Financing for Veterans the SBA Way Presented by David Tiller-Veterans Business Development Officer U.S. Small Business Administration TN District Office David.Tiller@sba.gov – 615-736-7176

Getting Started Why do you want to go into business? List your reasons, e.g. freedom & dogs What business is “right for you”? Identify the niche your business will ‘fill’ Before you start: see the SBDC or SCORE WHEN will you “really start” ? Want to be your boss. Want financial independence. Want to fully use your skills and knowledge. What do I like to do with my time? What technical skills do I have. What do others say I am good at? How much time to I have to run a successful business? Do I have any hobbies or interest that are marketable? Is my idea practical and will it fill a need? What is my competition? What is my business advantage over existing firms? Can I deliver a better quality service? Can I create a demand for my business?

PreBusiness Checklist Details on the business you are starting: What services or products will I sell? Where will I be located? What skills and experience do I bring to the business? What will be my legal structure?

PreBusiness Continued What will I name my business? What equipment or supplies will I need? What financing will I need? What are my resources? How will I compensate myself? Your answers to these questions will help you create a focused, well-researched business plan that should detail how the business will be operated, managed and capitalized.

Types of Business Structures Sole Proprietorship General Partnership Limited Partnership Corporation Limited Liability Company (LLC) One person operating the business. – most common, profits are taxed as income to the owner personally. Two or more persons join together in the operation and management of business. A formal partnership agreement is recommended. Each partner is liable for all debts. All profits are taxed as income to the partners based on their percentage of ownership. Partnership registers its business name with the county/city clerks office where the business is located. 2 Partners, were a general partner has greater control of the business, limited partners can only receive a share of profits based on the prorated amount of their investment. A legal entity made up of persons who have received a charter legally recognizing the corporation as a separate entity having its own rights, privileges and liabilities. There is double taxation for corporate earnings, but have advantage of limited liability. Limited Liability Company combines selected corporate and partnership characteristics while still maintaining status as a legal entity distinct from it sowners. LLC owners risk only their investment, personal assets are not a risk.

Financing a Business Personal Savings. Friends and relatives. Banks/SBA and Credit Unions.

Borrowing Money$$$ Small business people have a difficult time borrowing money. True or False? Banks make money by lending money. You must show them their investment in you will pay Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: HIGH RISK!

Borrowing Money$$$ Continued To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it and how you will pay it back. Your business plan must convince your lender that you are a good credit risk.

Business Plan & Loan Proposal What is the opportunity your business presents? Business Description Management Profile Market Information Financial Information Lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal. A good loan proposal will contain the following key elements: Business name, names of principals, social security number for each principal and the business address. Purpose of the loan – exactly what the loan will be used for and why it is needed. Amount required – the exact amount you need to achieve your purpose. History and nature of the business – details of what kind of business it is, its age, number of employees and current business assets. Ownership structure. Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments. Define your company’s products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs. Financial statements – balance sheets and income statements for the past 3 years. If new business, provide a projected balance sheet and income statement for 3 years. Personal financial statements on yourself and other principal owners of the business. Collateral you would pledge as security on the loan.

What to Take to the Bank Purpose of the Loan: Sources and Uses of Capital History of the business Financial statements for 3 years. (existing business) Aging of accounts receivable and payable. (existing business) Projected opening-day balance sheet. (new business) Lease details – copy of the lease or contract for sale Amount of investment in the business by the owner. Projections of income, expenses and cash flow. Signed personal financial statements. Personal resume – bio may be best

What SBA Looks for Good Character Management Expertise and Commitment Sufficient Funds (including loan) to operate Feasible business plan Adequate equity investment in the business Sufficient collateral Ability to repay the loan The basic SBA requirements for the borrower include good character. This is generally reflected by a near spotless credit report and no recent arrests or convictions. The borrower needs to have management expertise related to the business and a commitment to succeed. Generally, the SBA prefers an equity injection of 25% to 33% of the total project cost and there should be a feasible business plan. There should also be sufficient collateral and, most importantly, the ability to repay the loan from projected operating cash flow.

Your Credit Report What is considered: 1. Credit Score – 700 or above - good 2. Delinquent Accounts - Judgments 3. Payments over 30 days past due Free Credit Report: www.annualcreditreport.com The basic SBA requirements for the borrower include good character. This is generally reflected by a near spotless credit report and no recent arrests or convictions. The borrower needs to have management expertise related to the business and a commitment to succeed. Generally, the SBA prefers an equity injection of 25% to 33% of the total project cost and there should be a feasible business plan. There should also be sufficient collateral and, most importantly, the ability to repay the loan from projected operating cash flow.

