What You Need to Know About SBA Loans with Lending Expert Jeremy Willes

In this episode I interview Jeremy Willes, a lending expert who unveils important upcoming changes to SBA lending and what you need to learn if you are selliing your business and the buyer is using SBA to finance the transaction. For business buyers this episode contains useful information about obtaining an SBA loan.

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Lending Nuggets of Wisdom with Jeremy Willes.mp3

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Hello and welcome to M&A Murders and Accusations. The Good, the Bad and the Ugly of Selling Your Business. We dig into what you need to know and how not to kill the sale of your business. Now here's our host. Rick J Krebs, mergers and acquisitions advisor.

Hello and welcome to the podcast today. This is Rick Krebs, coming to you from the mountains of Utah. Your M&A cowboy murders and accusations. Today, we're not talking about murders or accusations. We're talking about lending. And I've got the. Lending expert here on. I on my podcast, Jeremy Willis, Jeremy and I have been working together. I don't know for several years now, maybe even 8 or 10 years and we just realized we've never met in person. We've worked together. Transactions never met a person, but I feel like I'm meeting him here for the first time today. But I used to send. Jeremy was pestering me with emails for a while. I had a couple of other lenders and he would. That's for me. And finally, I just threw a bone, gave him one and it was.

A hard one.

And he ended up getting it done. And they threw him another one. Got that one done. And I'm like, you know what I think I need to start sending him the good deals, the ones that are hard, that are the turn down. So that being said worked with him. For several years now and really trust and like working with Jeremy. So, so Jeremy, tell the people in the audience today a little bit about your background and how you got into lend.

Sure, sure. So I got. Out of the military in 1990. 8 and I kind of didn't know what I was going to do. I like to problem solve I and right before I got out. I went in to be a truck driver, so I was a motor transport operator and somehow after I got back from doing a tour in. The Balkans, so we. We were down there in Serbia and. Bosnia and all of that, when that was a. Real hot area. I ended up in. A in a finance position. So we had a number of soldiers that were going to why and we had to keep track of the orders that they filed and get reimbursed from finance, you know, military finance. And so I was in charge of a lot of that. So I kind of got, you know, my feet wet with dealing with finance and. It just it. It was attracted to me and somehow I ended up. After I got. On military I went the IT route, so I was working for like Hewlett-Packard and AT&T. I was running a call center. And a friend of mine, you know, that was doing mortgages was like, hey, you know, we need a guy to help. Us set up a network. My boss needs help with all this so I started doing some Technical Support for mortgage companies and then before I knew that my name got passed around. And I saw what they were doing. I said would you mind? If I learned how to do this stuff. And so I started moonlighting that some mortgage broker as a loan officer underneath somebody else's license. And so I did that from the early 2000s. You know, all the way through 08/09. That was a very painful experience, you know, at that time.

It was.

About probably about 8-9 years ago I decided that, you know, I still do mortgages in California. But I decided. That I wanted to, you know, pivot. And so I got into business and commercial lending and I noticed that all of my experience with the residential really helped me with the business side of things. And that's the reason why I'm able to. Get some deals pushed through because I understand. And you know, personal credit a little bit more than somewhat than a typical business, you know, broker or a typical business, you know lender and whatnot. And so a lot of times, what happens these folks walk into a bank, and if it just doesn't fit inside of the box, then the bank has no solution for them, right? There's no alternative. OK, we couldn't get you qualified for this, but we can get you this over here. And so being a broker that gives me the availability to work with several different banks and each bank has their own credit box. Most of them are very similar. But some understand certain asset classes better than others, and then the other thing is it's kind of like me prepping my clients to get all the answers to the test right before the test. So it's kind of like an exam cramp. So I know what an underwriter. Is going to like what they're not going to like I. Know how to Tweak micro score. You know, because sometimes that's the difference. Know you could be. The requirement could be 700 FICO score, you got 698, you still get the loan. That doesn't make.

Makes sense. So that's kind of when that happens, they're like, sorry, right.

Yeah, they don't.

