Come To Find Out
Welcome to Come To Find Out- your resource for all things real estate. You can come here to find out about the current market, terms that you see and hear during a transaction, things to do and not to do when you're in contract. The show will also feature interviews with industry partners and leading experts to help you choose who you want on your home buying journey with you. The home buying, selling and investing process can be so overwhelming, so this guide is meant to make it just "whelming."
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Come To Find Out
Expert Guidance for Financing Your Small Business Dream
Unlock the secrets of commercial lending tailored specifically for small business entrepreneurs with our expert guest, a seasoned local lender. Discover the crucial steps needed to secure a commercial loan, from registering your business to crafting a compelling business plan. We break down the nuances between residential and commercial lending, emphasizing the importance of a strong credit score and understanding unique pre-approval processes. Learn how SBA-preferred banks can be your allies in financing startup costs and real estate purchases, and get the lowdown on typical down payment requirements and loan structures.
We also tackle the complexities of securing an SBA loan, highlighting the critical due diligence required in real estate transactions. Our guest shares insights on gathering the necessary documentation and the significance of demonstrating liquidity, possibly through collateralizing loans with life insurance. For those in industries like restaurants and hotels or personal trainers eyeing property ownership, we offer tailored advice on showcasing business management skills and navigating heightened scrutiny. Tune in for invaluable guidance on making your entrepreneurial dreams a reality through strategic commercial lending.
Sarah Thress
614-893-5885
First Time Home Buyer course: https://sarahthress.graphy.com/
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Hi and welcome to this week's episode of Come to Find Out. This week I am really excited to bring in a local lender that specializes in commercial lending and because there are a lot of nuances and rules and regulations around it, we are not going to mention the bank that she's with, but I can assure you that she is very knowledgeable and so if this is something that you're interested in, you always can reach out to me. But I have her on because, uh, because I adore her and I love working with her. But also I have several people that will come to me and say, hey, I really would like to start a business, um, but I don't know what to do about purchasing a storefront or how do I go about looking for this? And, just like, in real estate, there are realtors that specialize in commercial and there are people that specialize more in residential.
Speaker 1:I specialize in residential, I don't specialize in commercial, but I have several colleagues that I know like and trust that do commercial real estate. And I say all of that to just say that these are two separate entities whenever it comes to residential versus commercial. And if you're interested in you know kind of knowing the differences, obviously you can listen back to any of the other podcasts that I've done before with residential lenders, but again, this today is about commercial lending, and if this is something that you have been wondering about, then you are in the right spot. So thank you so much for joining us. You're welcome, truly, truly appreciate it. Um, I would love for you to just kind of walk us through, like if someone reached out to me and said hey, I uh have a gym that I've been, you know, I've just been renting space at a gym, I'm a personal trainer and I want to now open my own space. What would you, what would the process look like if someone came to you with that type of a scenario?
Speaker 2:Yeah, so in that case it would. With any bank that you go to, not necessarily the bank that I work for you would go SBA, because you would go to the Secretary of State to file a name to ensure that there isn't that name already assigned to somebody. You would go to irsgov and you would get your tax identification number 10 is what banks call them it's bank lingo for us or employee identification number EIN and then you would proceed with a business plan and that you would do at the sbagov, and sbagov gives you sample business plans and the business plan consists of marketing, demographics, competition, projections. Even so, you would project your first three years typically is what banks are requiring, or I should say SBA lending is requiring, and you would put that all into your business plan. On your pricing for the gym so, for instance, if you're going to have personal training, if you're going to have group sessions, all of that needs to be included in there. Your projections are going to include so you want to have a space in mind are going to include your utilities, so you'll want to put all of that into your projections as well Once you've completed your business plan and you have a place in mind and you have your TIN or tax identification number and name in place, you want to start looking for a bank to work with.
Speaker 2:My bank in particular is SBA Preferred. We do a lot of SBA lending and typically it is startup, but we do also real estate lending on the SBA side, but we can do that in combination. So if you're starting a business and you're also buying the real estate with it, we can do that together. We can include your working capital, which would be startup costs. It'll include your payroll, it'll include your mortgage or lease for that first several years so that we can get you started up and running.
