plura Financial Blog

blog for plurafinancial.com, an online matchmaker between banks & small businesses

SBA Loan Statistics for 7A and 504 Loans, through 6/8/2012

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From the blog of pluraFinancial.com, here are the latest SBA loan statistics for SBA 504 and 7A loan approvals, through 6/8/2012:
  • Summary: The 2012 SBA loan trend continues…
    • On a Year-to-Date basis, SBA 7A Loan approvals are down 34% through 6/8/2012 according to sba.gov
      • The 7A Loan’s higher SBA guarantee fees and lower amortization relative to the SBA 504 Loan is attributed to part of the decline in 7A Loans as demand shifts toward 504 Loans.
      • Existing businesses and rural businesses in particular appear to be fleeing SBA 7A loans.
    • SBA 504 Loan approvals are up 27% YOY
      • Borrowers appear to prefer the ability to refinance existing debt, and the relatively low rates & fees associated with SBA 504 Loans
  • A closer look into the numbers: On a YTD basis, total SBA loan approvals were down $4.1 Billion, or 23% YOY
    • SBA 7A Loan approvals were down $4.9B YOY, or 34%, responsible for 100% of the YOY total SBA loan decline
      • 7A Loan approvals to existing business were down $4.1B
        • Loans to Rural businesses were down $1.8 B
        • Loans to Asian-American owned businesses were down $0.9B
        • PLP loans represent ~half of all 7A loans, and were down 57% YOY
      • 7A Loan approvals to startups were down $0.8B
        • Express loans, a popular SBA loan product for startups, were down $0.7B YOY
      • 7A Loans represented 82% of SBA Loans last June, and currently represent 71%.
    • SBA 504 Loan approvals were up $0.8B, or 27% YOY
      • Loans to Existing businesses were responsible for ~90% of the 504 Loan growth.
      • Approvals were up in nearly every SBA 504 loan category (minorities, existing businesses, startups, rural businesses, etc.)
  • Projections: We expect a continued shift toward SBA 504 loans in 2012 given the favorable rates and amortization relative to other SBA loan products.  This assumes the SBA will continue to permit 504 loan proceeds to refinance existing debt.  
-James Timberview/www.plurafinancial.com
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Written by entrabanker

June 21, 2012 at 4:43 pm

When to Raise Capital (Part 1 – When To Raise Debt)

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-Brandon Hinkle/plurafinancial.com

There’s a popular saying in banking that it’s always best to request a bank loan when you don’t need it.  And there’s a popular saying in entrepreneurial circles that a banker is one who gives you an umbrella when it’s sunny outside, and takes the umbrella away when it’s raining.  Either way, you should always seek money before you need it.  This is particularly true for debt financing.

When To Raise Debt For Your Business

If you foresee a need for cash in the future, and if you can prove your company has the ability to quickly repay a loan (plus interest), than you should start seeking a bank loan.

  • Criteria: See What banks look for in a business loan to better understand the bank requirements for debt, but suffice to say the bank needs to know your business has the wherewithal to repay a loan on time, plus interest.  You usually also need to put at least 20% of your own capital into the project being financed.
  • Favorable attributes of debt:
    • The ability to put other people’s money at risk (instead of your own) without giving up ownership.  Private equity folks get rich with this strategy.  Warning: too much debt can strangle a company.
    • Over the long term, debt is cheaper than equity (if you believe your business has meaningful value).
    • Loan interest (expense) can reduce the company’s taxable income.
    • Debt forces financial discipline; it’s harder to make risky investments when the company has loan payments to make each month.
  • $ Cost of debt: A traditional bank loan generally charges 5%-7% annual interest.   Sometimes the interest rate is variable, sometimes it’s fixed.  Fees generally range from 0% to 3% of the loan amount, depending on the bank and loan type.
  • Hidden cost of debt: 
    • Increased risk of bankruptcy.  Your cash flow might get a temporary boost from the loan, but be careful not to borrow too much money; otherwise, every cent your business generates will need to go towards debt payments, strangling the company’s cash flow.  If your business experiences any unfavorable surprises you might not be able to make the required debt payments, which could lead to bankruptcy.
    • Debt requires more financial discipline and cash management than equity because of the amortization schedule and loan covenants associated with debt.
    • Beware of vulture lenders.  The difference between 7% monthly interest and 7% annual interest is enormous.  7% monthly interest is equal to 84% annual interest.  No reputable lender speaks in terms of “monthly” interest rates.  Read the fine print and confirm that the interest rate being charged is the ANNUAL interest rate.  Avoid opportunistic vulture lenders at all costs.
  •   How to find the right bank for you:
    • plurafinancial.com (shameless plug) is a free online tool available to small business owners seeking to get matched with appropriate, reputable lenders to find the best possible rates.
    • Consult with your local Small Business Development Center.
    • Apply for a loan in person to 5-6 banks, including a few large national banks and a few small community banks.  Cast a wide net and don’t settle for the first offer that comes along!
“Part 2 – When To Raise Equity” coming soon!