Really give a. Action and say, hey, if you this, this, this and this we can retry in a number of months and the other thing that kind of hurts you too is they'll have a hard rule that will say they can't revisit. It maybe for 100 and. 20 days. So it's in your best interest to. Pull your credit before they pull your credit. So that there's. No surprises. You pay down some balances, boost your FICO score as high as you can. Because it's not just about. Getting the loan, but it's also your loan. Interest rate is. Going to be determined on your FICO score. So there's like tiers, right? You know they're going to give. You a different. Rate and term on somebody has a FICO score between 707 nineteen with somebody over 720 is going to get a better, better rate. Better term so. My suggestion is. Is before you go in there before you apply, know what your FICO score is, know what that's going to look like. So then that way. You can put your best foot forward. You can. Get the lowest. Rate and you can. Ensure that you're going to get approved.

Oh, I love it. I love it. First of all, thank you for your service.

Thank you.

Appreciate that as a as a vet, we really appreciate that. So this notion of pulling your credit before you do a loan, I love the idea and my book talks about preparing for a sale. You know, designing your sale versus just going out there, I call it mind your exit. Don't blind your exit. And I love this. I love the way that you approach lending in the same manner, which is let's prepare, let's get ahead of the issue. Let's go on offense, not on defense. So yeah, I love it, Jeremy. So we appreciate that in the background and how you got started. Very interesting from truck driver to lending expert. I love it so. Tell us about. Tell us about your broker and for the listeners, there's a huge difference between being a broker and being a banker or a bank. And I've worked with many different sellers over the years and it seems like they'll go to one large National Bank and then and we wait and wait and back and forth. For six months. And then they tell them no right. And then you have to start over. So maybe if you could elaborate a little more on the difference between a bank and a broker and how that works.

So a bank is going to only have products and services that are available to that bank. So they're, you know you can't necessarily walk into U.S. bank and then you know the US banker applies for the loan with you. You go down that process and then you find out days before you think. You're going to. Get the money. That it didn't meet their criteria, right? So pretty much. At that point. That's the end of your conversation. You know, the US bank is not going to say, hey, we'll call my buddy over here at KeyBank and I'll send them all the information and whatnot. And so you're really limited with dealing with the bank and. The other thing that I've seen as. A person applying for a loan because I've. Got small business and. So, you know bankers. You know, they get a nice comfortable salary. You know, we all make. The jokes about banker hours. And you know, they're really. Just kind of slow to respond and they don't necessarily have the same, you know, sense of urgency that I would. And so as a. Broker I work with a lot of the big banks. I also work with a lot of what we call. Non bank banks, so they are banks that exist only to. Do loans right? They don't take depository accounts and can't set up a checking account. You can't set up a savings account. All they want to do is SBA loans or they want to do a certain equipment class or they want to do commercial real estate loans and package those up on a secondary market and sell those to investors. And so they exist just to make loans. And so they. Understand a lot. More than a typical bank because the. Typical bank is trying to do. Everything for everybody, right, so there. You have a community bank. You know they want to be able to service. The community so. You know, maybe, you know occasionally that. Loan officer, does some SBA lending, but they're not. Really, that's not really their bread and butter. That's not something they do every single day very well. And so me as a broker, that's where I shot him, right? Because I can, you know, package those things up, I can send those to the banks that I know. Like that type of asset class and you know sometimes what happens is banks just stop lending for a certain asset class because what happens? Is they have to keep diversity on their on their balance sheets and so if they have too many restaurants at one time then that's you know, making that risk higher for that industry. And so they need to, you know, they might just stop lending to restaurants, even though you have the next, you know, Gordon Ramsay, you know, hit or whatever. They're just they're not. Going to lend? Client and so as a broker when you. Come to me. I'm going to do a better job of preparing you before I submit your loan. I'm going to try to catch things that an underwriter would ask about or you know, we call it, you know, having some hair on, on the deal, right. And so if I can get in front of that, what I found is sometimes if you. Let an underwriter. Come to the conclusion by themselves, they're. You know, looking at something and then they. Make a conclusion about what this real. Is then it's really hard to steer them away. From that conclusion, their. Their mindset is no. This is how it is. Whereas if beforehand you go in, you write up an executive summary, you say, hey, listen, you know here we know that this is a weak area of this law. But here's what we're doing about it. And so it tends.

