SBA loans offer a number of advantages for small businesses. Chris Hurn, the CEO and Founder of Fountainhead Commercial Capital, joins The Savvy Entrepreneur to talk about the ins and outs of both types of SBA loans: 7(a) loans, and 504 loans.
Fountainhead Capital is one of only 14 non-bank SBA lenders nationwide, and also one a small number of preferred SBA lenders. As a specialist in SBA lending, Fountainhead Capital prides itself on providing great service and support to its customers. He also says that it really helps to find a bank or non-bank lender that truly specializes in SBA loans to ensure you get the best experience.
Chris talks about the 3 key advantages of SBA loans over conventional lending: (1) lower downpayments; (2) longer repayment terms, both resulting in typical lower monthly payments. A third advantage is typcially the lack of loan covenants that commercial lenders include.
He talks about the differences between the two SBA loan programs, and also gives plenty of tips for pitching to lenders, as well as how to keep your relationship smooth with your lender.
The following is a transcript of our chat about the advantages of SBA loans. Go here if you’d prefer to listen to the original interview.
Doris Nagel 0:13
Hello out there, all you entrepreneurs and small businesspeople!
You are listening to The Savvy Entrepreneur Show. I’m Doris Nagel, your host for the next hour.
The show has two goals: first, to share helpful information and resources. Because I have made a lot of mistakes as an entrepreneur out there. My clients have made mistakes, my friends. So if I can help just a couple of you avoid one or two of those mistakes, then I’ve been a success.
The second goal is to inspire. I found being an entrepreneur is confusing. It’s often lonely. Sometimes you have no idea if you’re on the right track or not.
Every week I have guests on the show who are willing to share their advice and their stories to help with both of those goals.
My guest this week is Chris Hurn. He is the founder and CEO of a company called Fountainhead. He’s an entrepreneur by nature, he says, having founded two very successful small business lending companies in Florida.
Fountainhead describes itself as a national non-bank direct commercial lender specializing in helping owners of small to midsize businesses finance their growth and create wealth through conventional and small business loans.
Chris, thanks so much for being with me today. Welcome to The Savvy Entrepreneur Show.
Chris Hurn
Thank you for having me. I appreciate it.
Doris Nagel
Let’s start by just talking a little more about what Fountainhead does and who your customers are.
Chris Hurn 1:50
We’re a small business lender. We’re nationwide, so we’ve made loans in all 50 states and six territories.
Our target audience is the small to mid-sized business owner. We do finance some startups. Most of our borrowers have been in business for a number of years, however, and you know, we compete against banks and credit unions who try to offer business loans.
But we’re all over the country, even though we’re based in Florida. But we have a lot of fun. We’re very passionate about financing entrepreneurs, we think of ourselves as entrepreneurs first and foremost. So that’s a very different mindset than most of the folks we compete against,
Doris Nagel
When you say small to midsize, people define that differently. How do you define it?
Chris Hurn 2:38
You’re right. There are so many different ways to slice this. But we pretty much follow the Small Business Administration’s, or SBA’s view on this.
So typically, our clients don’t have more than 500 employees, and typically don’t have more than 100 million in revenue. But anything below that, it’s all across the board. We’ve financed brand new startups with zero employees or one employee. We also finance companies that have hundreds of employees and do 10s of millions of dollars in revenue. And everything in between.
I would say our typical or average borrower is probably in that $5 to $10 million range in gross revenue, and probably somewhere between 10 and 40 employees.
Doris Nagel
Are you industry agnostic? Or do most of your clients tend more towards manufacturing or services or software? Or are they all over the board?
Chris Hurn 3:34
It’s all over the board. We’re pretty industry agnostic.
There are certain industries that we don’t finance just because they’re not eligible under the SBA guidelines. Those are things like pure investment plays in residential financing, say for multifamily apartment building. Things that the SBA says are sexually prurient in nature. We don’t know anything that’s a pyramid scheme. As you would expect, we don’t finance those.
If I had to look at our top three or four industries, we’ve always done a lot of in the hospitality space. So a lot of bed and breakfasts and limited-service hotels.
We’ve always done a lot in the manufacturing and distribution space. That could be equipment related. It could be office warehouse related. We do a lot these days.
We also do a lot in the e-commerce space, particularly in terms of business acquisitions. That’s been a very hot area on the market right now.
