and the people you have to answer to are really important. And the culture here at First Business Bank is truly... It's special. I'm going to say that the best way to describe it in one word is that we care. Everyone cares, we're all professionals, really, really good at what we do, and for the areas that we were lacking, we have people to turn to that are experts in that specific area, whether it's a closing issue, whether it's an eligibility issue, whatever the case may be, we have the pieces in place here, at the bank, because someone like Marty Ferguson, who's the president of our division, has done an excellent job in putting the pieces in the right places to make everything run smoothly and move forward. So it's a function of the culture of the bank and the people here that have adopted that culture and doing our best to move forward and do well.

Mark Meloy:
Cesar, thanks. That's a great conversation, and also thank you for taking time to share your thoughts and experiences with our audience today. To our audience, thanks for listening to the conversation. We hope you found the topic helpful, and now better understand the nuances of an SBA loan as an important alternative. Join us next time on the First Business Bank podcast.