Brandon Hinkle is the CEO of pluraFinancial.com.  Prior to plura, Brandon served in the workout group for GE Capital’s sponsor finance division (Antares), and was an underwriter in Merrill Lynch Capital’s corporate finance group. He started his career as an underwriter in Merrill’s small business lending division. Brandon has a BA from Michigan State and an MBA from Northwestern University. Contact Brandon directly at:bhinkle@plurafinancial.com.

Written by entrabanker

June 7, 2012 at 9:35 pm

How Being a Tourist in Rome is Like Creating a Startup

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-Brandon Hinkle/plurafinancial.com

I’m currently nestled uncomfortably in the middle seat of an American Airlines flight, returning home to Chicago from Rome, Italy.  Reflecting upon my trip, and desperately trying to block out the screaming baby two seats away from me, I started to realize how many parallels there are between creating a startup and being a tourist in Rome.  Sounds strange, I know. But hear me out:

  • No fear.  Don’t be afraid of unfamiliar territory; it’s better to be lost somewhere beautiful than bored somewhere safe.
  • No regrets.  Even if you’re tired and want to go to bed, you won’t get this time back so grab another cappuccino and keep exploring.  At the end of the journey you’ll never wish you would’ve rested/slept more.
  • Reflect.  Take a moment to realize how lucky you are to be doing what most people only dream about.  Trying to visit five cities in seven days can be exhausting.  Pulling all nighters on a startup that produces more expenses than revenue can be frustrating.  But take the time to reflect about how lucky you are to be in the moment most people only experience in dreams.
  • Be an ambassador.  Create relationships with the locals and fellow journeymen; you never know when your paths will cross again, and you can never have too many allies worldwide.
  • Be in good company.  Surround yourself with people that make good decisions and share your same passion for adventure; avoid moody, emotionally inconsistent people that have a history of making bad decisions and crack amidst uncertainty.  In foreign countries, an unruly travel companion can increase the anti-American sentiment and ruin the atmosphere of the journey.  In startups, volatile personalities will create tension and ruin the culture you’re trying to create in your business.
  • Don’t run out of cash.
  • Talent can be more valuable than experience. It’s common knowledge that Michelangelo painted the ceiling of the Sistine Chapel, which was painted in a style known as fresco – a painstaking process that uses dry paint powder & wet plaster and requires decades of experience to perfect.  But it’s not widely known that it was the very first time Michelangelo ever tried to fresco.  Think about that for a moment.  The Pope picked Michelangelo, at the time a relatively unknown, over Rafael (a very well known painter and fresco-ist) because the Pope recognized Michelangelo’s talent. The Pope took a risk that was clearly exceeded by the reward.  Similarly, many successful entrepreneurs I know took “risks” on people that lacked experience but had extraordinary talent.  Anyone put in a position long enough will have experience, but you cannot teach someone to have talent.  Find talent and hold onto it.
  • Put yourself in your customers’ shoes.   In sharp contrast to impressionist painters, whose seemingly sloppy work is best appreciated from afar, Michelangelo was notoriously detailed in his work.  The Sistine Chapel was painted in two phases/halves and the first phase was vintage Michelangelo…the figures in the paintings included subtle facial hair, the clothes had frayed strands of cloth and other detail that could only be seen up close.  When Michelangelo first viewed his work from the ground level, he noticed something interesting; his painting was too detailed.  The characters were perfect, drawn to scale and mirrored the human figure in every detail.  But he realized many of the characters looked too small from afar and that nobody would ever be close enough to the ceiling to appreciate that kind of detail. So the second half/phase of the ceiling included figures much larger and less detailed as the first phase.  The most popular and photographed sections of his work (e.g. God touching Adam’s finger) was from this second phase.  Michelangelo had the talent to create photographic-like detail, but the wisdom to recognize that wasn’t necessary for this particular work.  He could get twice as much done in half the time without losing value.  Be cognizant of your customers’ perspective and use your time efficiently.  If you realize the target audience could benefit from a simpler design, have the flexibility to change the product.
  • Have a tour guide. After getting stung with various “tourist taxes” (typically prefaced by, “ah…for you, American, very special price…”) we finally agreed to pay for a tour guide for the second half of our trip.  The tour guide’s years of experience and credibility among the locals proved to be invaluable for us as we worked to maximize our time in Rome.  Likewise, credible advisors are invaluable for every startup.  They’ve worked with others who have made many mistakes and will help you avoid similar pitfalls.
  • Be decisive, or get hit by a bus.  Walking around in Rome, there are virtually no street lights or traffic guides; to cross the street you must move quickly and decisively to avoid getting hit by cars, busses, and scooters.  You’d have to visit Rome to truly understand this dynamic, but believe me; hesitating halfway across the road could be fatal.  The most successful entrepreneurs I know are extremely decisive.  Even if not always the optimal path, strong entrepreneurs pick a path and go for it.  They may get a few car horns, but they always manage to get across quickly, leaving the rest of the fear-stricken pack behind.
  • Have a niche.  There is a large gathering area in Rome known as Piazza Navona.  It’s a bit like an incubator facility on the inside, filled with dozens of budding artists and entrepreneurs trying to sell their goods & services to the public.  One particular entertainer, a guitarist, caught my attention. As we sat near him, it became apparent that the guitarist only knew four songs.  But he knew those songs well and that’s all he needed, as passersby rarely stayed longer than a few minutes, just enough to give him a tip for the good experience.  His guitar box was full of cash within just an hour.  Too many startups, ours included, can be accused of offering too many services, instead of focusing on the few things that customers value the most.