We’re going through a demographic shift, as I’m sure you know, Doris. There’s a lot of business owners that are looking to sell their business. 56% of all business owners are actually baby boomers and about 1000 baby boomers will be retiring every day for the next nine years.
So there’s a lot of transition that’s going to happen and a lot of business acquisitions of small businesses are financed with SBA loans.
Doris Nagel
Interesting. I hadn’t realized that.
I have had a couple of guests in the past on the show talking about business transition. And I explain that this may sound counterintuitive, because most of you are thinking about how to get started, how do I hire more people? How do I grow my sales?
But at some point, you will leave that business, no matter how successful it is. And you need to plan for that.
So it’s interesting that that’s starting to happen for lots of boomers. Transitioning and planning to leave their business has been tough for a lot of boomers. But it’s interesting to see that it’s finally happening.
Chris Hurn 5:31
It’s also a strategy that a lot of small business owners don’t think about. You know, we always think of large corporations that are doing mergers and acquisitions. And that even sounds fancier than a business acquisition.
But oftentimes, it’s a good strategy to perhaps buy somebody who is somewhat of a competitor, or maybe you have a line of business that’s parallel or complimentary to what you do.
Particularly coming out of pandemic, there’s a lot of businesses out there that are operating sub optimally. And if someone is acquisitive, now’s a good time to take a look at doing this.
But yes, you are correct. It’s also a function of the only thing that’s certain is death and taxes, as they say. So eventually, one day you either stop your business, or you’re going to try to sell your business.
And if you can sell it and get something for it, that’s a whole lot better than just shutting the doors and throwing the keys away.
Doris Nagel
I totally agree. So when and why was Fountainhead founded? What was the unmet need that you saw and wanted to fill?
Chris Hurn 6:36
I’ve been doing this for over 23 years.
I actually started with GE Capital, which, at the time, was the largest non-bank, direct small business lender in the country. Eventually, I left and joined Heller Financial, based in Chicago.
But then eventually, GE bought Heller. My running joke was that they could have just not kept my compensation and would have saved billions of dollars.
But my blunt answer is that I got frustrated with large corporations and the ebb and flow of their credit policies in terms of small business lending.
What I mean by that is with a lot of larger companies and even highly regulated banks, they tend to get very concerned about concentration risk. And I understand why it exists. I understand how to mitigate that.
But I also think sometimes it’s very short-sighted. I think that if you have perfectly good businesses, even if your concentration is high, you don’t turn them away. So say you don’t want to have more than 10% of your portfolio in daycares. And then you get another daycare come in the door that’s a really strong deal, I don’t know why you would turn it away, just because it’s now going to now be 10.3% of your portfolio.
So those are some of the sort of things that frustrated me a little bit. So I started my, my first non-bank, small business lending company, back in 2002, as a result.
I had actually left the small business lending arena for a couple of years and a buddy of mine over a beer at a bar — which is seems like where a lot of things start. — encouraged me to come back.
And I did, but I wanted to do it my way. So I started my own company, in 2002. I actually sold it to a bank in 2010, and stuck around for almost four years, much to the chagrin of most of my friends who couldn’t believe I stuck around as long as I did.
But then I started Fountainhead in February of 2015. So it’s been a good run. We’ve been booming in terms of our growth. As of tomorrow, we will be on the Inc 500 list for the fourth year in a row.
I’ll find out our rank tomorrow. But it’s a been lot of fun. It’s very gratifying what we do and I just really enjoy helping to grow small businesses. That’s kind of in our DNA. And it’s very exciting to play such an impactful role in the lives of small business owners.
Doris Nagel
Congrats on the Inc 500! That’s a terrific accomplishment, particularly for multiple years, because I seem to recall the year over year growth that you need to experience to stay on that list is pretty daunting.
Chris Hurn 9:27
Yes it is. And thank you.
My old company was on three years in a row as well. And tomorrow will be four years in a row for Fountainhead.
Doris Nagel
One thing that I hadn’t realized until I started doing a little research for the show is that Fountainhead is described as a non-bank lender. And I thought, “Oh, that’s interesting. What does that really mean?” I feel like I should know, but I didn’t.
So first of all, I would love for you to share with my listeners a little bit about what the difference is between a non-bank and a bank lender.
