SBA 7A vs. 504: What Every Entrepreneur Needs to Know

[00:00:00] Hey gang, on today's episode I chat with Kurt Solomon who is an SBA expert. He's been in the SBA

[00:00:06] lending space for 30 years and we dive deep into the differences between the SBA's flagship 7A

[00:00:14] lending program and their 504 lending program. They are distinctly different but they're both

[00:00:20] great tools and loan programs that help a small business owner acquire property, expand their

[00:00:26] business and grow. So sit tight, tune in, it's a great conversation, you'll learn a lot.

[00:00:33] Welcome to the Brick & Mortar Money Show. The podcast dedicated to helping business owners

[00:00:40] and professionals achieve wealth, autonomy, and control through commercial property ownership.

[00:00:46] Join us as we unlock the power of real estate to transform your business and investment

[00:00:51] strategies. Whether you're seeking to expand, invest, or gain more freedom in your entrepreneurial

[00:00:57] journey, this is your destination for insightful stories, expert advice, and actionable strategies.

[00:01:06] Welcome. Hey welcome listeners today. I have the distinct honor and privilege of having Kurt

[00:01:13] Solomon on the show today. Kurt is an expert in the SBA space. He is a senior vice president for

[00:01:19] business finance group and he's had over 30 years in the SBA space. I'm really excited about picking

[00:01:26] Kurt's brain today about the two primary SBA programs that we mostly deal with the 7A and the

[00:01:32] 504 when it comes to real estate. Kurt, welcome to the show today man. Thank you Paul. Nice to

[00:01:37] be with you. Yeah so let's start off and give everyone a sort of a background of yourself

[00:01:42] and your experience, how you got into space, and that sort of thing. Sure. I graduated from

[00:01:47] Skidmore College in upstate New York and wanted to stay in the area and a 504 company called Empire

[00:01:53] State Certified Development Company hired me, which why I was very grateful and had a 30-year

[00:01:58] run in the industry. Spent 15 years with them and where I found that was unique is they offered

[00:02:04] both 7A and 504. If you're asking for something that can give you the differences,

[00:02:10] I certainly have been through that conversation many times with clients.

[00:02:14] Then back in 2008 came down to Virginia with my wife and I've been covering the mid-Atlantic region

[00:02:20] for our CDC business finance group since then. Excellent you picked a fine time to move in 2008.

[00:02:27] It just isn't a side but anyway why don't we start off real quickly before we get into the

[00:02:32] differences and everything and unless you think it's appropriate to hold till later is what is

[00:02:36] a CDC? What is that? Sure. As we'll get into it today, there are two primary programs the 7A

[00:02:45] and the 504. A 7A is basically administered through your lending institutions, your banks,

[00:02:51] your credit unions. The 504 program is specialized and you must go through a certified

[00:02:58] development company that offers the program. There's about 200 of us across the country

[00:03:04] varying sizes, varying locations. But yes if you are looking for a 504, they are

[00:03:10] administrated through a CDC and we service, underwrite, approve and close these loans for the SBA.

[00:03:19] Okay, okay great. Let's dive right in then from the beginning. Let's start with someone who

[00:03:24] they're a business owner and they're seeking funding from time to time for different reasons

[00:03:28] and they've heard about SBA. The good, the bad and the ugly. I think a lot of people

[00:03:31] are introduced to SBA through the PPP program here in the last couple of years.

[00:03:35] But why don't you start with an overview of kind of the 7A and 504?

[00:03:39] Sure, yeah and this is a great starting point because I think when people think of SBA,

[00:03:45] they look at it as monolithic and SBA loan. There is big difference between SBA programs

[00:03:51] so it's not an all catch all item. So I would say that the two primary programs are the 7A

[00:03:58] and the 504. The 7A is what I would say is the flagship of the agency. This is administered

[00:04:05] through banks, through credit unions that offer this program. Most lending institutions offer it,

[00:04:13] as I just said, but they vary in size. So you might have a community bank that does

[00:04:18] two a year. You might have a specialized large bank that has hundreds of 504 loans a year.