Speaker 2:Typically, sba is 10% down, but there are certain instances and I'm not specialized in SBA, but I do know a little bit just to make me dangerous but what I would say is there are certain instances or certain industries that would cause it to be a special circumstance. So we say, say as me, as a commercial lender not specializing in SBA in particular, I would tell somebody that is looking to do a startup that the down payment or equity injection, as we call it, equity injection, as we call it it would vary from 10% to 25%. Oh, wow, just depending on the industry that you're in, yeah, okay. And you know you want your FICO score, your credit score, to be in place before you come to us and typically banks are right around the 670 and above on the FICO score. So you want that. You don't want to sign a lease or a contract before you have pre-qualified sort of. So the difference between residential and commercial is we don't do a pre-approval.
Speaker 1:Oh, okay.
Speaker 2:No, we will give you a letter of interest which means this is our structure. This is the amount that you told us you're looking for. We've cash flowed you to a certain extent, but we can't pre-approve you. We can't even say it's a pre-qualified. We've taken a look at everything and given you a letter of it. We like your concept. We looked at your business plan. We like what you're trying to do and here is our loan structure.
Speaker 2:Basically and the loan structure is, at least at my bank is five-year term and a 25-year amortization. So that's the typical, I should say. So. If you're getting into investments it's a lot different, but as far as anything real estate it would be a five-year, 25-year amortization on the conventional side. Sba side is a little bit different. Sometimes you could do 25-year term. It just depends on what you're looking to do. If you're looking to fix your rate or have a variable, the term is going to change and then the prepayment penalty will change on the SBA side too and I'm not up to all of the regulations on the SBA side, but I do know that piece of it.
Speaker 2:And then on the conventional side, like I said, it's five-year-day pre-look at a pre-approval, because we've already opened that loan and had it in place for four years, four and a half, seven years, so 90 days prior to maturity. We're taking a look at it to ensure do we want to do this again? And then we start the renewal process. We don't want you to get into a purchase contract before, prior to even looking at homes, right, but it makes more sense and you can say, contingent upon getting financing, of course, so it doesn't get you into trouble, but it does, on the realtor side, tend to be upsetting because then if they don't get the financing and they were you know if we could do a pre-qualification or a pre-approval, it would make more sense for you guys. But it is what it is.
Speaker 2:On the commercial side, yeah, and it is a different vehicle, um, so now our um economy is calling for us to um to collect appraisal costs upfront. So even before we get an approval, we're getting those uh appraisal costs um upfront, and if there's an environmental that is in need, then that environmental cost is also collected. The nice thing about my bank is a lot of the banks out there are charging a bank fee, um, and we just charge a hundred dollar bank fee. Wow, um, and everything else is out of pocket. It's normal expenses your appraisal, the environmental title work, that's all what we call normal out of pocket expenses. Um, title work is included in your settlement costs, so that can be at closing, obviously, because we don't know what that's going to include, right, yeah, um, but we have been collecting appraisal costs upfront and I think a lot of banks are probably doing that.
Speaker 1:Um yeah, well, I think that's so great and I love that you kind of walked us through that process, because you are correct. Like I, you know, because I'm not in the commercial world I would be like, well, yeah, we need a pre-approval and then we'll set up a search and then we'll do that and it's. It's almost the complete opposite instead with commercial. You know, if someone's thinking about purchasing something you know starting a business or you know whatever they would want to go find the, the piece of land or the, you know the parcel of the building, whatever it is that they're looking for that's going to fit their needs. They're going to find that first and then come to the lender to see if it's going to make it work, and I have to imagine that this then makes the entire process much longer than it is for purchasing a home.
Speaker 2:Yeah, that is. Another piece of the difference between residential and commercial is the fact that it could take 45 to 60 days for closing on our end. And I frequently get realtors who typically do residential but have clients who they've dealt with in the past sold their home and then they're looking for commercial real estate for some particular reason their business. Obviously, people have other lives other than just their homes right Right.
Speaker 2:Um, and they're looking to purchase real estate for their businesses, um, and that completely makes sense to me. The trouble is the understanding of it. It's not just an overnight process. It's not 30 days. We can't close in 30 days. There's due diligence on our end, especially when it comes to real estate.