The other things I hadn’t realized, and it’d be interesting to hear your perspective on this, too, is that almost 50% of the small business loans that are out there are through non bank lenders, which I thought was astounding. So it’s kind of a whole segment that I’m not sure people even necessarily even aware of.
So comment on both of those points a bit.
Chris Hurn 10:41
In simple terms, a non-bank lender, such as ourselves, is a non-depository institution. A bank takes in deposits and then sends them out in the form of loans.
We don’t do that. We have our own sources of capital. I have a hedge fund partner. I’ve got an asset manager partner, and I’ve got my own capital in the business. Hence, why say I’m an entrepreneur who finances other entrepreneurs.
So that’s really the key difference between us and a bank. There’s only 14 institutions like us in the country that have this special license from the federal government which enables us to do SBA loans.
It takes a long time to get approved for one of these. I’m pretty sure the SBA knows my conduct grade in fourth grade, and my underwear size in eighth grade. It took us about two and a half years to get this approval.
And it’s based on your experience in making SBA loans. It’s based on having the appropriate capitalization, on having a good reputation in the industry, things of that nature.
So we we’re quite proud of that approval, which we actually received three days before Christmas in 2018. And then the government promptly shut down until February of 2019 [due to Congress failing to fund federal agency operations].
So we didn’t announce until then that we had gotten into this particular SBA loan. Now, we had been doing a different SBA loan called the 504. But this new one that we got approval for is the marquee loan program of the SBA calls the 7(a).
And then from late February of 2018, we had basically operated that business unit for just over a year when the pandemic hit. At that point, we pivoted the entire business into helping administer Patient Protection Program loans, or the PPP.
You asked me what are the biggest differences between banks and non-bank lenders, and what we do differently? I would say the biggest difference for us is that we are hyper-focused on providing the services that we do.
We only have three loan products, and that’s it. I’m not ever trying to move somebody’s depository accounts or lines of credit or payroll processing, or insurance, or all the other things that the banks try to do to be vertically integrated.
We don’t do any of that. We just make SBA 7(a) and SBA 504 loans, and then we also have our own proprietary conventional products. And that’s it.
So we’re highly specialized, which is important in such a specialized economy that we live in.
I’d like to think we’ve done just about every type of deal. We actually totaled up our collective experience across the entire team, and we have almost 400 years of SBA lending experience on our team. We were pretty proud of that.
And what that means to potential borrowers is that we’ve seen it all. We know how to handle just about every scenario.
And the other big difference is we’re much quicker than banks. We make decisions typically in 24 to 48 hours to approve loans, whereas most banks don’t even call people back in 24 hours. So it’s a huge distinction of ours.
What we do fundamentally, Doris, is one of the biggest transactions — if not the biggest transaction — in the lives of our small business borrowers. So they need a high degree of support, a high level of touch in terms of experience. We quite literally have to hold people’s hands sometimes through the process so that they understand it.
And that takes a special type of person to do that. And we’d like to think we’re really sincere when we do this.
And these are things that are not normally common in the financial services industry, right? Specialization, sincerity, I call them the four S’s. And they’re just not done very often. And so I think it’s something that really helps us stand out a lot.
Doris Nagel
How do you find most of your customers? Is it just through web searches? Or do some of the SBA offices or SCORE mentors refer their clients to you?
Chris Hurn 14:58
Our clients come from a lot of different places. We’ve become experts at marketing online and offline over the years. Again, not something that’s very common from a bank — usually, they’re terrible with marketing.
A big piece of our business comes from referral sources. And once they’ve referred one transaction to us, they typically send business to us all the time. So we get a lot of repeat business, and we also get referrals from our existing customers.
I also do a lot of speaking, as you can imagine, along with several other members of my team. We do a fair amount of speaking at small business trade shows and conferences and things like that. And then I appear in a lot of media, too, whether it’s radio shows like yours, or podcasts or national media publications, etc.
So it’s kind of a big mix of all this. What makes us kind of unique is that we don’t have commercial loan officers. Most of our industry has them – they’re sometimes called a BDO, or Business Development Officer. Basically, they’re outside salespeople.
But we don’t do that. I did that maybe for the first nine months because everybody else did that in our industry. But I soon realized that it just didn’t make any sense to do things that way.