[00:04:24] So it really varies on expertise and that's something which I would recommend that if you were to go get

[00:04:31] a 7A loan, you might want to go do some research. If you're asking what the 7A program is and I

[00:04:38] thought about this a lot last night, the best way to describe the 7A is it provides a lender a

[00:04:43] third option. If you were to go get a loan, they have two options for you. They can say,

[00:04:49] yes, we'll make the loan or no, we can't make the loan. With an SBA guarantee that provides that third

[00:04:57] option, we can't do this loan conventionally here but with an SBA guarantee, we can say yes. So

[00:05:03] it's basically given that option to say yes to you which obviously if you're looking for financing,

[00:05:09] that's a great answer. I look at SBA 7A is and this is important is that the

[00:05:15] reason the bank or the lending institution can move forward is because the SBA is going to guarantee

[00:05:21] a portion of that loan. So if you borrowed $100 and you didn't pay the bank back,

[00:05:27] the SBA will replenish $75 to the lender and that's what is attractive. If you've thought

[00:05:35] of PMI insurance for a home mortgage, it's just that safety net. So that's important about the

[00:05:41] 7A and then the advantages of SBA 7A, the best thing about the program besides getting the money,

[00:05:47] which is obviously important, is the fact that it's very flexible and has a variety of uses.

[00:05:53] You can use it for real estate, equipment, work in capital, inventory needs, buying a business.

[00:06:00] So it's very flexible in the nature of that program. And one important note on the 7A

[00:06:07] is the SBA will not decline alone based on insufficient collateral. And I think that's important.

[00:06:13] A lot of times a bank can't provide you a loan for work in capital because there's no collateral.

[00:06:18] And the SBA is basically said, we will not decline someone just because it's insufficient

[00:06:24] collateral. So that's important to understand. Now switching gears, the SBA 504 program is

[00:06:31] very specific and that is for owner occupied real estate and large pieces of equipment.

[00:06:37] Okay. So when you're looking for fixed assets, this is the program that I would definitely

[00:06:43] kind of focus your attention to. Unlike the 7A where again we talked about the

[00:06:49] third option in the mentality that is obviously the borrower's not strong enough maybe without

[00:06:56] an SBA guarantee. The 504 is completely different. It's for growing strong businesses

[00:07:02] that are looking to preserve capital. Okay. If you are a growing business, you need that cash

[00:07:09] to support that growth. You're hiring employees, your receibles keep on building up, you need

[00:07:14] inventory so you need cash to grow. And so the SBA understood this and back in the 80s created

[00:07:20] the program to allow for 90% financing. As Paul probably told you many times if you're looking

[00:07:26] to get conventional owner occupied real estate and go conventional they're going to be looking

[00:07:31] for a 20 or 25% down payment with the 504 because the intent is to preserve your capital.

[00:07:38] We try to limit that to 10% which obviously that additional cash can be remained in the business

[00:07:44] to grow the business. And Kurt I want to put an asterisk there for a minute because

[00:07:50] the point you make about preserving capital for a growing business

[00:07:54] and I don't know where I learned this along the way but our general rule of them is a

[00:07:59] growing business is just eat cash. You mentioned it in terms of you got your hiring new employees,

[00:08:04] you're pushing money into advertising, you're expanding your capacity, maybe your production

[00:08:09] facilities and that's investment that comes in advance of your revenue and profit. You've

[00:08:14] got to be able to plow cash in this beast that's growing. Eventually you'll get your return

[00:08:20] but at some point you've got to feed the beast and if you're putting it into your bricks

[00:08:24] and mortar then you might not have it then to feed the beast so you could be you could

[00:08:28] put yourself in a position that not to win let's just say. Absolutely and I have it right here

[00:08:33] don't put into the brick and mortar but it's fascinating yesterday I was making a presentation

[00:08:38] to a bunch of banks and I brought up an article that back in the 90s it just is it's called

[00:08:44] why businesses can be profit rich but cash poor and it is I will send you the article because

[00:08:51] I think you might want to share that it's just extremely important to understand that if

[00:08:55] you're a small business that cash has to come from somewhere and in most cases you make profits

[00:09:04] and those profits those excess cash flow is reinvested back in the business to fund that

[00:09:10] grow well if you think logically if you're buying a building and you're going to need that

[00:09:15] cash flow to support the debt service on the building that's you don't have that cash that

[00:09:20] you've generally been relying on anyways it's a short not a short six page article but love to

[00:09:26] share with you one other thing I just want to talk about is the advantage of the SBA 504 is

[00:09:32] this is bond financing most businesses that are on this call today cannot just go to the bond market

[00:09:38] like GE or Apple and get their fixed rate financing so the SBA understood that and decided that

[00:09:45] this creation is program is to pool all these small businesses across the country each month

[00:09:50] and have one block sale and because these are backed by the United States government the risk to the

[00:09:57] bond holder has been reduced which reduces the rate so it's a below market fixed rate for 25

[00:10:03] years so that's another advantage that we will talk a little bit later on why it's so important