Of all the sights I saw, one image stands out more than any other: the Roman Coliseum.  Standing inside the coliseum as the sun poured through arcs in the east wall, imagining the chariot races & gladiator battles that took place nearly 2,000 years ago is…indescribable.  Awe struck by the scale of what they built, with the limited tools & resources available to them when it was done.  I am 100% certain that nobody will remember the name plura Financial in the year 4012.  I’d be happy with 2022.  But the journey through Rome, the coliseum in particular, made me proud to be a part of a team trying to create something special.

Visit Rome, it’s a life experience.

(And yes, the baby is still crying…)

Written by entrabanker

April 30, 2012 at 4:54 am

Margin vs. Markup: The Difference Between Charging a Margin and Markup Percentage.

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If you buy inventory for $100, would you rather sell it to customers at a 20% markup or a 20% margin?  For everyone that said “Margin, duh!” you can stop reading right here because you probably already know what I’m about to write.

For those that hesitated even for a moment, however, I hope by the time you’re done reading this short article that you’ll never think about using the markup method ever again!

Allow me to elaborate.  A markup is just a factor used to add some cushion between what you pay for something and what you sell it for.  A 20% markup means you’re going to sell the item for 20% more than what you bought it for.  But what’s your gross margin?  20%, right?  Wrong.  I’ll explain in a moment.

Before illustrating proof about why margin-based pricing is always better than using a markup, let’s be clear about what margin-based pricing means; charging based upon a 20% margin implies that you’re going to charge the customer whatever price is necessary to generate a gross profit margin of 20%.  This not only always results in a higher selling price than a 20% markup, but also ensures you can more accurately predict the overall gross margin of your business.

Here’s the math, comparing the impact of margin vs. markup pricing:

 

 

 

 

 

 

 

 

 

 

By applying a 20% margin instead of a 20% markup, your sale price and profit are $5 higher than if you had used a 20% markup.  More importantly, your gross profit margin is 3% higher with a 20% margin versus a 20% markup.  Note that gross profit is a $ amount (Revenue – COGS), while gross margin is a % (Gross Profit / Revenue).