Speaker 2:We uh, I have a piece of property I'm working on right now. It's got a well, it's got above ground propane tanks used for heating. So there were extra steps. Due diligence on our end that needs to happen. Questionnaires, uh, environmentals, uh, it, it, it is more that goes into it and you think, oh, we'll just collect everything from the client and get it. It is a little more difficult and I think you probably can can, um, understand that or empathize with that is you can ask all you want, but people have lives. They're working full-time jobs, you know, and or running businesses and have kids and they've got sports and they're running around. You get it.
Speaker 1:I get it.
Speaker 2:And so collecting things isn't as easy as you think it is. So even from the beginning, we're collecting three years personal financial statements, so tax returns, and then three years business tax returns, and then, if it's a startup, it's the business plan. So someone comes into you and they want to buy their own gym. It's not that easy. You've got to develop this business plan and it's extensive. There's a lot of detail that goes into this. You can't just throw a business plan together in two days. It's not going to happen. No.
Speaker 1:I mean you can, but it's not going to be a very good one. That's exactly it.
Speaker 2:It's not going to be well thought out and you know, it's just yeah, and here's another important piece on the SBA side, and this is a SBA regulation. Basically, the first thing they're going to ask you is so let's just say, you went to school for psychology and you were a psychologist and you did that, but now you want to own a pharmacy.
Speaker 1:I don't know.
Speaker 2:Let's just say you want to own a pharmacy. Well, what experience do you have? That's going to be the first question that that lender who does SBA is going to ask you. And that's the first question the SBA underwriters are going to ask what kind of experiences does this person have, what kind of qualifications do they have to run? Number one run their own business. And number two she was a psychologist, now she wants to be a pharmacist and run a business Right, so there's some logistics behind it that need to be there.
Speaker 2:So a resume goes into your business plan.
Speaker 1:Wow.
Speaker 2:Um, so your resume needs to be beefed up If you really want to do this pharmacy. What experience do you have, um, as a pharmacist to start owning your business? What? What qualifications do you have to manage a business with people employees and pay them, and know that piece of it and make growth to ensure that you be able to pay back this SBA loan?
Speaker 1:Right, well, and it makes sense. And I love that there is that much due diligence, because I have to believe that you know someone probably, uh, jumped into something and that's why we have these regulations. You know, it's just like every, every regulation we have, or every step we have, is based off of something that we've learned from, you know, things not working out in the past. So you know someone saying like, hey, I want to be a pharmacist, and it used to be like, oh sure, that's such a great idea and here's your money.
Speaker 1:So it's much better now that we have those regulations, so I love that, and I would have never known that you had to have your resume in there along with your business plan.
Speaker 2:A lot of people don't. And then the second piece is that you have some liquidity even after your equity injection. Your down payment quote, unquote, right. So we want to see that there is stability behind that guarantor. So whoever's going to be guaranteeing that loan needs to have some liquidity. It can't just be, and sometimes they're going to want you to collateralize it. Sba does this quite often with startups, and that is, they'll want you to collateralize the loan with some life insurance.
Speaker 1:Oh, wow.
Speaker 2:So, let's say, the life insurance is I'm sorry, the loan that you're requesting is about $ 800,000. Yeah, they would want to see you have about 800,000 in life insurance. Um, so, and and the SBA is very known to over collateralize, so even though they have your life insurance for $800,000, we're not guaranteed to get that $800,000 back right. So they're going to look at your home. They're going to look at collateralizing in other ways as well, because it is high risk to start a business. Yeah, because it is high risk to start a business. Yeah, it is high risk to start any business, let alone the high risk industries that are out there, like restaurants and hotels, that SBA doesn't necessarily really like.
Speaker 1:Yeah, well, probably because it's such an oversaturated market with such a high percentage of failure, and I mean I hate to say that word, but they, you know, there just is, and so I think that, you know, makes perfect sense. Yeah, yeah, I love it. So, basically, um, if someone is like, hey, you know, let's just go back to the personal trainer, um, example, so, hey, I'm a personal trainer, I have been renting space, now I want to purchase something. So the steps would be to, you know, go onto the websites that you mentioned and to fill out the forms to create a business plan. Make sure that their resume is, you know, up to date and solid, to show, hey, I've owned a business before, or at least I've been a personal trainer for this long and I've rented for this long, and whatever it is that's going to show the bank.