[00:10:08] to stabilize your occupancy expense but that's important to know and then the biggest contrast

[00:10:13] 7a and 504 is as I said 7a you go to a bank you go to a credit union they one shot boom they provide

[00:10:20] that loan to you they service that loan with the 504 there's three parties involved

[00:10:26] the lending the primary lender your bank credit union they're providing 50 percent we're providing

[00:10:33] 40 percent that's your SBA 504 bond in a second position and then you're responsible for that

[00:10:41] 10 percent down got it got so would you say it's a little more of a complicated process on the 504

[00:10:48] than the 7a I would say that the complication comes in the fact that you're dealing with two parties

[00:10:55] but if you see the benefits that you would get then obviously I'm willing to put in the effort

[00:11:02] to get more of an advantage in my structure or my financing so you are all right there is

[00:11:07] more complication but again this is what I do every day so we and we know we've worked on a couple

[00:11:14] deals together we collaborate and we all get our marching orders we work down and get it done

[00:11:20] yeah no doubt I think if it's done if it's done in a team approach like we've done before then

[00:11:25] you can the end buyer their impact is minimized in terms of multiple parties involved and so

[00:11:31] it can be seamless in a lot of cases what about let's shift gears a little bit and talk about

[00:11:36] okay so we have these two different programs different purposes benefits on each but what about

[00:11:41] eligibility and the process what's involved there can just anybody get these loans absolutely so

[00:11:47] let's talk about eligibility if you look at SBA in general this could be 7a or it could be 504

[00:11:53] you need to be for profit you've got to be privately owned you've got to be an eligible

[00:11:59] small business and basically that's talking about you're providing some type of service

[00:12:05] don't want to get too technical but for example an apartment building that is called passive

[00:12:11] investment investment real estate it's not a small business you're not providing a service

[00:12:17] however a daycare is a small business so we'll go through the list but I think you get the gist

[00:12:21] and then for profit that kind of kicks out anything that's a non-profit anything like a church

[00:12:27] that would not be eligible for a 504 again the the purpose of this program is to create

[00:12:31] and retain jobs so that's the primary focal point of the program as far as a definition of a small

[00:12:38] business that varies based on program so the 7a has revenue size employees employee size and

[00:12:47] it's hard for me to give you that specific data because it's based on industry so if you're

[00:12:54] a restaurant versus a hotel that revenue that job could be completely different especially for

[00:13:00] a manufacturer I think you have to have over 500 jobs to be considered not a small business so

[00:13:05] I'll leave that to for another day as far as the 504 it's pretty simple do you have a net worth

[00:13:11] less than 20 million and do you have net profit after tax on your tax return that does not exceed

[00:13:19] 6.5 million so based on those parameters you can see that in my 30 years I've maybe seen a

[00:13:25] handful of cases where I've said sorry you're just too big most the people I deal with are small

[00:13:31] as far as information that would be required for any type alone it's pretty standardized in the

[00:13:37] industry historical tax returns your personal financial statement your personal tax returns

[00:13:43] I think the one thing that we're very focused on that maybe a bank or credit union might not

[00:13:49] be so obsessed about is gear to date financials so if we're in the midst of 2024 we're not going

[00:13:57] to really want to rely just on your 2023 tax return but we're going to want that company

[00:14:02] impaired balance sheet profit and loss statement receivable and payable ageings if you have them

[00:14:08] and that's one thing that I recommend that if you don't have a good handle on your quick books

[00:14:13] and you're looking for financing make sure that you put in the effort and take care of that

[00:14:18] because I've seen deals where they've taken months because they'd have to get their CPA

[00:14:24] to complete a year to date because they don't have the ability to do it which is frustrating for them

[00:14:31] but again it's something that we would expect on the financials so what are you looking for

[00:14:39] from a qualification standpoint okay bottom line we're looking for the ability to repay the

[00:14:45] loan historically so we're going to be looking if this is a rent replacement deal they own a restaurant

[00:14:52] they are sick of spending money on rent to the landlord want to buy their own place and retire in

[00:14:57] 20 years which is a great example of using the program we're going to look at that what is your rent

[00:15:02] here and what are your profits and add-backs to see if you can support the building now I'm

[00:15:10] not saying that it has to be positive that you can afford it historically we do are able to look at

[00:15:20] based on projections but again from a rule of thumb we are looking first to see if that you can

[00:15:25] afford the building are you looking for any trends in terms of like profitability and that sort of

[00:15:30] thing because you're looking for typically three years back right is what you want to see

