Episode Transcript
[00:00:00] Speaker A: In this episode, we take our next step on the journey to you becoming the next entrepreneur. And we talk about how to fund your small business. Let's get started from New Money New Problems. It's the New Money New Problems podcast. A show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles uh, they've never seen.
Negotiating compensation, purchasing your first investment property, Helping your family with money. The highs and lows of entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison and this is the New Money New Problems podcast.
Hello, this is Brenton Harrison of New Money New Problems and your host for the New Money New Problems podcast. We are smack dab in the middle of our series on mid career pivots into entrepreneurship. But before we get into this week's episode, I want to remind you about our upcoming webinar this Tuesday, March 4th, with our friend estate planning attorney Jennifer Williams of, uh, Cedar Council. The webinar is titled is your house in order? We're going to be talking about a lot of crucial elements when it comes to building an estate plan. Why, even if you think you don't need one, you really do need one. And how to make sure that you use all of your resources, not just the attorney, but financial advisor, a cpa, to make sure that your wishes are carried out in the proper way. So that's Tuesday, March 4th at 6pm Central Time, 7pm Eastern. Go to put a link in the show notes for you to register. I really hope that you will tune in for what we feel is going to be a good session. Now onto this week's episode. We have this week my friend Lane Rhodes of Live Oak Bank. Last week we talked about how to identify one form of business acquisition, that form being a, uh, business franchise with Leslie Cuban. But whether you are acquiring a business, starting a business from scratch, um, buying into a franchise, it's highly likely that at some point you will need financing for that business. So Lane is going to walk us through all the details of how to qualify for conventional loans versus SBA loans, which is her specialty. And a great resource for people who have a business that trying to expand or purchase or in some cases even start from scratch. So as soon as I stop talking, the next voice that you hear will be Lane Rhodes of Live Oak Bank. Hope you enjoy.
[00:02:23] Speaker B: Yeah, so nice to be on the show today. I work for a company called Live Oak Bank. Um, Live Oak is a completely virtual bank. So very different from other companies that I'VE worked for before, but we primarily focus on SBA lending. Um, we do other conventional loans as well, but we got started as just an SBA lender, so it's kind of a unique story in the banking space. Um, there's never been a bank before that's launched just solely doing SBA loans. And our CEO, Chip Mahan, did just that several years ago and has been very successful with it. We've been the top SBA lender in the country for the last six years. Um, and I've been doing SBA lending for a little over 20 years.
[00:03:11] Speaker A: Wow. So, you know, I always. You said this is a little different from banks where you've worked previously. We want to hear a little of the backstory. How did you get into this to have been doing it for 20 years?
[00:03:23] Speaker B: Yeah, that is a great, great question. Um, I got into it. I was a commercial, um, healthcare banker at SunTrust bank, now Truist, um, and I was pregnant with my son and got called by a recruiter that said, you know, I think you'd be perfect for this job. You can work from home.
Back way back then when that, that happened, working, um, from home was not really a thing. You know, if you were a banker, you put on your suit, you went into the office in downtown Nashville every single day. I had a one year old at home and was, you know, pregnant with my second. And, like, gosh, working from home would kind of be a little life changing for me. So I just kind of luckily fell into it, which, funny enough, is how most people fall into SBA lending. You know, there's not like a course in business school of this is a path where you should go down. Um, so most people that get into SBA lending get into it from being a traditional banker. Um, at Live Oak, we kind of take a different stance on that. So I am one of the lenders that focuses on, you know, lending to all different industries. But one of the things I really love about Live Oak is a lot of our lenders are actual entrepreneurs, and they got into it because they got an SBA loan. They were very successful in their industry. And we lend in different industry verticals. And so we've hired people from outside of banking to get into SBA lending. But traditionally, people just fall into it working at a bank and hearing about it. Um, and since I lend across the country in all 50 states, I don't necessarily have to be in a brick and mortar branch every day. A lot of my clients, um, you know, I do eventually go meet them in person, um, for every single deal that I do. So even if you're in California or I did a deal in Alaska this year, um, you know, I go and meet with the clients face to face, in person, wherever they are. And I just absolutely love working with all of these entrepreneurs. Um, what they do to kind of keep our economy going is absolutely amazing.
[00:05:40] Speaker A: Well, let's go to one of the foundational elements. Ah, we recently did an episode about franchising, and before we get into the episode itself, I said, uh, define what a franchise is. So I'll do the same for you. Please define what an SBA loan is.