From that point forward, we pulled everything inhouse. We have inside sales, people who take inbound leads, and who actually make outbound calls to referral sources. And that’s how we operate.
We just think there are too many well-paid salespersons who just don’t do much, and oftentimes, you’re just throwing money down the drain.
I’d rather have people work more closely together and not be beholden to some prima donna salesperson. And it’s obviously worked out extremely well, for us.
That’s not something that would have happened 30-plus years ago in this industry. Change happens very slowly in the financial services industry, and the banking industry specially. Even to this day, community bankers feel like they have to go out, do the windshield, time, drive out to see a prospect, get the dog and pony show walking around, telling you all about the business and whatnot.
But mostly, it just wastes a lot of time. We do a lot of that, but we do it over the phone and by email And if you’re competent, you can easily demonstrate it over the phone and via email. And frankly, today’s business owners don’t have a lot of time to waste.
Today we live in an era where you can order stuff and get it the next day, if not later that day. People kind of expect the same about their financial services approvals when they when they apply for financing, they expect to get answers fairly quickly.
So that’s something that we’ve adapted toward, and I don’t think there’s many out there in the banking world that have adapted very effectively. So it’s a huge difference.
Doris Nagel
I would agree with you, Chris.
Talk about the two SBA loans, the 504 and the 7(a). I’m not sure everybody’s even aware of these programs, and what some of the advantages are to them.
Chris Hurn 18:19
The problem with both of them is that they suffer from terribly-named government programs.
Most people don’t have a clue, either. So I will explain it really simply, which is that 7(a) loans are the marquee program of the SBA. That program does about last year, last fiscal year, it did about $23 billion.
And then the other program, the 504, is the second largest, and it did about seven and a half billion. So in total, a little over 30 billion was loaned between these two programs.
But what’s really interesting is that the SBA is the most efficient government agency. They have an output of $30 billion in loans, managed by less than 1000 people at the agency which has a budget of less than a billion dollars.
And the economic impact of that 30 billion is substantial. I’ve often said SBA punches above their weight compared to all other federal agencies. And that’s the reason for it.
And frankly, we saw this last couple of years, during the pandemic. With PPP, there was almost $800 billion of those loans.
Doris Nagel
SBA certainly moved fast on that. There’s been a lot in the media about abuse of that program, and there was some. But if they had sat on things, it would’ve been a disaster. For a government agency, it was insane how fast they turned things around.
Chris Hurn 20:05
Well, I can tell you there was a lot of insane stuff over the past two years, Doris.
But yes, overall, it was remarkable. They really had a big spotlight on them. And for the most part, I would say they did a tremendous job. They worked harder than they ever expected to work in government service.
And as a result, we saved a lot of businesses, collectively between the SBA and their private sector vendors like us. We helped stabilize the economy and I really fear what might have occurred if that hadn’t been the case.
But back to the two loans programs. 7(a) is the most versatile of the SBA loan products, and frankly, of any business loan, for that matter.
7(a) loans can be used for business acquisitions. 7(a)s can be used for partner buyouts. Seven A’s can be used for working capital, business debt refinance, acquiring refinancing, renovating, or constructing owner occupied or owner operated commercial real estate. It can be used for equipment purchases or refinances. It can be used for franchising FF in the franchise fees, all these different things.
So it’s really, really versatile, just about anything that a business might need can probably be done with an SBA seven a loan.
The SBA 504 very simply is a bit more limited. It is only used in cases of acquiring, refinancing, renovating, or constructing owner-occupied owner operated commercial real estate, or heavy equipment. And that’s it, those are the only two things that an SBA 504 can be used for.
So anything working capital related, is going to push you in the direction of a seven a anything business acquisition related partner buyout related, it’s going to push you towards a seven, eight. So that’s those are really the two big distinctions.
Doris Nagel
Why would small businesses want an SBA loan as opposed to a conventional loan to value loan?
Chris Hurn 22:02
There’s really a few things. It’s the down payment, it’s the loan terms, and it’s the monthly payment.
A typical, ordinary conventional bank loan for commercial real estate, for instance, will require 20 to 30% as a down payment.
With an SBA loan, it’s almost always 10% as your down payment. So that makes a huge difference, particularly coming through the pandemic. People understand how precious their capital is these days, and they want to preserve it as much as they can.