How Your Loan Request is Viewed The Five “C’s” of Credit Character Cash Flow Collateral Capitalization Conditions To come to a credit decision on a loan request, SBA evaluates a business in the same way a bank does. When reviewing a loan request, the lender is primarily concerned with repayment. Loan Officers judge loan applications based on what is commonly referred to as the five C’s of Credit. Character-we generally rely on the lenders assessment of character. We do review credit reports and personal resumes of the business owners. Cashflow-We look at historical and projected financial statements to see if there is enough inflow of cash to cover the day to day operations, business debt and the SBA loan. Collateral- “is anything of value used as security to repay your debt” it is your second source of repayment if business cashflow fails to pay the loan. Assets purchased with loan proceeds must be used as collateral. If there is not enough business collateral, then we will look at personal assets to secure the loan. Capitalization-Is the equity or personal risk you have in the business. The more the borrower has at stake, the harder he will work to make the business a success. Conditions-are the internal and external factors that can affect business operations.

SBA Financial Programs MicroLoan Program Micro Loans—up to $50,000 Patriot Express Loan Initiative SBA Community Advantage & Small Loan Advantage 504 Loan Program 7(a) Loan Guaranty Program SBAExpress Loan Program

SBA Serves a Wide Variety of Capital Needs $5.0 million $5.5million If mfg. 504 Loans $5.0 million 7(a) Loans Growth in Business & Changes in Capital Needs $350,000 SBAExpress Capital needs for small companies vary greatly from business to business. That’s why the SBA offers such a wide variety of loan guaranty programs. More and more small businesses today get their start with SBA’s Microloan program for capital needs of $35,000 or less. Many other startup companies utilize our LowDoc program with a simple one-page application can be used for loans up to $150,000. The 504 fixed Loan proceeds can only be used for fixed assets. It’s guaranty is up to a $1.3 million dollars it is for long-term financing at a fixed interest rate, with an emphasis on generating or retaining jobs in rural or distressed areas. Our regular 7(a) guaranty program provides loan guaranties up to $1.5 million. Our SBAExpress program is designed to serve capital needs of $2,000,000. All of these programs are designed to work hand-in-hand with each other. $500,000 Patriot Express $50,000 Microloans

One Micro Lender in TN—Pathway Lending (formerly SE Community Capital) MICROLOANS One Micro Lender in TN—Pathway Lending (formerly SE Community Capital) Finan

MicroLoans Direct loans through nonprofit intermediaries Loans of up to $50,000 Fast turnaround Up to six years to repay Used for — Machinery, equipment, fixtures Leasehold improvements Inventory Working capital Technical and management assistance available The SBA’s 7(m) MicroLoan Program also differs significantly from the regular 7(a) program. The MicroLoan program is operated by intermediaries, who borrower money from this SBA program and then relend it directly to smaller businesses in loans of up to $35,000. Terms are up to six years and proceeds can be used for machinery, equipment, fixtures, leasehold improvements, inventory and working capital. The intermediaries also provide technical and management assistance to their borrowers. TheMicroLoan Program is not available in every location. Contact your District Office for availability in your area.

SBAExpress Underwriter uses own forms -- not SBA’s Use bank’s lending policies -- not SBA’s Loans or revolving lines of credit to $350,000 SBA guaranty is 50% Interest rate maximums apply Our newest lending product and one that seems destined to become as popular as our LowDoc program is SBAExpress. This product is reserved for use only by PLP lenders or other SBA-approved lenders and, like the LowDoc program, it is limited to loans or revolving lines of credit of $150,000 or less. The guaranty is 50% on this program, but the lender uses only bank forms -- absolutely no SBA forms in the underwriting process. The lender applies all of its policies in the closing, servicing and liquidation of the loan and has total underwriting authority. Financial Assistance

Patriot Express Loan Initiative. Begun June 2007-Now $3 Patriot Express Loan Initiative *Begun June 2007-Now $3.1B in loans since *Loans to $500k—Vets, Spouses, Widows, *Guardsmen, Reservists—interest rate adv. *Loans under $25K-No Collateral Required *SBA TN Success Stories: Dents-R-Us *VOSBs are Veteran Owned Small Businesses—Get used to acronyms