[00:05:56] Speaker B: That is a great place to start. Just because there is a lot of misinformation out there about the SBA programs and ppp, or the, you know, paycheck protection program that was launched during the pandemic, kind of elevated SBA out there where it became a regular household, you know, name that people knew of, the SBA department. Um, so the Small Business Administration historically does not actually lend money. They're a government entity that has different programs that they administer.
Um, but the SBA loan programs that the bank. Banks actually do, the banks are the ones lending the money, so the government actually just guarantees the loan. So it's good to know that, you know, there are multiple different types of programs you can get through the sba. The SBA does administer disaster relief. So the paycheck protection program that we had that was so important during the pandemic, and then the funds that you get if you are a victim of a natural disaster. So like the floods that we had here in Mental Tennessee, the tornadoes that we've had, um, those also get money directly from SBA as a function of helping administer funds on behalf of female. Um, but the traditional SBA program that's helping the entrepreneurs, those are programs that the banks are actually the ones lending the money for. So there's multiple different programs under that that banks can choose to participate in. At Live Oak bank, we participate in most of the SBA's programs. There's a few that, because we are a larger lender, we can't participate in because they're for community banks and that sort of thing, because that's what the government is really good at. They want everybody helping to spur economic growth, whether you live in a community with a population of 500 people or you live in a huge, you know, metropolitan area like Nashville with millions of people. So, um, that is just a little bit kind of about the program. But the banks are actually the ones that you know, administer. It's the banks funds that you're getting. It's not government money that you're getting. The taxpayers do help fund the program just as far as, like, the subsidy allowance goes for it. Um, but it's the bank's money that's being lent out, and you get a government guarantee. And that guarantee is like an insurance protection program for the bank that if for some reason you default on the loan, the government's going to come in and give the bank money to help make the loan whole if something happens at the end of the day. So it's really an insurance protection program.
[00:08:50] Speaker A: And, um, for lenders who offer multiple types of business loans. I know that Live Oak specializes in SBA loans. There are banks who will offer SBA loans and then what I would call like, a conventional loan. If you could speak to the difference between, you know, positively or negatively, an SBA loan versus what someone would call a conventional loan that's not guaranteed by the sba.
[00:09:16] Speaker B: Yeah, there's definitely pros and cons to both. We like to offer solutions that cover both. So if you qualify for both, I'm going to give you the pros and cons of both options. Um, so from a conventional loan standpoint, conventional loans are typically for established borrowers. So if we're talking about, you know, a business loan and you're coming to the bank, the bank is always going to be looking at historical data to make their loan approvals. Banks are not great on using future projected earnings, um, to make their, their loan approvals based off of. So one of the reasons you might use SBA would be if you needed the loan to be based on projections versus if you have historical data, you could use a conventional loan option. Another option comes down to how much of a down payment the borrower has to inject and put into the transaction. SBA loans allow for a lower down payment than what we would do on a conventional loan basis. So if down payment is an issue for you, you might want to utilize an SBA loan. For example, I have an individual that wants to buy the building that they occupy right now. They do not want to have to dip into their business's savings account because that's their working capital that they need to buy inventory and keep staff.
Um, so they would like to finance 100% of that building.
I can do that with an SBA loan. I cannot do that with a conventional loan. With a conventional loan, I'm going to require that they put in 20% towards that building purchase. Um, another big Trend right now that you and I have talked about is, you know, people wanting to buy a business. And when you're buying a business, you're typically buying limited fixed assets. You're buying a revenue stream. So the company that you're buying, they're going to have intellectual property. They may have some computers, they may have some software. They have a great employee, employee base, and they have clients, but they probably don't have a ton of fixed assets. Um, that is an ideal candidate for an SBA loan because the SBA does not have collateral requirements. Whereas on the conventional side, when I lend towards something like that, we're going to want collateral backing that loan and able to provide them, um, you know, a valid loan solution. So the SBA kind of fills the gap where conventional financing drops off, but there is oftentimes some overlap where the client may qualify for a conventional loan and qualify for an SBA loan.
[00:12:04] Speaker A: You, before we go into the break, you, uh, we're going to get into the details of, like, how to position yourself to qualify for SBA financing. But I was talking about acquisition, entrepreneurship. And, um, you mentioned buy, then build, which to me, with my limited knowledge in this field, I'm like, oh, well, that's where it started. And you actually gave me a historical tidbit to say, no, it actually began before that. Could you share that with our audience?