So to me, that’s one of the big distinguishing features of why more and more business owners are seeking out SBA loans versus just ordinary conventional bank loans.
The other advantage is the repayment term. And typically, it’s the amortization. Oftentimes, if you go to your community bank, not only will they ask for 20 to 30% as your down payment, but you might only have 15 or 20 years of amortization to repay that loan.
And a lot of times they’ll put in place a much shorter term where there’ll be a balloon payment after, let’s say, three years or five years, maybe seven or 10 years, and then you’ll have principal that’s outstanding at that time, either to be paid off in cash or to refinance.
So that’s another big distinguishing feature of an SBA loan. Commercial real estate is always financed at a 25-year amortization. If it’s a 504 loan, the worst-case scenario is you might have a 10 year term. So that’s pretty lengthy. And oftentimes, if it’s for a 7(a), and if it’s for non-commercial real estate-related proceeds, it’s almost always a fully amortizing tenure term.
So that also makes a big difference compared to what an ordinary bank might offer, which is going to be much, much shorter.
And both of those things contribute to much lower monthly payments. Which means that the cash flow of the business can stay as high as possible, which is what you want. Particularly if you’re growing, or even if you’re heading into difficult economic times, you want to have as much free cash flow as possible.
So these are the ways that you can do it. Yeah, those are the big three.
And one more thing: loan covenants also are not usually a common feature of SBA loans. But they are very, very common for ordinary conventional bank loans. And that sounds like a technicality – like something nobody should really care about.
But the problem is when you go into slower economic times or even recessionary economic times, that’s oftentimes when the banking community tends to tighten up quite a bit. And one of the ways that they do that is by enforcing some of the loan covenants that are typically part of their loan agreements.
Maybe they don’t like your industry anymore. For instance, when your loan comes up for renewal, they say, “ You’ve got 60 days to pay us off — we want you out of the portfolio.” And it could be for no reason from that business owner, but they just happened to be in the same industry where maybe the bank took a loss with a different borrower.
So it’s little things like that. If a business gets in difficult economic times, oftentimes the ratios that the banks are watching tend to get pressured. Then you get what are called non-monetary defaults.
And again, this isn’t to scare anybody. But this oftentimes happens when we find ourselves in a recession or a slow growth timeframe where the banks are so risk averse that they want to kick perfectly decent businesses out of the portfolio who may be just going through a short-term problem.
And SBA, by comparison, doesn’t have these issues. If you make your SBA payment, you should be good to go.
Doris Nagel
You mentioned credit tightening and potential recession. Everything I see in the news is full of headlines about credit being tightened for small especially for small businesses and startups. Is that something you’re seeing? And does it affect your lending operations?
Chris Hurn 26:27
I am starting to see it. You’re correct, Doris, which is that there’s dozens and dozens of arguments for or against recession right now. Whether it’s the technical definition or various other metrics that people could look at. Frankly, that’s for academics to decide eventually.
Doris Nagel
But people in finance in various places are getting nervous, I think it’s safe to say?
Chris Hurn 26:51
For sure, that’s right.
And it’s a bit wacky, because we were not expecting the big jobs report that we got last Friday — it was double what anybody expected. We are near historical lows in terms of the unemployment rate.
Yet, we’re also near historical lows in terms of the consumer confidence rate. There’s just a lot of things that are sort of contradictory.
Doris Nagel
And yet that’s accompanied by very high inflation, which is interesting, right?
Chris Hurn 27:17
Exactly. And high inflation, which is that probably is weighing most heavily on the consumer’s mind, because they’re seeing it when they go to the gas pump, or when they go to the grocery store.
And they’re also seeing in stock market, which had been tanking until last month, and it seems to have come back a bit.
But there’s just all this conflicting information out there. But what nobody can really deny is the fact that the economy is slowing down. And that’s on purpose. That is what occurs when you have inflation burning like it has been.
It also occurs when the Federal Reserve tries to tame inflation and starts to hike interest rates, right? So the whole point is to slow this stuff down.
But you’ve also had booming employment. And so I suspect we’re going to be continuing to see rate hikes for the remainder of this year [2022].
I think inflation may have already peaked, but I don’t know. I don’t have any better of a crystal ball than anybody else.
But it does have an impact on small businesses. It impacts prices for inventory, for instance, which often results in the small business owner having to increase their prices in order to try to continue at same profit margin. It often means that they’ve got to pay more in terms of their wages to keep the employees they’ve got or to recruit new employees.