[00:15:35] yeah right now it's been tough because we're coming with the last cycle with COVID there's a

[00:15:41] there's not a lot of standardized trends as you can imagine but yeah we are certainly looking for

[00:15:46] trends and that's why a lender would require three years because you want to look backwards

[00:15:51] to see if there's any blips or anything that needs explaining got it got it okay so having

[00:15:58] your financial house in order at least up to date so you can present is a really important

[00:16:03] step in the process and then what else is involved in the process typically with respect to what

[00:16:13] I say hey Kurt I want to get a 504 loan and do I have to I don't want to buy a building should

[00:16:18] I have a building already identified is this something that you can review all my financials

[00:16:23] in advance and say yeah like on the residential side a lot of times people get a pre-approval

[00:16:27] letter right where they'll go absolutely I got it now yeah so we are here to support small

[00:16:34] business while we cannot move forward with the SBA process until you have an executed contract

[00:16:40] many times I get calls from bars what can I afford and we will walk through them do a cash

[00:16:46] flow and go based on the cash flow you could be looking at a two to three million dollar building

[00:16:51] and and support that building safely so we'll have those conversations and again it's always good

[00:16:57] to have that with the with their bank partner too so okay let me back up when you're looking for

[00:17:02] a 504 loan you're going to contact me directly but as I said before there's got to be a primary

[00:17:07] lender involved so generally we'll say who do you bank with now let's get a three-way call let's all

[00:17:13] work together and sometimes they don't work with the bank they have a they don't have a specific

[00:17:19] lender relationship and then they sometimes ask me would you recommend someone and certainly we

[00:17:24] would do that but that's the first step but the process starts with an executed purchase

[00:17:29] contract when we start getting on the train tracks towards an approval and a commitment letter

[00:17:37] very good yeah okay it's interesting to me it's funny that a lot of business owners

[00:17:42] they've never bought a building before for instance and they think the process is the

[00:17:50] real estate they bought is maybe the home they live in maybe an investment property or two

[00:17:55] and they come into the process in many cases thinking it's the same process you go in a contract

[00:18:01] you're going to close in 30 days all you need is a couple of tax returns and all that but this

[00:18:05] process is different pretty significantly so can you outline kind of expectations

[00:18:11] yeah before I do let me tell you a quick story that just happened last week

[00:18:15] so you have a borrower most of the people we deal with this is the first time buying

[00:18:19] commercial real estate they were working with a residential realtor and they put together a contract

[00:18:25] for a closing in 25 days and that right off the bat there's got to be expectations and we want to

[00:18:32] be transparent an appraisal is going to take 25 days on a commercial property so I would suggest

[00:18:39] that if you are looking at a real estate look at someone that that that can be your back

[00:18:46] that has done commercial real estate to make sure that you have the contingencies in there so you

[00:18:50] don't lose any money in a deposit if that makes sense yeah yeah for sure I see that too I've seen

[00:18:57] that in the in a lot I highly recommend that folks that we work with a commercial realtor that's

[00:19:05] got the proper expectation experience because so many of the residential realtors they're they are

[00:19:10] driven by a very short timeline and it's hard for them to see because they don't they've not

[00:19:15] been through the process and and they do set expectations and but if you do in that situation

[00:19:20] you have to adjust it right away because what is it going to take so we're going to appraisal

[00:19:24] it's 25 days and assuming that you're you have your financial house in order and you can provide

[00:19:30] the tax returns the year day financials the the receivables and the payables that sort of thing

[00:19:37] what's it going to take yeah and one thing I'd like to comment the reason that it takes

[00:19:42] some time is we are your trusted advisor you're buying a building we want to protect you so a

[00:19:49] getting an appraisal to make sure it's worth that but one thing that I would highly recommend

[00:19:54] to understand is that this is not residential real estate there could be potential environmental

[00:20:00] issues and while it takes longer to get to a closing we're doing all this due diligence

[00:20:05] to protect you and I'll give you a great example I live in the Richmond area and

[00:20:10] I was working on a deal in Kerry town which is a nice area and the borrower did not want to wait

[00:20:17] to get the proper financing in place so he bought the building with seller financing took title

[00:20:24] of that property guess what 50 years ago it was a dry cleaner it has cost $25,000 to clean up the

[00:20:33] site and I'm not going to say I'm not an attorney I don't know if he was responsible but

[00:20:38] is that the kind of headache that you want on your shoulders so yes is it longer processed

[00:20:43] than a residential closing but most of the time the reason it takes longer is because we're protecting