To help that. Go through.

Easier and so you know some people when. They think of a broker, they. Think of oh wow, this is going. To cost me extra money, you know. Do I really need? This guy, you know, I have a great relationship. With my bank. And you know my answer to that would be not necessarily a lot of times I get paid and I can get you a better deal than if. You walked in on your own. Because, you know, I'm independent. So the banks not paying for me to have, you know, Class A real estate and. To sit in a. Nice office. I pay my own expenses. Not paying for. 401K They don't have all that.

For it.

And so if they don't have all that overhead, then they can afford to give a loan that kind of wholesale. So it's like I'm. Like a wholesaler for loans, if you will. And so that's the advantage point for you as well as you sit. Down and you apply for one. Time with me. I'm going. To take that same application to different banks if we. Get to know over here and. In some situations. We're going to run it concurrently, so we're not just waiting for know and we've lost all this time. And then now we're starting the process over again. So those are those are the, the advantages I would say of using the broker versus.

That makes that makes perfect sense. It's interesting. I've worked with worked with buyers in a sales transaction and working with the bank. They'll ask for a condition and you send it over, and then the next thing you know. You get a denial. You're like what you've been working with them for weeks and weeks and you're like, well, what? And they're like, yeah, you sent that over and like. That killed you deal right? And but I think a broker as a as a person to kind of look at something before it goes to the underwriter and having another set of eyes look on it. Look at it is extremely valuable and I'm going to put this up for our listeners and that is even if a broker costs you more money, it's absolutely worth it. And not that you do or don't but, but if it did, the brain damage that you go through and the way you can work for six months and then you send one piece of paper over on an e-mail and the other underwriter denies your loan. You know, just if you had a broker, someone to look at that it would just cause. A lot of less grief, which is what we're all in so you know, on a couple of things here that I, I I'd like to elaborate on and that is.

You did.

That not all SBA lending is the same. You mentioned a bank will have a certain portfolio that they put together and then they no longer have a liking for restaurants. But if you.

Don't know that.

Ahead of time, they accept your application so they get paid based on the number of applications they get, so they love to accept the application and bring you in. They don't tell you ahead. And that they're not lending on restaurants. Because they'll get sued for it, right? Anyway, where a guy like you knows the landscape of those lenders and knows what they're doing and that I think is the value also. They'll just they'll. They'll run you down the road for three months and then say, oh, we're not going to do it. And then you're like, wow, SBA won't do my deal, right? But that's not the case. It's the bank that won't do your deal. We need to. Go somewhere else. We've also run into what I call A2 tiered underwrite. And that is that people will say, OK, this is SBA qualified and there's the SBA requirements up here and then there's the bank requirements, which are often stricter than what the SBA is. And so and so picking not and not all banks have those, some of those banks are direct SBA direct where? You'll only underwrite your file one time and that's it. But not all banks are made alike, and I think sometimes we think that they are and we can get discouraged through this process. You know, I've dealt with that where the banks underwriting guidelines are more stringent than what SBA would be and they're, they're denying our transactions. Right. But I go somewhere else. There's a there's a local bank. I'm not going to name names here, but there's one here. And boy, if it's not brick and mortar, they don't want to do it, you know, and I. One of my one of my buyers comes in and says I'm working with this bank. I'm like, no, you're not. Not if you're buying this business cause I'm telling you right now, they're not going to.

Do it makes only approving the unicorns is what we unicorns.

I love it and it's just it's the bank's appetite for lending. They only. Like brick and mortar. They don't like, you know, on a lot of these, a lot of these business transactions, there's a good deal of goodwill or blue sky. And so you have the intangible assets and some banks don't like the intangible assets, they're only going to land on what they can go and see and feel. Kick you know and so having someone like yourself is extremely valuable. Through this transaction to make sure it goes smoothly, make sure that there's less time spent and less, you know, less pulling her hair out on her head. I've lost nearly all the hair on my head and you know, I feel like some of. These one deal took it all out. You're lucky, Jeremy. You've got you've got a pretty good head of hair there, so you're keeping it. So I always. I always like to ask these questions because I think that learning a little bit more. About some of the mistakes you've made, but tell me what? What are some of the biggest things that you learned as you got into learning or maybe some mistakes that you made early on that taught you lessons that you can share to help us?