So all these things have a slowing effect on the economy. And it also has the effect of slowing down ordinary conventional business lending. Again, banks are notoriously risk averse. And in slower economic times, they’d rather go to the sidelines and wait things out.
Doris Nagel
I think also there’s still the long shadow of 2007 and 2008, where there was a sense that some of the lending out there was too aggressive. And so now there’s probably a recoil. Maybe the pendulum has swung back the other way a little bit.
Chris Hurn 29:28
There’s some of that, for sure. But in times like this, this is where SBA and its participating lenders really shine. It’s a bit counter-cyclical, I guess is my point. Because if businesses still need financing, in good economic times, or bad economic times.
But you’ve sort of whittled down the playing field quite a bit in poor economic times. There’s not as many options for the business owner.
So SBA becomes a pretty significant option for business owners in times like these, because most SBA lenders are continuing to lend even in even in tough economic times while their contemporaries on the conventional side typically aren’t so much.
Doris Nagel
Are you seeing an uptick in applications for SBA loans?
Chris Hurn 30:23
Yes. We have seen an uptick over the last about six weeks or so. Which is good for us. We want more business, we want to help more people. So for us, it’s, it’s terrific.
But I still don’t quite know what’s going to happen for the overall economy going forward. So we’ll see.
Doris Nagel
Does the SBA set the qualification for the loans, or is that something each individual lender does? And so how does that affect how you operate?
Chris Hurn 30:52
SBA does have minimum standards, but the dirty little secret in ordinary conventional banking is that inevitably, the bankers overlay their own internal credit policy and parameters on top of the SBA’s.
So you have situations where a borrower goes to their community bank, who maybe doesn’t do a lot of SBA loans, and they get turned down at the community bank. But then they go to a different SBA lender, and they get approved.
Because SBA is just this faceless bureaucracy, it’s really easy for bankers to throw SBA under the bus. And so the community bank says, “Well, we can’t do your loan, because SBA won’t let us.”
But then the business owner goes down the street to another SBA lender, and lo and behold, they can do the loan.
So it can be confusing. It creates a lot of myths and misperceptions out there about SBA lending. But in general, Doris, what an SBA applicant has to show is a debt service coverage ratio, which I’ll explain in a second, of 1.15 times historically, on a projected basis going forward.
What that means in simple terms is that the business has to throw off $1.15 for every dollar of annual debt payment that they have. That’s a simple, layman’s way to explain it. And this is a very common analysis done in business banking.
Now, back to tightening economic times. Most banks probably have a minimum debt service coverage ratio of at this point of 1.35 or 1.4 times coverage, maybe even for the last two years combined.
And so you’ll see business owners oftentimes will fall just shy of that. And that’s when they might be much more of a candidate for an SBA loan.
Remember I said that historically, 1.15 times coverage would be projected?
Doris Nagel
When you say, “projected,” what does that mean?
If you’ve been in business for 10 years, you get a little better idea. But even then, businesses have ups and downs and hiccups.
And I’ve listened to a lot of pitches from startup entrepreneurs. And 1.5 is just so minimal compared to what most of them will tell you that their business will earn. What does “projected” really mean?
Chris Hurn 33:41
Well, “projected” in the SBA world means the borrower’s got to have a business plan with pretty detailed assumptions. And we as the lender are going to go through those assumptions and make sure we believe them. And regardless, we’ll probably still discount them some.
So that’s where business lending, particularly small business lending, becomes a little bit of art and a little bit of science. It’s not all science. So it makes it a little bit different than residential lending, for instance, which they’ve made about as cookie cutter as it gets. But that’s not necessarily how SBA loans work.
Doris Nagel
What are some of the most common mistakes you see small businesses make either in applying for a loan, or in trying to pay off a loan that they’re maybe struggling with?
Chris Hurn 34:27
The most common mistake I see is, frankly, they’re just not very well organized. They don’t know where the documentation is that any lender is going to ask for. They might know where some of it is, but they don’t know where all of it is.
And that oftentimes delays not only the approval or the commitment letter, but even delays the closing, unfortunately. So that’s a very common thing.
I still occasionally see balance sheets that don’t balance that’s always kind of fun – I mean that facetiously.