[00:20:49] you yeah that's good and what do they say fools rush in I forget the exact expression but you

[00:20:55] definitely don't want to rush into a commitment that's going to be a million two million three

[00:20:59] million five million whatever it might be without due diligence and the thing about the contract

[00:21:05] I'm with you I've seen that too before where deposits go hard and most borrowers don't understand

[00:21:12] that concept of hey you've got a certain period of time for due diligence and if you don't if you

[00:21:17] don't have a reason to escape the contract in that period then you have a good chance of losing

[00:21:22] your earnest money and it's generally more than $1,000 if you're buying a million dollar

[00:21:27] building or two million dollar building right sellers want more than that so it's important

[00:21:31] to have the right people and have expectations of the process and also it's up to you Paul that's

[00:21:36] what's been great about working with you is sometimes when you're dealing with a borrower

[00:21:40] they start to get emotionally tied to the building or etc and are not thinking but having someone

[00:21:48] like you that is not emotionally tied to it and provide guidance say no this is the way we

[00:21:54] should go I so that's why it's been a pleasure working with you I appreciate that Kurt and

[00:21:59] and you two you guys are great with with your process and your approvals very fast which

[00:22:05] brings me to a point because my experience working with you has been

[00:22:10] very good and the there is a stigma in the world about SBA you know taking a long time and being

[00:22:17] being a nightmare thing and you mentioned that every bank in America basically can do an SBA loan

[00:22:23] a 7a or they can partner with the 504 but there is a difference right in terms of they have

[00:22:29] different statuses right SBA has a preferred lending status right with some people which I know you

[00:22:34] guys have but then you have you have others that aren't at that level can you just discuss a little

[00:22:38] bit about the difference in working with a preferred lender versus a non-preferred lender and

[00:22:43] just because everybody can doesn't mean that everybody really should right in terms of due

[00:22:48] loans that they have no experience in because that's where you get these nightmarish kind

[00:22:52] of experiences I think yeah and so right off the bat I would just got off the phone yesterday

[00:22:57] with someone yeah I heard it takes six months to get approval so how do I structure the purchase

[00:23:02] contract so the rumor mill is crazy but I'll try to set the record state so with the 7a program

[00:23:09] many of your experienced SBA 7a lenders out there are called what is called preferred lending

[00:23:16] lender program plp that basically allows them to approve 7a loans without having the SBA

[00:23:23] go through their process they're pre-approved they have their ability to make loans so in that case

[00:23:29] you're talking the approval process could be less than 24 hours not saying the whole process

[00:23:35] takes 24 hours but I think we're just focused on SBA and that that entity so again

[00:23:42] if there are plp lender very quick if they're not and they're doing a traditional submission

[00:23:47] maybe a week so that but again it really depends on that would be a conversation

[00:23:52] that you'd want to have as far as 504 we had a call yesterday with the SBA and their turnaround

[00:23:58] time is 2.4 days so it's pretty attractive I'm not saying the whole process takes two point fair

[00:24:04] days because we can get into what we do initially but by saying that SBA takes forever or SBA is

[00:24:11] a problem if there's a problem more than likely you're pointing the finger at me not SBA

[00:24:16] as I said two days turnaround time or you're dealing with someone on the front end that

[00:24:22] isn't either communicating clearly what they need and why and getting the proper documentation right

[00:24:27] or a lot of times the borrowers themselves for whatever reason don't get you what you need

[00:24:32] to be able to submit this package to SBA right or to sign off if you're a plp lender

[00:24:37] that's correct so it's generally and I will say this we are here to do I'm so passionate

[00:24:46] I want to find ways and be as creative as possible but just be mindful most of times delays are

[00:24:53] caused by circumstances and when I mean that by if I have a situation where there's some

[00:24:59] issues such as I've had a medical problem a credit problem and I have a credit score of 560

[00:25:07] I had a previous bankruptcy and I don't want to go on it forever but when you have those

[00:25:12] type of things I will let the borrower know for the timeline that might be extended a little longer

[00:25:18] because there's going to be a little more explanation it takes a little longer to explain

[00:25:22] these issues not saying I can't get it done we probably get it done but it's going to take a

[00:25:26] little longer so I think that's where the the rumor mill that it takes forever because

[00:25:31] you're getting those isolated cases where it's a tough loan in the first place

[00:25:37] tell me if you agree or disagree with this I think when you're buying

[00:25:40] so most business owners generally don't wake up one day and say oh I'm just going to go buy

[00:25:46] a building tomorrow it's a process something's marinating in there in the back of their mind