Speaker 2:If they've managed other employees that's important If they've done accounting of some sorts in college or whatever it was. But running a business is not easy. No, by any means. And so that's why and SBA is backing this loan along with you yeah, they want to see that you have some skin in the game, but they also don't want to just lend money to somebody just because yeah, yeah, so yeah, absolutely, Well, I love that.
Speaker 1:And then they would come to you or any you know commercial lender and they would, uh, you know, say here's all the stuff, here's the property that I'm interested in, and that's whenever everything would start with the process of seeing if you could even financially make it work.
Speaker 2:Yeah, now, sba, I know I mentioned our bank fee is only a hundred, but on the SBA side it's different. It's way different. Conventional lending is a hundred. I know a lot of community banks do like a 2% of whatever the loan amount is, or something like that for their bank fee, which is it can be pretty hefty, right, and so, no matter what our loan amount is, that's just a hundred dollar flat fee. Sba, depending on what you do. Variable fixed 25-year term with 20, it just depends.
Speaker 2:There are going to be some costs in there and this is important to know. On the conventional side, the interest rates are lower than what, at least right now, than what, right, at least right now. Then, lower than what the SBA is currently offering. Oh, okay, um, and it's important to know that the rates are dropping and I think they're going to drop again, um, closer to the end of the year. Yeah, um, and I mean, at least you know that's what we're all hearing, right, right, but, um, the important thing is you know we're quoting rates in the mid fives right now, um, for commercial lending and that's it's the.
Speaker 2:The interest rates are different than on the residential side. Um, there are times where it can be completely different. Like commercial lending, uh rates can be higher than on the residential side typically, but they'll vary, and my rates will vary day to day, because we are looking at the US Treasury for our rates and we utilize our own personal cost of funds in-house and we utilize our own personal cost of funds in-house. The other important thing on the SBA side is that the bank that I work for holds on to their SBA loans.
Speaker 2:They do not sell them. A lot of banks do, yeah, even though they say they're a preferred bank, sba lender, and they are, don't get me wrong, that holds onto them and yeah, so that's important to some people because you know it's being serviced by us. The same person that took your loan application is the same person that you can go back to when it's renewing's renewing or if you want to, um, sell the building and, uh, pay it off, um, so those questions can all be relayed back to the same person that you dealt with initially.
Speaker 1:Yeah, yeah, I love that and I really appreciate you, you know, just kind of walking us through that, giving more information, because I think that people you know that are going through this for the very first time there, you know, maybe they have purchased a home in the past and so you know they're used to that process of like, getting the pre-approval and all of that. So I love that you kind of walked us through that because, especially if someone is new to this, there's going to be so much information that you know that they need and so many different pieces of uh, you know, pieces and parts that they need to bring together to make this work. So, thank you.
Speaker 2:And then there are several different uh companies out there that do small business, uh lending um or advice on how to start. But you can always come to me.
Speaker 2:I don't have any problems with that but there are several different companies out there, um, and right now they're not coming to my head, but I know of one, it's ECDI and they do um help small businesses get started with their for a price, obviously, but they help them with their business plan if they're looking to start a business, and help them get everything in order, if there is any and they do some lending there too. Even though they help assist a business who is starting a business, um, they can um do the lending there or take their package and go to a bank of their preference and do it, depending on on the size of loan.
Speaker 1:Yeah, I love that. I love that. Well, thank you so much. As we mentioned in the beginning of this episode, because of rules, regulations and all of that, we couldn't actually mention the bank and her name and all of that. But if you are listening to this and you are interested in a commercial loan of some sort, please reach out and I will connect you with this lovely lender and you can ask all of your questions. So, thank you so much for taking time out of your day to educate us.
Speaker 1:This was all such valuable information and I love that it was really explained in a way that anyone uh anyone can understand it. You didn't use a lot of like you know uh lingo in the you know like, um, some people will use all of the industry lingo and it's like, okay, you're not talking to you know people you work with. You're talking to people that don't live in this world.
Speaker 1:So I really appreciate that. Thank you Absolutely Well, thank you so much for tuning in. Please make sure that you leave a review, because feedback is the greatest gift that you can give me. Please make sure you are sharing this, because that is the greatest compliment that you can give me and, um, you know my special guest here. And also make sure that you are following along so you never miss another episode. Thanks so much and we'll see you next time on. Come to find out.