Earlier this year, I resigned from my w2 job. But it wasn't actually the job I was quitting. I quit the business model. I'm leaving behind the old SBA model to build the future one. It's been said time and time on The Art of SBA Lending podcast. "The model is broken." 📉 How many SBA departments have you seen downsize and outright close in the past 24 months? A lot. 🏦 Only 13% of banks and CUs are participating in the 7(a) program despite it being such an amazing product for both the institution and the small business owner. 🔸And while the industry has made some progress, the SBA process has not caught up to the expectations of our borrowers. In fact, the gap is widening. I'm tired of talking about the issues year after year. I wanted to finally do something about it. And now we are. And I'm reuniting with some old friends along the way. This might have been the worst kept secret in the world, butttt... I'm officially part of Lendesca — a first-of-its-kind SBA fintech. Our mission is to modernize the SBA lending landscape by bringing new SBA lenders into the ecosystem and allowing them to leverage our infrastructure to provide SBA loans faster and easier than ever before. 15 years into my SBA career and I couldn’t be more fired up. Here’s to Act II 🥂 🎬

Yesterday I revisited my roots. I stopped by Central Florida’s own Portrait Bank — just a few blocks away from where I started my career as an SBA BDO — to talk about SBA lending, and told this story… A local banker called me with a deal. It was a metal fabricator that needed $2.2mm to buy and renovate a building. And it had to close in 30 days. Or the deal was dead. I remember it like it was yesterday. I show up, a 23 year old, in a loose-fitting suit. Across from me, a 50 year old business owner. HE was counting on ME to financing the LARGEST TRANSACTION of his life. I could feel the weight on my shoulders. This forever changed how I approached the job.

The SBA 7(a) program was around for decades before anyone really noticed it. Banks had it on the shelf, but they avoided it like the plague. More paperwork, more complexity. It was the loan of last resort. Then in the '80s a lender called The Money Store came around and flipped the conventional wisdom on its head. They actually LED with SBA. Over time, they scaled up to about 100 salespeople to tap into different markets all around the country. They actively promoted the unique benefits of SBA: - Lower equity requirements - Longer terms - Fully amortizing terms And boy did it work. They were the #1 SBA lender for 16 years straight - a record still held to this day! By the '90s, GE Capital, CIT, and others had picked up the same playbook and ran. The model has been essentially the same ever since. Until now. Check out my full episode on CEO Journeys with Paul Vedder to learn more about what we're building at Lendesca and our vision for the future of SBA lending.

SBA just banned 870k people — more than 10x the amount of people that were approved for a 7(a) loan last year — for being *suspected* of fraud 🤔

Small business owners ask me this constantly: if I'm coming to a bank because I need money, why does the bank expect me to already have money? Fair question. Banks love lending to people with a ton of cash. That's just not the reality for most owners bootstrapping a business. Here's what's actually going on. Most SBA loans require a down payment. Once you stroke that check, your lender doesn't want you drained dry. You need something left over. How much? Depends who you ask. Some say 5% of the project. Some say 7. Some say 10. Nobody agrees on the number, but everybody agrees you need it. The next question is: what do you consider as liquidity? Is a retirement account liquidity? A brokerage account? Cash sitting in a safe? Life insurance cash surrender value? Working capital funded inside the loan? Extra cash the investors are bringing to sit on the balance sheet? How does "keep a rainy day fund" get this complicated? Leave it to SBA lenders. But the reason behind it is simple. On a business acquisition, when — not if — something goes sideways, you need cash to make payments while you figure it out. Post-close liquidity is your friend.

This woman is a legend!

I had a borrower send me a long list of questions about an SBA 7(a) loan we’re working on for a commercial real estate purchase. She’s also talking to several banks about conventional financing, so she wanted to really understand the tradeoffs. As I went down the list answering her questions, I was reminded of something: The SBA 7(a) program might be the most borrower-friendly commercial loan product on the market. Look at this particular deal: $1.4MM commercial real estate purchase. Our SBA structure provides: 🔸Up to 25-year, fully amortizing financing 🔸No balloon payment 🔸$0 borrower equity injection in this structure 🔸Renovations can be financed 🔸Equipment can be financed 🔸Working capital can be financed 🔸No financial covenants 🔸No minimum ongoing DSCR covenant 🔸No liquidity covenant 🔸No requirement to move the banking relationship 🔸Only a 3-year prepayment penalty 🔸Ability to refinance into conventional financing down the road One of her questions was essentially: “What happens if the property appreciates, and I want another bank to refinance this in year 4 or 5?” My answer: Absolutely. That’s actually pretty common. It can be the loan that gets you into the building without having to write a massive check. It can finance the real estate, renovations, equipment and working capital needed to make the move. It can give you a long amortization and preserve cash when cash matters most. Then, a few years later, when the business is stronger, leverage is lower and the property has hopefully appreciated, you can graduate into conventional financing. Yes, SBA loans require more documentation. Yes, there are rules. Yes, the process can be more involved. But when you look at what the borrower actually gets in return, there are very few commercial financing products that offer this combination of leverage, amortization, flexibility and freedom after closing. That’s why I continue to believe SBA 7(a) is one of the best commercial loan products ever created for small business owners.

He just said the quiet part out loud

Facts

The $10,000,000 SBA 7(a) loan is coming. The SBA made clear on a call last week that part of the reason for the recent changes to their acquisition lending guidelines is to prepare for a larger loan limit. The support for this is unanimous. The reasons to do it are based in common sense. In 2010 the 7(a) limit was raised from $2mm to $5mm where it has sat ever since. If you simply adjust for inflation we should be sitting at $7.5mm right now. The result is a lack of access to capital in the $5-$10mm space. But in order for the SBA to increase its limit, we must get our house in order. The rules will have to be different for a $10mm loan. The new requirement that a Quality of Earnings report for business acquisitions $3mm+ is the first taste of that. In the meantime, the decoupling of the 7(a) and 504 programs provides a bandaid solution. (Now, you can get a 7(a) loan for $5mm and still br able to get another $12mm+ though the 504 program.) As the loan limits increase and the 7(a) and 504 program grow, more and more owners will have access to affordable capital to start, grow, and acquire businesses. That’s a good thing!