[00:25:49] for whatever reason maybe your lease is coming due you've been in a five-year lease and you've

[00:25:54] had rent escalations and you're thinking okay it's coming to any year or maybe you've just

[00:25:58] maybe you just signed a lease renewal and you're like I don't want to do this again in

[00:26:02] three years right and so it's a process and so if you if you start thinking about this and

[00:26:07] getting involved in the process seriously maybe six to twelve months before you're out there really

[00:26:13] trying to find the property and go into contract all that you can get all your ducks in order right

[00:26:18] early and so when you go into the process it's a much more stress-free process than if you just

[00:26:26] throw caution to the wind and I'm going to go get a building tomorrow and just throw it all

[00:26:29] at everybody and I've seen too some people operate like that but probably not the best

[00:26:33] way to approach it proactivity that's the biggest thing I got two examples just from this morning one

[00:26:41] someone that decided to enter into a purchase agreement without even thinking about financing

[00:26:46] and now everyone's biting their nails because of the settlement date and no one's got a package no

[00:26:51] one knows what's going on versus another person that I'm working with that's got a wonderful

[00:26:57] company he's not looking to find a building for another six months but wants to understand

[00:27:03] I was talking about earlier what can I afford when I start going searching here's my tax returns

[00:27:08] here's my financials do you have any questions we're taking care of the underwriting before they even

[00:27:13] find a property yeah that might be a little too early but again for him it's going to be make them

[00:27:20] most it's going to work out at the end because he has his ducks in the room

[00:27:24] yeah yeah and you can be more strategic about the process and you can be more strategic about

[00:27:29] the building that you find or whatnot and speaking of that talk about construction because

[00:27:34] again if I'm thinking three years out or two years out and I'm like okay I'm out growing the space I

[00:27:39] think I can grow continue to grow my business and maybe I want to customize the space because

[00:27:45] I've got clients or patients or or maybe dog owners that are bringing their dog to my vet

[00:27:51] and I want to give them an amazing experience and if I build something to suit

[00:27:55] um can I do that with the program what's involved and the the secondary question is

[00:28:02] what about the idea of building a building larger than I need and leasing out some of the space to

[00:28:08] help defer some of the costs and then maybe create a potential opportunity for me to grow into

[00:28:13] later as I continue to grow up so we see a lot of construction ground up construction

[00:28:18] so that is obviously allowed be mindful that in that kind of situation there's going to be a

[00:28:25] construction loan where the lender is going to provide you advances to pay the contractor

[00:28:31] over time period then once it's all completed then we will convert into a 504 and you have

[00:28:36] permit financing but definitely it's something that we can do we do it a lot one of the great

[00:28:42] advantages of the SBA 504 and construction deals is that if you if you just think about a

[00:28:49] construction project there's a lot of added cost you've got architect fees you got design fees

[00:28:55] you got construction interim interest so for example if you're not even in the building yet

[00:29:00] but you're paying interest on the advances so there's a lot of costs that all could be

[00:29:04] capitalized into the 504 loan so you're not paying them out of pocket so to give you a

[00:29:09] great example I'm doing a 15 million dollar ground up construction hotel and I think in that deal

[00:29:16] there's about 750 thousand dollars just for interim interest so the borrower doesn't have to make

[00:29:21] those pay there's no cash flow coming in yet so that interest is being paid and capitalized

[00:29:28] into the loan which is a great advantage to use the program pause you were talking about this

[00:29:33] is a growth program we want to see expansion retain job recreation so certainly a borrower can

[00:29:41] build a little bigger than what they need today with the intent that over the next 10 years be able

[00:29:48] to expand and complete and fill out the whole building the rules on that is that the borrower

[00:29:54] needs to occupy at least 60 percent of the building initially and then over time it is expected

[00:30:01] that they will take on more of the building they can lease out 20 percent permanently so 20 percent

[00:30:09] of the building can totally be permanently leased out that's fantastic and yeah we have a lot of

[00:30:15] clients that do that and the construction thing is is amazing and obviously that's a little more

[00:30:19] involved because you have plans specs budgets that sort of thing but the point you made is

[00:30:24] huge of this in this interest that you can build into the loan funds because you can't

[00:30:29] do that on a conventional bank loan right you're paying that freight every single month right

[00:30:33] I should can I comment on that really quickly Paul yeah so the reason that you can't probably do

[00:30:39] it conventionally is there's a different mindset with conventional lenders they have a targeted

[00:30:46] loan to value we will do loan to value of 80 percent that interim interest doesn't add

[00:30:51] any value to the property so you're going to have a loan to value issue the reason we don't