If you’ve historically used markup-based pricing, you’re not alone.  But you & your business could be doing much better with a margin-based pricing strategy!

This article was written by Brandon Hinkle, co-Founder of www.plurafinancial.com, the FREE online matchmaker between banks & small businesses seeking debt.   Click here for a glossary of more financial definitions & calculations.

Written by entrabanker

April 27, 2012 at 10:38 pm

What is SUI Tax?

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-James Timberview/pluraFinancial.com

SUI tax stands for State Unemployment Insurance tax.   This seemingly minor line item in your company’s payroll taxes can add up quickly, so pay close attention to it.  Like so many other government tax rates, the SUI rate is difficult to understand/calculate.  But we’ll try to explain this vastly over-engineered calculation in a way that’s (hopefully) a bit easier to understand.

At the simplest level, the SUI tax rate goes up (or down) over time as your unemployment claims go up (or down), but with a % limit, in order to help the government pay unemployment insurance to folks that have been laid off.  New businesses get a fixed SUI tax rate, usually 4.35%, because new businesses have no prior track record of unemployment claims.  The SUI for existing businesses can change each year depending on how many unemployment insurance claims your employees have filed over the past few years.

According to the Illinois Department of Unemployment Security, most new businesses will pay a fixed SUI tax rate of 4.35% (of total payroll).  That’s a staggering amount of money for any business with meaningful payroll.  Certain industries that have relatively high propensity to lay people off (e.g. construction) have an even higher SUI tax rate (e.g. 5.25%).

If you’ve had any employees file for unemployment in the last few years, your SUI is subject to change each year (“variable”) and according to the IDES is based on the following calculation:

[(Benefit Ratio * State Experience Factor) + Fund Building Rate] = SUI tax rate

This can be loosely translated to mean “[(The percent of your workforce the state expects to file for unemployment * a cushion to help bridge the gap between how much unemployment insurance the State collects versus pays out) + some extra cushion to make the unemployment fund even bigger].”

Benefit Ratio = [(Your company’s prior year(s) Unemployment Insurance claims * The State’s Benefit Conversion Factor)/Last year’s payroll for your business].  This basically shows how much unemployment insurance your ex-employees have received relative to each $1 of the company’s total payroll. The Benefit Conversion Factor is number set by the State to adjust for the impact of negating certain tax changes.

State Experience Factor = (The amount of global SUI tax the State collected last year / The amount of unemployment insurance it paid out).  For example, if it collected $100MM of SUI and paid out $70MM of unemployment insurance, the State Experience Factor would be 142%.  There are some adjustments done to this number to net out credits & reserve requirements but for these purposes we’ll spare you that excessive brain damage.

Fund Building Rate = The extra cushion the State needs to ensure the UI fund is “solvent”.

The minimum SUI tax rate in Illinois, for example, is 0.55% = [(0*139%) + 0.55%].

The maximum rate is 9.45%.  [This is the current cap, regardless of what the Benefit Ratio is]

A few examples as provided by the IDES:

1)      Benefit Ratio of 0.031% * 139% State Experience Factor = 0.0431%, which rounds to 0.0%.  0.0% + the 0.55% Fund Building Rate = 0.55% SUI tax rate.

2)      Benefit Ratio of 1.5299% * 139% State Experience Factor = 2.1266%, which rounds to 2.1%; 2.1% + the 0.55% Fund Building Rate = 2.65% SUI tax rate.

3)      Benefit Ratio of 8.0612% * 139% = 11.2051%, which rounds to 11.2%.  Although adding the 0.55% would yield 11.75%, there is a 9.45% cap thus the SUI tax rate would be 9.45%.

The SUI tax calculation is not a fun exercise; but, as anyone with a large payroll knows, it’s an impactful number that’s important for you to understand.


Disclaimer – we’re not SUI or tax experts.  We’re not even CPAs.  We’ve just experienced the burden of the SUI tax and are trying to explain our understanding of how it works for folks new to the issue.  For detailed explanations, talk to your CPA, visit www.ides.illinois.gov, or for a good time call your local Department of Employment Security. 