[00:12:30] Speaker B: Yeah. So, you know, it's buying businesses obviously has been around as long as we've had businesses out there to buy. Um, however, they became very popular and a way to kind of, you know, skyrocket or get into entrepreneurship faster through acquisition was started several years ago by two Harvard professors that, um, in the Harvard Business Review, wrote a long article that then became a published book on how to buy a small business. And it was as simple as that. That was the title of it. And so these two professors at Harvard really kind of launched and incubated this whole concept of they had students in their MBA programs that obviously one of their goals after they graduated with their MBA was they wanted to run and operate a company.
It was thought that you normally needed to go have this great new business idea to be able to go do that and then launch a startup. And they said, you know, hey, let's take a step back and look. Could you potentially go buy a business that has a similar business model to launch your great idea? And you're buying a business that has existing cash flow, has existing employees. So you're not starting from ground zero. You're getting a head start on whatever this Great business concept is that you have, um, and so that really kind of spurred this movement across the whole entire country, where business schools across America now coach and have groups on entrepreneurship through acquisition.
[00:14:09] Speaker A: What do they say? Uh, know thy history, know thyself. So it's always. It's always good to peek back in the. In the window of time to hear how things began. So with that, we're going to transition into a break, but after the break, we're going to go into the details of how you can qualify for SBA financing. We'll be right back.
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Welcome back from the break. We are here with our friend Lane Rhodes of Live Oak Bank. She is walking us through the ins and outs of SBA financing. Lane, welcome back.
[00:15:48] Speaker B: Thank you.
[00:15:50] Speaker A: Now, let's get into the meat and potatoes of how to go through the loan process with an SBA loan. So we'll start with if you could describe the avatar or the profile of a typical person who comes to you for financing.
[00:16:05] Speaker B: Yeah, so the typical person that comes to us for financing right now, um, you hinted about it, is this big movement right now to go buy a business. So we're working with what we call searchers or potential buyers across the country that are very interested in getting into, you know, business acquisition, um, through buying an existing company. Um, there's also other individuals that are looking to start businesses I know you mentioned, and you've got somebody speaking on franchises coming up. So SBA loans are a great tool for funding a startup franchise as well. So that's another typical SBA client. Um, another big thing that I see right now, just because these loans have been more prevalent with the emergence of loans on the Internet right now that are easily accessible, is business owners will go out and Get a very high rate, um, small business working capital line of credit from an online lender with, you know, some of these, I see 30% interest rates on them. So they'll come to us looking to refinance those as well. So refinances of a high interest rate rate business loan are oftentimes another great candidate for the sba.
[00:17:22] Speaker A: When we have a client who's going into a home purchase, I tell them make sure your debt to income ratio is as low as possible. I tell them make sure your credit score is as high as possible and then their income is what it is. There's an added layer when you're talking about starting or buying a business. Can you talk about the personal finance profile that they need to have? And then also what does the business have to look like to be approved?
[00:17:51] Speaker B: That is a great um, question because I often get this, I have people that call that want, similar to the mortgage side. They want to get a pre qualification for them as a potential SBA buyer. Um, and so there's two different profiles like you said. So personally you need to make sure that you have your personal house in order. So similar to the same things that Brenton, you coach about when going to buy a house, you want to make sure that you're credit score is high, that you know your debt to income ratio. We still like to see that at 50% or less.
Um, credit scores do play into this. Um, we typically like to see 650 or above. However, I do tell people we get a lot of, you know, young individuals that maybe haven't built credit yet. So if it's an issue where you just haven't built credit so you don't have credit on your credit report, don't let that necessarily be a barrier to applying for an SBA loan. Now if your credit score does have late pays and stuff on that, that is something you would want to get cleaned up ahead of time because that's gonna be a big red flag to any lender of if you historically haven't paid your loans on time, that's a really good indication that you're probably not gonna pay future obligations on time. The other thing you want to be ready for is if you are doing a business purchase and um, you're going to need a down payment having those funds readily available as well. So making sure that you have some, what we call personal liquidity, personal cash that you can actually come up with that down payment, that's going to be really important for you when you apply for your SBA loan.
