Buoy Capital - BUSINESS CAPITAL IN A TIGHT CREDIT ENVIRONMENT

Business Capital

You are here: Home / Archives for Michael Hobbs

Michael Hobbs

New State Disclosure Laws

By

States are rapidly passing laws to try and make business lending more transparent for borrowers and most of these laws have a lot of teeth in them. Of course California and New York are leading the way, but others are quickly following suit. Utah and Virginia have recently passed laws and laws are pending in 6 other states. Most are similar in nature, but some (like Utah) have broker registration requirements as well once you close so many loans with state domiciled businesses.

In California, there are very strict guidelines on disclosures that went into effect last December (2022). These must be provided whenever a lender or broker makes or modifies any type of written offer (text, email, letter, etc.). There has to be acknowledgement of some type that it was received by the prospective borrower. Any verbal back and forth is okay, but woe to you if you pass something along in writing without the accompanying disclosure, like APR, fees, brokerage commissions, etc. There are even strict guidelines as to the type of font you have to use on the forms. MCAs are also covered, which is probably news to most players in that industry. Commercial real estate loans are expressly exempt.

There are nasty criminal fines and jail time in CA threatened if you knowingly break the law. Also civil penalties are spelled out and allowances for the borrower to sue the broker and/or lender. There is also a provision that both lenders and borrowers have to keep these disclosures on file for 4 years, whether the borrower moved forth on the loan or not.

A number of lenders are putting in place procedures that state all offers to prospective borrowers have to come from them directly via DocuSign. By simply opening the disclosure document electronically, the borrower is giving tacit knowledge of receipt. The broker receives a copy of the offer and disclosures, but the sales process is totally different. It would seem to me that all these interim disclosures should serve to make the actual closing process smoother as all uncertainty on the borrower’s part has been removed.

Bottomline, brokers and lenders need to be aware of licensing requirements in place in each state. For borrowers, this is a great tool to bring transparency to the entire process. One thing that comes to mind is how awful a lot of the MCA disclosures are going to look.

Lines of Credit

By

I get asked this question a lot:  What is the difference between a line of credit and a revolving line of credit?   They are very similar, but there is one big difference from a lifespan standpoint. 

If you arrange a line of credit with a lender, it’s a one time arrangement for a specific period of time.  Once you pay it off, it’s over.  A revolving line of credit, on the other hand, stays open until one party or the other deems it over.  In both cases, you are provided funds up to a certain credit limit and you can use and pay back those funds at your discretion.  You have a lot of flexibility in either case, but a revolving line allows you to borrow and repay the monies over and over again, up to a certain limit.

In any case, the amount of credit line a lender will grant you will depend upon your credit score, income and credit history.  Most businesses use a line of credit to finance expansion, but my philosophy is to not wait until you need it.  Arrange a line of credit when times are good (and you quality for the largest amount), draw down the minimum amount to keep it active and have the comfort of knowing it’s there if and when the time arises that you really need it. 

SBA Express Loans and Preferred Lenders

By

The SBA promises a turnaround time of 36 hours for their express loans. But, that doesn’t include the time it takes for the lender to approve the loan, which could tack on another few weeks. So, instead of 60-90 days, you’re looking at 30-60 days for the SBA loan processing time when all is said and done.

Under the Preferred Lenders program, the SBA gives select lenders more authority to process, close, service, and liquidate SBA-guaranteed loans. An SBA field office serving the area in which a lender’s office is located can nominate the lender, or the lender can ask a field office to consider it for preferred status.

SBA Working Capital Loans

I work with one lender who has been designated by the SBA as the only lender able to offer a new type of working capital program that can actually fund in as little as 10 days after a complete application is received.  

The maximum amount funded is $150K @ an interest rate, adjusted quarterly, of Prime + 3.75%.  The really unique aspect of this program is the 10 year repayment term.  A 700+ FICO score is required, but the SBA will fund up to 30% of your gross annual receipts, as long as you have been in business at least 24 months. 

Industries Currently Considered Credit Risks

By

The trucking industry has typically been considered high risk by lenders due to a number of factors, such as the fact that payments come in anywhere from 30-90 days after completion of the job and globalization issues.  Lately, numerous additional factors, such as driver shortages, fuel cost increases, demand and lack of pricing power has only exacerbated this viewpoint.  I’ve seen working capital lenders recently increase the amount of average monthly revenue they require by a factor of 4.  In other words, where they would previously provide a working capital loan to a trucking outfit that generated $100K in monthly revenue, they have all of a sudden raised the bar to requiring $400K in monthly revenue, effectively rendering the majority of the small business trucking operators ineligible for working capital loans.

The Fed Tightens Credit

The other sector now facing similar challenges is the construction industry, for obvious reasons.  Higher interest rates, labor shortages and supply chain issues have all combined to throw monkey wrenches in both residential and commercial starts.  This isn’t all bad news, as the overinflated housing market is starting to cool off.  For instance, in my DFW home area, average home prices are down 10% over the last several months.  But I’m seeing ancillary players in the industry also being “redlined” for working capital loans.  I recently had an established architectural firm subjected to the same increased monthly revenues requirements as I outlined above for the trucking firm, all because they are considered part of the construction industry.