Tightened SBA & Bank Lending Requirements
David Sussman on Fox Business: Small business feel the pain of partial shutdown – Valcor CEO
Lauren Simonetti: David Sussman, the CEO of Valcor Worldwide, joining us. Hi David.
David Sussman: Hi Lauren. Thanks for having me again.
Lauren Simonetti: Great to see you. Thanks for coming back. So what are some of the effects small businesses are seeing already? And I am envisioning small businesses, like contractors, perhaps, to the government. What other source of small businesses are feeling the heat right now?
David Sussman: Well, the SBA, according to the Wall Street Journal yesterday, are no longer funding loans to small businesses. There’s going to be a backlog and even if this thing ended today, which is unlikely, there’s going to be a backlog for weeks and weeks.
Lauren Simonetti: I mean, that’s going to have huge ripple effects, huge ripple effects, if lending is cut off.
David Sussman: Yeah, it really is. And many businesses need working capital. They need money to expand their business, buy product and they’re just not getting it. And the SBA, it’s probably going to slow them down for months, not weeks.
Lauren Simonetti: A lot of businesses come really close to making ends meet, at the end of the month. They rely on capital, short-term capital, solutions to keep running, not to mention being able to expand and hire more workers. What’s your temperature on that and the effects of the shutdown on that?
David Sussman: Well, unfortunately, things haven’t changed since the last time I joined you on this broadcast. Banks are still not lending at the level that it needs to be, for small businesses. They’re sitting on a ton of cash right now and they’re watching their money earn good returns because of the quantitative easing that the Fortune 100 and the financial institutions have enjoyed through the stimulus, from the Fed, which looks like it’s going to continue now with the appointment of Janet Yellen. But what we are finding, it is the small business, it is the business owner that runs a business up to say 100 employees, which represents a massive majority of the business out there, which are not getting the loans from the big banks. So they have to turn to alternative sources and that’s what we are finding; we are very busy with right now.
Lauren Simonetti: Yeah, and you came equipped with tips that our small businesses out there can raise and conserve cash. The first one we have here is what you’re calling, “asset-based lending”. Can you walk us through some of the pros and cons of that?
David Sussman: Well unfortunately, when cash slows down, a lot of companies, they just hold on to their cash; they try to reserve that capital and payments slow down to their creditors and vendors. And so if you are a business that is waiting for money to be paid to you, you need that money. It’s the lifeblood of your business; you’re not getting it from your client. You may be out to using asset-based lending as an option. Where you can use factoring, which I’m sure a lot of your viewers have heard of, where you can actually finance the receivables to your business. It’s almost like a bridge loan situation, where you are getting one, two, three months ahead, in payments. And there are factoring companies out there that provide that as an alternative of purchase orders…
Lauren Simonetti: And what about refinance?
David Sussman: Refinance on commercial real estate is definitely a good way to go today, especially with the interest rates as low as they are, many terms are coming due right now, that were taken out in 2005, 2006, 2007, on the 7 & 10 year terms. And what we’re seeing is that many of those commercial properties maybe under water. I am working on a case right now, out of Maryland, and we found that they got a piece of property in 2006, it was appraised for approximately $2 million, we just looked it up yesterday and it’s being appraised at $1.3. The loan is $1.5; so what do you do? You’re going to have to refinance that loan, maybe restructure the loan with the bank, talk with the bank about extending out the loan or reducing the interest rates. And if you can refinance, that can conserve capital for your business, which is obviously, much needed today.
Lauren Simonetti: Good tip. And then we have here- another way to bypass some of these banks and lending institution, is to perhaps consider selling a small stake or a big stake in your company to private equity?
David Sussman: Yeah, we are all familiar with the Shark Tank analogy today but you have to ask yourself, is this a good match for somebody that’s going to come in and take 30, 40% of my company? Management issues come into play; and whether or not you feel good, I mean that has to be, what I call your spidey senses. Do you feel good in your gut about working with a capital management firm that’s going to maybe, replace your board, maybe replace your brother-in-law, who you’ve had as your CFO for the past 20 years. And they may not feel that he is the best person to run the company. And so there’s going to be issues with that. But the positives on that is that they may be able to bring in a source of cash, which is much needed. They may be able to provide opportunities by opening doors to clients and vendors, and other sources of professional services that may not have otherwise been available.
Lauren Simonetti: And then there are some other options, perhaps, some risky options and I haven’t heard of these – mezzanine financing and hard money loans?
David Sussman: Yeah, we like to go to those when there isn’t any other options. Unfortunately, we are using more of these today than we ever thought we would because most businesses don’t have a lot of options. Think of mezzanine financing as a second mortgage on your home. Most conventional loans today, will go up to 65% loan to value, otherwise known as LTV. Well, what happens if you need 80%? What happens if you need 90%? So that remaining 25-35% that you need, will go to a secondary tier loan. It may be a higher interest loan; it may be a shorter term; it may be more expensive. But there are companies that provide that. They are called mezzanine. Hard money is very similar to that. It may be in the form of a bridge loan. Maybe I need it for a year or 18 months or 2 years. It will be a higher interest rate. One of the good things that we’re seeing today and this is for your clients to understand today that run small businesses, do not be scared of the term, hard money. I would’ve never recommended it a few years ago. But hard money lenders today are more conventional than they’ve ever been. We’re doing hard money lenders for some of our clients, through some of our lenders – we have a categorized lenders database that we use, and we’re seeing loans in the 5,6,7% range, which in most cases, it’s comparable to what we’re seeing in most banks today.
Lauren Simonetti: Okay. Those were great tips, David Sussman, the CEO of Valcor Worldwide. Have a great day. Thank you for all that. Your website is up on the screen.
David Sussman: Thank you for having me.
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