On the flip side with the business, um, the SBA only lends money to a business. You're personally guaranteeing it. But the bulk of the SBA loan approval is going to be based on the cash flow of that business.
So if you are buying an existing company, the loan amount is going to be 100% dependent upon the last three years of tax returns for that company that you're looking to buy. You as the buyer is important that you one have a good credit score, you have good industry experience, and you can come up with whatever the needed down payment is going to be. But at the end of the day, if the cash flow from the company that you're looking to buy cannot support the loan, it doesn't matter how strong you are as a buyer. So both of the sides of the table play an equal role in getting approved for an SBA loan. Same thing if it's an existing business. If it's an existing business, and let's say you're coming to apply for an expansion loan, we want to see that the company is at least covering their debts today at, uh, a one to one cash flow ratio. So if the business is struggling and you're thinking that maybe going and expanding, expanding or buying a competitor can kind of help the business be more successful, we're going to say no, we don't need you to take on more debt if your company isn't currently breaking even and covering all of its expenses. We really need to dig into the fundamentals of your business and figure out why it's not profitable before trying to go and take on more debt. Um, then we have the instance of a startup, and a startup doesn't have tax returns, existing cash flow, anything like that. So when we are looking to do a startup loan, and this is one of the misconceptions out there from, from the SBA marketing that seems to be out there, is that SBA is a great tool to fund a startup. Yes and no. So the SBA still tells us that we need to have a revenue source, a cash flow source stream that is not projections that can repay the loan. So if you're coming to us for a startup loan, you need to have some sort of outside secondary income that can help cover those payments while the business is getting profitable. And you talked about this on your last podcast, that in a startup scenario, whether you're buying a franchise and starting up or starting a brand new concept, there's going to be a 6 to 12 month period there where you're spending money and not generating the revenue to cover that. So you've got to have some sort of outside income to be able to cover that in order to qualify for an SBA loan. For a startup, we can never base the loan 100% on projections, because even the best projections are just that. They're projections. And I've never had a client in my 20 years of doing this nail their projections. Exactly.
[00:22:50] Speaker A: That is good counsel. And we, you know, we did talk about in the first episode having to have the ability to kind of bootstrap yourself if it's a startup, because, you know, why. Why would somebody let you borrow money on something where you say, I think it'll do this as opposed to, I know it has done this. Right.
Um, so to me, if you're talking about the loan itself, you mentioned that you had a person who was trying to buy the building in which their business resides, and they had a, uh, 100% financing opportunity. I know that all SBA loans are not 100% financing. So could you talk through, like, the typical down payment, what somebody might have to bring to the table?
[00:23:30] Speaker B: That is a great point. With real estate, the SBA does allow for us to finance 100%, but the SBA does have very strict rules around, you know, down payment. They call it skin in the game a lot of times. So they want the business owner to have skin in the game. Um, so when looking to go buy a business or launch a business, um, buying a business that's got an existing revenue stream is a little less risky than starting a business. So because of that, it warrants a lower down payment. And the SBA says we can actually fund 90% of a business acquisition. Um, and so the client really just needs to come up with 10% at that point. But a big misconception for buyers looking to buy a business is I only need to come up with 10% of the purchase price. And that's not really the case. It's 10% of the total transaction. And one of the biggest things that can cause an acquisition to not go the way that they plan it to go is they didn't budget enough working capital.
So always make sure you're factoring your working capital and closing cost into the total project cost. And that's where your 10% is coming from. A down payment standpoint, if it's a startup, we're going to want to see more skin in the game. So maybe 20%, maybe 30%. If it's not as risky, if it is a franchise like you talked about, Maybe it's only 10 or 15% because it's a proven franchise model that's been around for, you know, 30 years and has a really good roadmap of how you get to that break even and profitability.
Um, we also do financing, um, where we might require a feasibility study. And if the feasibility study comes back that there's just this huge pent up demand in the community for whatever the product or service is, maybe we require a lower down payment because the, the feasibility study is showing us that you're going to be able to launch and hit profitability a lot sooner than other business models. Um, so feasibility studies are important when we're looking at startup financing. We oftentimes will require that depending on the industry. So there's a lot of different things that can go into how much of a down payment is required.