Absolutely. You know, I think. For me, I've always been a. Champion for the. So you know, when I was very green in this industry, you know, I was trying to get everything pushed through. You know, there's just some loans that just they. Should never see. The light. Of day and there's just not enough there. To really do it and some sometimes.

When you do that.

That you spend your wills, you create false hope for your clients. You create some bottlenecks for your lenders. You know they're looking at your files as like, you know, oh man. I don't know if this. One's really going. To you know, go through it. Might should. I take this. Guys call. You know those type of things? Are, are crucial. And you know. The other thing is it's just like. You know, if you have somebody. Or you go to a restaurant. Have a great. Experience and then you know, you recommend a friend or somebody else to go and then. They don't have a great experience, right? Somehow that all falls back on you, right? So you have to be a little. Bit more selective as to especially the relationships. That I have with banks who? I introduce those relationships. You know, and I've had deals where. To the client circumvented me and went directly to the bank and some of those banks will push them back. And say hey. No, you need to. Work through and that's. What we work through and other banks are. Happy to just you know. Cut out the middle man. And whatnot. So those are some tough lessons learned as to which banks you know value. What I bring to the table and which customers are bring to. Table and you know not every customer is a. Customer that you know is a. Good customer for. You and you know, having a hard conversation with somebody and saying, hey, listen, I don't think we're going to be a good fit, you know, in some situations it'll get that customer back on the right track because now they feel like, OK, they don't take you for granted. And so you. Know when you're green. You're just eager to please everybody and you want. Everybody to be. Happy and. When you try to do that, you don't make no one. Happy, right? Yeah. And so yeah, I. I think those are some of the biggest mistakes especially in this in my industry it's really.

Kind of that.

Age-old, you know, saying it's not what you know, it's who you know, right? It's a relationship. It's 100% relationships and you know those are invaluable and you don't want to burn those bridges. And so, you know, you do that by making sure that the customers that you introduce in the banks are going to be a good fit for that bank. It's going to be you know. A solid experience. Everybody involved and you know also know create false. So sometimes as a broker, the best thing we can do is give a heart no. Because I get people that ask. Me for stuff all the. Time and then it's like, well, what about this? What about that and? I sometimes I tell the bankers, you know, because they send me their turn down. So, I say, look, I'm not going to. Get every you know pushed. But there's a. good chance I'll get. I'll get I. Will get it pushed through but. If anything, I'll get that guy. Off your back, right. He's going to be calling you all the time. What about this? This, this, this. This, and it's like I'll take that. Pressure off you. I'll put it back. So, I think those are the big things that I've learned from being new and being experienced.

Well, thank you. So, let's talk about the landscape now. Let's talk about what's going on. SBA rates are up 5%, right? Residential reefs are nonexistent, so. What are our banks still lending? I mean this environment, what's going on? Are you still doing deals? Are they lending still? Are they holding back? Tell us what you're seeing out there.