[00:30:57] want to have that issue is SBA gives us about a 10 percent variance or flexibility on the appraisal

[00:31:02] so to help you understand let's say we did a million dollar building and it only appraised at

[00:31:08] $900,000 you would think we have a problem however under the SBA that appraisal would be good for

[00:31:15] us because we want to include those soft costs we want to include that interest we want to

[00:31:21] preserve cash so that's the only reason wow that is huge is does that apply to the 7a and 504

[00:31:28] just the 504 that variance I would imagine it's been over 15 years since I did specifically 7a

[00:31:36] but yes there should be no problem with rolling those costs in as well because again under the

[00:31:41] 7a program you're really not hitting an ltv target as I said before SBA will not decline

[00:31:47] alone based on insufficient collateral now speaking of the collateral the question that I get a lot

[00:31:53] and I know there's a difference here between 7a and 504 let's say I want to go buy a building

[00:31:58] curt for my for my HVAC company and I'm putting 10 percent down are you going to put a lien on

[00:32:04] my house because my wife is not really excited about that that is a wonderful question and

[00:32:10] I'm glad we get to talk about it so there is one stipulation in the SBA standard operating procedure

[00:32:19] we call it the SOP that basically says that if the loan is under collateralized the lender must take

[00:32:25] all available collateral so in many cases on a 7a loan there would be something tied to

[00:32:34] residence or other collateral if you have equity so yes I very important to understand

[00:32:41] if there if you have equity in your house and you're asking for 90 financing under the 7a which would

[00:32:48] be under collateralized they're going to tie up your house with that said the 504 program we do not

[00:32:56] take real personal real estate as collateral that's not our standard practice however

[00:33:03] would we take a credit enhancement take that someone's house or take some additional collateral

[00:33:09] if it is a startup operation where payment is based on projection we've been known to do that

[00:33:15] and occasionally occasionally so I didn't want to say absolutely we wouldn't do it but I could

[00:33:20] tell you with the 7a that all available collateral forces the lender's hand on that

[00:33:26] got it yeah I know that's a big it's a big point for some people and particularly

[00:33:31] for those of us that are married you got to know and so that's another point too that

[00:33:36] just winding down just issues that I've seen how important is it if you have someone looking

[00:33:42] to buy a building and we've already discussed the fact that most of our folks that people go on

[00:33:47] to buy using SBA have never bought commercial real estate before how important is it if they

[00:33:52] are married to be like on the same sheet of music with their spouse about this because

[00:33:56] if they're not what could happen sure yeah so one thing I would say is it's funny because I deal

[00:34:03] with all the banks all the credit unions of Virginia and there's some that would require the spouses

[00:34:08] guarantee and some that won't even despite the fact that maybe he or she the spouse does

[00:34:14] not have any ownership in the business I find that kind of interesting but I guess it comes

[00:34:19] down to looking at their personal cash flow you've all this debt what is the supported

[00:34:24] income and maybe the spouse works outside of it but anyways I'm going on a rampage let's get to the

[00:34:31] topic with the SBA if a spouse has no ownership in the operating company they would not be required

[00:34:40] to guarantee however the SBA is going to want a joint personal financial statement

[00:34:46] with the joint assets joint liabilities and both their signatures and the reason is if for

[00:34:53] example my wife was married to Jeff Bezos and she wanted to get an SBA loan she would not qualify

[00:34:59] because of the household income and so that's the only reason why there's a requirement to have both

[00:35:06] both husband and wife on the personal financial statement but we don't run personal credit on the

[00:35:11] spouse they're not involved but that's very clear because I've had times where I'm not

[00:35:15] having my wife sign this because she's not involved and I'm like I understand it's just

[00:35:20] now she has a $50 million trust fund that's all we care about

[00:35:25] yeah no it's you have to really explain that so they understand what's going on because it

[00:35:29] doesn't make sense if I why does my wife have to sign this absolutely you get a lot of pushback

[00:35:34] from business owners because they they're so independent right and they're used to calling

[00:35:39] the shots and making decisions and being in charge and you're like no it's got to happen

[00:35:44] one last question that comes to mind and then I'm going to wind down with any other thoughts

[00:35:47] that you have that we haven't covered um you mentioned credit not checking the spouse's credit so

[00:35:52] how important is credit to 504 or 78 loans mean what what's what do you guys look at

[00:36:00] yeah I think that's one of the advantages of us or SBA in general is you go to a bank

[00:36:06] and they probably have a minimum credit score that they're looking for and if you fall under