Written by entrabanker

April 11, 2012 at 3:47 am

Corporate Jargon Translator – Part 2 (Stuff Analysts Say)

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Analysts say a lot of creative things to avoid getting fired in Corporate America.  Here’s a quick guide to help you translate some popular Analyst jargon:

Stuff Analysts Say (and what it really means) in Corporate America:

There were unintended consequences (My idea totally backfired…)

It’s not a silver bullet but it’s a helpful tool (I have no idea how this pivot table works)

I don’t disagree with you (You are right and I am wrong, but I won’t give you the satisfaction of actually agreeing with you)

Too funny (Go away. Every minute you spend at my desk telling me your lame story is another minute I have to stay later at work)

They puked all over it (They said no)

They responded with some pretty aggressive rhetoric (They said no, again)

They’re trying to take a pound of flesh (I forgot to read the Fee section of the agreement before having you sign it)

We’re in sync on the broad strokes of the deal (We’ve only agreed on the easy points)

I ran a sensitized case for the financial model (My boss has no faith in my abilities, and wanted to see what’s really going to happen)

I just want to ensure my call notes are accurate (Please repeat that, I was reading ESPN.com when you said that last part)

Apologies for my delay, was stuck in a long meeting (We had a call scheduled?)

I’m sorry, my cell phone is acting up…whose number is this? (I didn’t think you were important enough to add to my Outlook contacts when we first met)

We’re going to put it on hold/in dry dock (My boss said no, but I forgot to tell you last month)

There is perceived value (Our marketing people creatively tricked customers into paying for this P.O.S.)

We’re trying to get the data to corroborate it (I haven’t started working on this yet)

Let me run the numbers some more and circle back (I still haven’t started working on this yet)

I’m not wedded to the idea (I just realized my recommendation was dumb)

I’m getting deal blur (I guessed the answer to your question, and guessed wrong)

Let’s socialize the issue (I plan to ignore your concern and hope you forget about it)

We need to kill the alligator closest to the boat (Let’s ignore less urgent assignments until the boss forgets about them)

____________________________________________________________________________________________

This article was written by James Timberview, featured in the blog for pluraFinancial.com.  Special thanks to Brandon Hinkle and Joe Polaneczky, who contributed several catchphrases to this hodgepodge of CYA jargon.

Written by entrabanker

April 5, 2012 at 4:23 am

SBA Statistics for 7A and 504 Loans, through 3/23/2012

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-James Timberview/www.plurafinancial.com

The SBA recently posted its latest results for small business loans. With the SBA’s FYE being September 30, we are nearly halfway through its fiscal year.  Here are some interesting takeaways from the SBA’s loan approval results through YTD 3/23/2012:

  • As of 3/23/2012, total SBA approved loan volume was down 35%, or $4.8 billion, YOY
    • The drop in approved Preferred Lender Program (PLP) loans was responsible for 39% of the total YOY decline.
    • The drop in loans to rural-based businesses was responsible for 20% of the total YOY decline in SBA loans.
    • The decrease of approved loans to Asian Americans was responsible for 13% of the total volume decline YOY.
  • SBA 7A loans are down 45% YOY
    • 7A loans to existing businesses had the largest decline, shrinking 47% YOY.  This is likely attributed to 7A loan fees being reinstated in FY 2011; hence, borrowers (and lenders) were rushing to get 7A loans done prior to the fees going up.
  • SBA 504 loans were up 15% YOY, slightly offsetting the 7A volume decline
    • The uptick in 504 volume was likely due to folks rushing to take advantage of the ability to use SBA 504 loans to refinance debt, a favorable attribute that is set to expire in September 2012.
  • The mix of SBA loans approved for startups versus existing businesses has remained relatively flat at 23% and 77% of total volume, respectively.
  • Wells Fargo approved the largest volume of SBA loans thus far in 2012, and an average loan size of ~$350k.
  • Chase approved the largest # of SBA loans, with an average loan size of ~$125k.
To apply for an SBA loan online, or to learn more about the SBA, visit pluraFinancial or the SBA.

Written by entrabanker

March 28, 2012 at 4:47 am