The answer to. That would be yes, yes and no. So they are, Wendy, but what they're doing is they're typing up that credit box. Earlier you mentioned that SBA has their own set of rules and then banks have their own set of rules, right? We call those overlays, right? So, SBA is pretty wide, they're out here and then banks are right. And so, we're seeing a lot of that. We're seeing banks, but act from certain asset classes that they're thinking are going to. Be riskier. The other day I I've been doing a lot of refinances for seven-day loans that have commercial real estate and we're either trying to put those into 504 or we're getting better rates that are fixed on an index. It is not Wall Street. So, I was getting some hotel deals and I had some letters of interest from the bank securing them, you know, grading. And then there's no sooner after I did that and I was putting together a package, the bank came back and said, well, we're putting a moratorium on hospitality, so we're stepping away from hospitality. And so that leaves you. You know, there's not. A lot of options. But what they're doing is they're. Tightening up their credit guidelines. Right, so you know. Or maybe they were approving something that 640. Now it's, you know, 680 or 700. Maybe they want more. They're going to be less new Sky deals, but. What can I say? The good news is, is that SBA has made some recent changes. For 40 years, SBA does loans through banks, and then they also do loans to non-banks right? So non-banks would be there were fourteen companies that kind of had the market share that were non depository banks that could participate with SBA loans. Things like blue line on debt, cabbage, you know those companies have the lion share of being able to do an SBA loan. If you can go through a regular traditional depository bank or credit union, that type of stuff. Well, as of April 12th this year, they lifted. They've lifted a 40 year more. Going on. And So, what that means is other non-bank lenders, people that want to participate in this non props will be able to get licensing from SBA and be able to participate with SBA loans. And so that's going. To create much more competition for those 14 big guys and it's also going to open up more gateways for underserved community. These smaller loan amounts, that type of stuff, and so you know from that standpoint, we're going to see more competition. And so that's going to benefit the individual borrower overall for sure, because when there's more competition in the market, that's. Going lower. Rates that's going to create more opportunities that were not available beforehand. So, I see some good things coming down the pipe.

I love it. Love it. I love to see competition with the leaders. You know, they think they're the only game in town. So, love that. So there were a couple of other things you were telling me about that came down the Pike. But in regard to the sellers being able to work in the business and the standby provisions, so talk about those two, you're the 1st to tell me about these. By the way.

So, these are all of these things that are coming out right now with SDA. Some of them are going to be rolled out as of August, but going back to, you know, the banks are going to put their own. Restrictions on. On top of that. But you know, some banks are going to open up, you know, a lot wider, but it's typically in the. Past what would happen? And we have a deal right now that. You and I are working. On with the cabinet company and so. You know us. Have 3 owners. That is partly cabinet, you know companies. Ownership and one of the requirements are for the. New buyer to come. In, is that the? There are two owners that want to. Hang on, hang on. You know, even after they sell their shares in the company, they still. Want to be a part of the organization? Well, the old way of doing things with SBA said. That those always needed to exit the company within.

12 months that they keep so absolutely ridiculous. By the way, yeah, take the people who are most qualified to help with the most experience and you limit the amount that they can contribute to the business that they have been contributing to for 40 years. It's like uh, I don't know the guy that that came up with that rule, but I would love to have a debate with him. I'd love to go bunk him on the head. Actually, because it was such a ridiculous role and I'm so excited. They're changing that.

Definitely I think SA has. Gotten a lot lighter shining on that, that. Organization within the government as a result of what happened with PPP and all of this. Stuff during the pandemic, right? You know, a lot of people didn't get money that needed to get money and money ran out and you. Know there were. A lot of communities that. Were underserved because they didn't have access, and they didn't have Jake. Morgan Chase Banker on speed dial. So yeah, that's definitely going to even the playing field, but I think they've heard, you know. The. The complaints. And so, they're opening things up and they're putting more control back to the banks or the, you know, whoever's going to fund the loan and putting more of that responsibility on them. But yeah, I think that’s it. A great thing. To be able to continue to have. Somebody in business and so that also allows for a buy-in, buy out type of situation. So now if somebody wants to continue to maintain ownership in the in the company, the existing company or new one that's created. If they're under 20% then they don't have to be a part of the new SDA loan for the acquisition. Now if they're or, then they're. Going to have to be a personal guarantor on it, so if they just keep their percentage under the. 20% they can still be a part. Of that company, under the new ownership and not have all the liabilities to be able to Add all. Of the you know. Seasonality and experience that, that that comes with you know they've been working in the company they own. It and they run. It, and I think that's going to. Help you as well because I think. You know, sometimes the thought of selling a business is kind of like letting go of something that's been a legacy for them and something that's like their baby and. So now they. Don't have to let go. As a result.