[00:36:11] that credit score something they can't do we're a little different is tell me the story give me

[00:36:19] this story doesn't make sense and so when everyone asks me what's your minimum credit score there is

[00:36:27] none it's more about what's the story if there is an issue with your credit score

[00:36:32] and that's fine but you I'm sure you're still looking for some trendy analysis like someone who's

[00:36:37] had serious financial issues and they've just not really paid their bills at all you're like yeah

[00:36:42] we're not going to touch that but if someone had a life event or what everyone has events right life

[00:36:48] happens but then a recovery from that and say okay yeah they had this issue four years ago but now

[00:36:53] since then their life has been back on track maybe they had a hospitalization or something and

[00:36:58] absolutely and that's what I was talking about where unlike maybe a large lender that

[00:37:04] is looking at just a credit score we're not going to just look at credit score we want to hear the

[00:37:08] story and that's true there are life events that happen in fact I had one guy yesterday which was

[00:37:13] funny he had a low's credit card and he never used it never used it however there was a annual

[00:37:21] fee he wasn't aware about so he's got 12 months and it killed his credit score but once I heard

[00:37:28] this story like that could have happened to me the guy got but he saved 10% on that one purchase

[00:37:34] it's yeah I laugh every time they ask every time I go to the store we're like no no and I've seen it

[00:37:39] I've seen people do things like that and it's man it's so easy to fall into that trap and not

[00:37:44] even know it and the pain and the price you pay but our good news so so you guys are

[00:37:48] common sense approach so generally speaking the approach with SBA is hey we want to help

[00:37:56] businesses grow and on this 504 if you're a growing business we want to preserve your capital

[00:38:02] we want to hear the story we want to try to make this thing work anyway we can if it makes sense

[00:38:08] we're going to protect you as the borough first not going to let you get into something that's

[00:38:11] going to you know blow up in your face but at the same time we also want you to continue to

[00:38:16] thrive as a business and grow and so instead of taking all your cash reserves and your working

[00:38:20] capital and plowing into the building you're going to have it for growing your business yeah

[00:38:25] yeah what do we miss Kurt what what last point thoughts I would say if in summary do your homework

[00:38:34] get multiple options talk to many people and the reason I say that is it's human nature

[00:38:40] as a lender we're going to do what's in our best interest and I love the story about

[00:38:46] I'm a runner if I go to a running store and that owner of that running store gets

[00:38:50] higher margins on Nike and I come in there and say what shoe should I get I can tell you it's

[00:38:56] going to be Nike yeah so what I suggest is that you get perspective and just don't use one isolated

[00:39:03] and you'll find out that you'll get the best structure for you and I know we're running out

[00:39:09] of time but that's what I would suggest is make sure talk to a couple lenders and see what's

[00:39:13] the best interest for you yeah absolutely I'm a firm believer in that I think borrowers

[00:39:19] should be educated you know the old adages if if the only tool I have in my toolbox is a hammer

[00:39:25] every problem is a nail right and so that's not good and when you're going into this space where

[00:39:31] the dollars are big and the consequences are big you need to be well educated on the options

[00:39:37] and in some cases the 7a maybe your solution it could be a 5-4 and maybe a conventional

[00:39:42] just depends on your specific goals and situations what you're trying to trying to do Kurt

[00:39:48] this has been great very educational very interesting I love the stories and the day-to-day

[00:39:53] experiences I appreciate you being on if somebody needs to get in contact with you directly what's

[00:39:57] the best way to do that sure 540-846-7355 excellent all right we'll get that in the show notes

[00:40:08] Kurt thanks for being on the show today man this is great a lot of fun appreciate it

[00:40:12] you have a good day you too hey gang just wind it down here today thanks for listening to the

[00:40:17] show and as always if you need capital to grow your business you're looking to purchase

[00:40:24] commercial real estate or build build a building or invest in commercial real estate you're looking

[00:40:29] to acquire a business or a competitor or just need growth capital we'd love to talk to you we

[00:40:34] fund businesses all day long our mission is to help entrepreneurs win and to fund their

[00:40:39] businesses and fund their dreams so that they can make an impact in their community reach

[00:40:44] out to me today go to our website click the button schedule 20 minute conversation discovery call

[00:40:49] we'll have a quick conversation see if there's a need see if there's a fit and we can take it from

[00:40:53] there the website is vpc victor paul charlie dot capital that's vpc dot capital all right

[00:41:04] there's no dot com on that it's vpc dot capital as always keep crushing it and hope to see you

[00:41:11] soon around here take care