Loans for Fixed Assets SBA 504 Program 504 Certified Development Co. Program Long-term, fixed-rate financing Up to $5 million in SBA-backed debentures SBA debenture guaranty of up to 40% of total loan Must create or retain one job for every $50,000 of SBA debenture proceeds Our very successful fixed asset product, the 504 Certified Development Company Program provides long-term, fixed rate financing at or below New York prime rate. The 504 program is operated by Certified Development Companies licensed by the SBA. Private lenders approve a loan for 50% of a 504 project and get a first lien on all of the available assets of the company. The SBA issues a debenture guaranty that can be as much as $1.3 million, not to exceed 40% of the project cost and SBA takes a second lien position. The project must create or retain one job for every $35,000 of the debenture. Financial Assistance

Benefits of a SBA 504 Loan High-leveraged financing for fixed-asset purchases Long-term pay back - 10 or 20 years Lower interest rate In most cases borrowers can get 90% financing for the purchase of fixed assets, much higher than the 50% to 75% offered by traditional lending markets. This product also benefits the borrowers by greatly increasing the terms. SBA’s share of the loan can be financed for either 10 or 20 years, while the bank portion can be financed over at least 10 years. More importantly, it is the only product we offer where a blended rate is at or below New York Prime Rate. The longer terms and lower interest provides increased cash flow to meet current operating needs. This is a great program and, again, we would welcome the opportunity to share more information with you about the 504 program. Just contact an SBA representative if you would like more information. When you are financing real property and improvements or purchasing long-lived machinery and equipment, the 504 Program should be given primary consideration. Financial Assistance

To Qualify for a 504 Loan* Business must be operated for a profit Tangible net worth of less than $7.5 million Average net income of less than $2.5 million for the preceding two years * Business cannot be involved in speculation or rental real estate investment The business seeking a 504 loan must be operated for profit and have a tangible net worth of less than $6 million. Also, the average net income of the business for the preceding two years must be less than $2 million. Most of the eligibility rules that relate to the 7(a) program also apply for the 504 loan program. Financial Assistance

A Typical 504 Project A private sector loan covering up to 50% A loan from the CDC covering up to 40% (100% SBA-guaranteed debenture) At least 10% equity from the business Participating lender has first lien on assets The typical SBA 504 project includes a loan from a private sector lender covering 50% of the project. A loan covering up to 40% of the project is advanced by the CDC, with 100% of that backed by an SBA-guaranteed debenture. At least 10% equity must come from the small business or the applicants. If the proposed building is deemed to be a special-purpose facility, or the business is a start-up, an equity injection of as much as 20% may be required. Financial Assistance

All TN SBA 7(a) Lenders are listed at the TN District Office website: 7(a) Loan Guaranty All TN SBA 7(a) Lenders are listed at the TN District Office website: www.sba.gov/tn

Basic 7(a) Loan Guaranty Program You apply for a loan guaranty with an SBA participating lender Interest rates are negotiable Lender submits application for SBA review and approval Loans are centrally processed After SBA approval, lender disburses funds You pay the bank, not the SBA The mainstay of all SBA lending is our 7(a) Loan Guaranty Program. This program is an original part of the law that created SBA in 1953. All of our lending products are a part of this original section of the law, with the exception of our 504 fixed assets loan program, which we will tell you about later. The 7(a) process is very simple. The borrower applies for a loan guaranty with an SBA participating lender. The lender submits an application to SBA for review and approval. After SBA approval, the lender disburses the funds. The process is really that simple. Financial Assistance Financial Assistance

7(a) loans may be used to: Loan Proceeds Eligible for Most Business Uses 7(a) loans may be used to: Expand, renovate facilities Buy machinery, equipment, fixtures, buildings and land for business Finance receivables and augment working capital Refinance existing debt (with compelling reason) Finance seasonal lines of credit Construct commercial buildings Finance direct costs on contracts Funds from an SBA guaranteed loan can be used for most legitimate business purposes such as expanding and renovating facilities; purchase of machinery, equipment and fixtures; as well as real estate and improvements for use by the small business. Additionally, proceeds from the loan can be used to finance receivables and for working capital; refinancing existing debt, and financing seasonal lines of credit. These represent just a few of the types of expenditures that are permissible from the proceeds of an SBA loan. Financial Assistance

Small Loan Advantage New Loan Program June 2012 Loans to $25k-prime +3.75%-no collateral Loans $26k-50k-prime +3.75% + collateral $26k-50k—may require UCC filing DUNS number required-free to borrower Loan payments come from business checking account Loan is made in the business’ name

Thank You! Questions David Tiller-Vets Business Dev.Officer david.tiller@sba.gov 615-736-7176 Questions