[00:25:50] Speaker A: It's interesting though because I think it's great counsel, I know it's great counsel to say make sure you don't just build in down payment of the purchase price, build in the working capital. But I still think that that is so surprising to most people. Like you could have a million dollar business that maybe 125, $150,000 of your money allows you to buy a million dollar business potentially. And I think that that opens up such a door that people assume I can't go buy this or that because where would I come up with the money? Well, it may be much less than people are thinking. So my last question to you, because I want to be respectful of your time, is now that you've walked through the ins and outs, now that you've walked through the financing, when does someone start this process? Do they need to contact someone in your industry when they're just thinking about it, or is it, you know, when you have identified an opportunity, when you're ready to go, that's when the process begins.
[00:26:49] Speaker B: I say it's never too early to get your team of advisors together.
Um, even if it's just I do a lot of coffees with people, um, similar to you, Brenton, that are just kind of thinking about it. They may, you know, have been in the corporate grind for the last couple of years and they haven't, you know, been able to achieve what they want in the corporate space. And so entrepreneurship sounds like something that may be of interest to them. Um, so I'm always more than happy to like take those coffees and talk to individuals. And sometimes, you know, the advice and counsel that I give ends up convincing somebody that they're really good, staying at their corporate job. Because there's so much risk that's involved in, you know, being an entrepreneur. Um, but for some, it gives them hope that just like you were saying, it's mind boggling to them when they think about, oh, my goodness, you know, this company's being sold for $2 million. Where in the world would I ever be able to come up with enough to be able to go buy a business like that? Um, and it might be a lot more attainable than they could ever imagine. So getting somebody involved early that's willing to sit down and spend the time is important.
Um, if SBA lending is something that you're exploring, I do highly recommend using a bank that is a preferred lender with sba. Um, every bank out there wants to say they offer the Small Business Administration loan programs because it's not a great look. If they say they don't, it looks like they don't support small business. However, there are very few lenders out there that do it and do it regularly. Um, and because of that, you know, you want, you want the best. Like, if you're gonna go, you know, have heart surgery, you're not gonna go to your eye doctor. It's kind of the same in the banking sector space. If you're going out and getting an SBA loan, you probably don't want to go talk to your personal banker that, you know, maybe handles your, your home equity line of credit. You need to go talk to an expert that does this day in and day out. That can help you avoid some of the pitfalls. Having helped, you know, thousands of clients go through the process of buying a business. So get a banker involved, you know, fairly early in the process. That can help work as a guide. Um, oftentimes the clients that I work with that are buying companies, I'll work with them for two to three years and we'll look at, you know, 50, 60, sometimes 100 businesses before you find the right fit. And we help give you and equip you with the tools to help you even look and analyze these appropriately. We have an office hours call that we do every single Tuesday where we walk through the actual cash flow model with our potential business buyers to show them what the bank's gonna be looking at. And then we actually provide you the Excel template so that you can run the cash flow yourself. I've come in contact with potential buyers that have worked for months trying to create their own. Why create your own cash flow template when you can work with a seasoned advisor that can help provide you resources like that? Where you don't have to reinvent the wheel.
[00:30:02] Speaker A: Well, you teed it up very nicely because you recommended finding an experienced banker. I know you're an experienced banker. You said you should use a preferred SBA lender. I know Live Oak is a preferred SBA lender, and you mentioned that you lend in all 50 states. So if you could share with our audience how they can contact you and we'll finish up.
[00:30:22] Speaker B: Thank you so much. That is awesome. Um, you can reach me at Lane Rhodesive Oak Bank. Um, which dot bank is the weird part to our, um, email address there. Um, but you can also visit our website. You know, liveopebank.com we have a great website. We are primarily just an SBA lender, so, um, we're not going to be the place to go get your home equity line of credit. But if you're looking for a good SBA loan, we're definitely the lender for you. So I'm, I'm also on LinkedIn. I have tons of people reach out on LinkedIn pretty much every day that are wanting to explore the entrepreneurship through acquisition space. And I'm more than happy to, you know, take a zoom meeting, take a coffee meeting with anybody that's looking to explore this space and just wants to learn more.
[00:31:09] Speaker A: Well, we will put that information in the show, notes. Lane, thank you for your time and thank you for being a guest on the New Money New Problems podcast.
[00:31:17] Speaker B: Thank you so much for having me.
[00:31:21] Speaker A: New Money, New Problems. This was the New Money New Problems podcast, a show for successful professionals searching for the tools they m need to navigate financial opportunities and obstacles they've never seen.