And what we were having, and my sellers hated it. So, what was happening was the sellers would say, OK, so you want me to carry a seller note for five years, but I can only contribute to the business for one. So, for four years, I got to hope that this new buyer who I know and I've only known for a few weeks or a couple of months here. I'm turning everything over to him and hoping he's going to pay me, and I can't contribute to the business. The bank will not let me contribute to the business and so anyway, I'm not going to share all the expletives that were that have been shared with me about how stupid that was. But I'm glad that common sense is ruling is preventing a little bit and that and as we're talking about. Now it's. The other big complaint I was getting was the standby provisions, and this just came out the last couple of years where SBA required that the sellers be on standby with the seller note or anywhere from 12 months to 10 years. And the sellers hated that, right? They're like, wait a minute. I'm going to carry this paper. And again, I'm not going to have control. I can't be in there. I can't influence them. I just got to hope that I get paid so. Tell us about the standby provisions and the changes coming around. So, in order to.

Do an SBA loan right then. SBA is going to lend 90%. Of the cost. Right. And so, you know, the banks, the SDA says that you can do up to 90%. So there has to be an injection of 10%. So where does the 10% come from? 10% can come, 5% can come from the buyer. Another 5% can come from you know the seller taking a note and that note would typically have to be put on standby. In order for it to be considered equity now you can design a note where you know the seller is carrying. You know, doing a 10% note, but only 5% of that is standard because you have the other 5% from the buyer. So together that's the 10% equity injection that's needed. But what this is doing now is. That same seller know will now also be considered equity injection, provided that there's no payments on it for 24 months. So, after month 24 on month 25, they could start taking payments and that's still considered equity injection into the deal. So that's going to allow the seller to get paid. A lot sooner. Rather than to. Put that on standby so that that's a new provision. There's also talk that if. It can deck service between the SDA loan and the seller. Note that the seller note could potentially even be interest only and still be considered equity injection into the deal, so those. Other changes that are coming out.

Yep, love it. I wish it were zero months. We'll take 24. But 24 is a. Lot better than 10 years, yes, yeah. That's what we've been dealing with since. 10 years. Alright, any other? Nuances you'd like to share anything. Else that you're seeing.

That's exciting. Yeah.

So, and another.

The thing that they're changing is the affiliate status and I run into this. You know, sometimes some of my hotel owners. We'll have ownership across multiple hotels, right? So, I'm trying to do this transaction with this person over here at, you know, days in. But he owns the La Quinta Best Western. And all the other stuff is well in. The past, if he. Owned more than 20% of each one of those businesses, I had to get tax returns for all those. Businesses that he. You own more than two. And so that's now that affiliate status has now changed to 50%. So that's going to make you know things a lot easier because before what they would do. Is they would. Look at. OK, I'm looking at this business too. Finance it, but I. Got to see. What's going on with all your other businesses, even though it doesn't really, you know, relate to? This business still has. Somewhat of a global burden on the borrower. So now we're digging into all of those things. So now unless they're 50% or more and we don't need to see the tax returns on that business, that's not going to come into play with the underwriting of. Another business so. Right. That is a huge advantage. I think it will allow more. Deals to happen because. Then you'll be able to pull a lot more equity, you know, investors and people that want to be a part of the business. So, you can fork out all together and take.

Down more businesses, so that's terrific. Thank you. So, ours. Our guest today has been Jeremy Willis and the big takeaways. Or does lending is coming down the Pike from the SBA. All your credit before you send it to the lender and take a look at it. There is 698 credit score. Do what you. Need to do it to get a 700 or. Whatever that is, brokers are. Good, not bad and identify your weaknesses. Early on, I really appreciate those takeaways and appreciate your time today, Jeremy. So, share your contact information with our listeners today, please.

So, our website is outside the box funding so you can find that at OTB funding FUND ing.net. And then if you want to send me an e-mail, my e-mail is jeremy@ootbfunding.net. I guess I could be my cell. Phone number as well area. Code 510. 342-2880.

Thank you. You have a great, great day and I appreciate you being on our show today.

Thanks for inviting me. I appreciate it. Thank you.

Rick, you're welcome.

Have a great day. Thank you, listeners and till next time, it's Rick. You're M&A cowboy from. Heber City, UT.

Thank you for attending our podcast. We invite you to join us for future episodes of M&A, murders and accusations. The good, the bad and the ugly of selling your business. You can also visit us at www.bsalesgroup.com or e-mail Rick directly at Rick@Bsalesgroup.com