Doris Nagel
Like checkbooks that don’t quite balance, right?
Chris Hurn 35:04
Exactly.
I also see business plans that sometimes have these just extraordinary growth rates. And we often scratch our heads. Unfortunately, projections are only as good as the people making them, we discount that a lot when we see it.
Doris Nagel
I think entrepreneurs sometimes confuse the projections for the lender with projections that they think they need to make for a pitch competition or something, right?
Chris Hurn 35:33
Right, or their hopes and dreams, you know, the unicorn dreams or something.
They have to be a little more reasonable and down to earth with projecting their profitability.
I’ve been giving business owners this advice for over two decades: the year prior to when you want to have a business “event” — and I’m putting air quotes around it, because it typically means either getting financing or selling the business — that’s the year you want to make sure you’re showing all the profits that your business makes. It’s not the year to screw around with stuff and try to hide profits just because you don’t like to pay Uncle Sam taxes.
Nobody likes to pay taxes. But if you want to have a business event, you want to be able to be as transparent and put your best foot forward that you can.
And yet I still see people play these games. And I tell them, “Yeah, that’s great. But the problem is, you don’t cash flow and paper, so [your event] is not going to work.”
So those are some of the mistakes I see.
Paying off the loan? I don’t know that I necessarily see mistakes paying off the loan, per se. Although, just because the business owner says they want to pay off the loan by a certain date, invariably, that date gets pushed. And so the payoff letter has to get updated again.
But it’s mostly in applying for the loan that I think a lot of mistakes that are made. And I think business owners have to listen to their lenders a little bit better.
We oftentimes will talk to our prospective borrowers about this is very early in the stage. We say, “This is what our best borrowers do. This is what our best customers do.”
And we go through with them and explain that we need them to be organized, we need them to start assembling certain documents. We give them a checklist ahead of time to get working on.
Just because they get us some information doesn’t mean it’s necessarily done. There will probably be some more homework to do in order to keep the deal on track, and to hopefully hit their target closing date. But it takes cooperation on both sides.
We joke about all the time that, as soon as the commitment letter is issued, somebody goes on a two or three-week vacation out of the country. We’re trying to get to the closing table to help your business. And you went and went on this this big trip, because I guess we lowered your anxiety about whether you would be approved or not.
But it’s not done until we until we cross the finish line, and they actually get the funds that they need that loan for.
Doris Nagel
You mentioned that you end up doing a lot of hand holding.
Talk about some of the kinds of issues that arise .
Chris Hurn 38:14
It’s all over the board.
Sometimes it’s ridiculously inflated business plan projections and assumptions. You know, it’s kind of a running joke we have around the office that, you know, when we get a personal financial statement, everybody thinks their business is worth at least a million dollars. Right? If not, you know, a multiple of that.
We know how to read income statements and balance sheets, and we know what business valuations go for.
You often scratch your head and go, “I don’t know how this person thinks the business is worth a million dollars. They had $200,000 last year in gross revenue and made $20,000 net profit.” But I see that a lot. So you’ve got to sort of coach them into being a little more reasonable.
We oftentimes will get people that are truly shocked by what’s on their credit report, because they haven’t been managing that correctly. Oftentimes, the credit bureaus get things incorrect or don’t remove things that should have been removed, and oftentimes making mistakes. So sometimes we do some hand holding in terms of trying to work them through that.
We’ve also had to do some handholding in terms of the SBA forms themselves. Often, business owners don’t understand some of the questions or some of the some of the documentation that’s necessary.
Sometimes they’re not as honest as they should be on various eligibility questions. We really hate it when we’ve spent a bunch of time on a transaction, only to find out later that the borrower had a recent bankruptcy or had a recent criminal conviction that they didn’t disclose — just little things like that.
We can work with things, to some extent, so long as we know what they are. But when people try to hold back, and we find it out later in the process, it’s very frustrating for us.
And sometimes we have to kill deals very late in the game, because somebody hasn’t disclosed this big judgment that they have against them and now have a big lien that we can’t take care of.
I think we’ve seen just about every single thing that can happen.
Doris Nagel
What advice would you give to small businesses in working with their lenders in general? What are the things they should think about doing in order to have an ongoing great relationship with their lender?
Chris Hurn 40:52
I think it starts with making sure their lender knows what they’re talking about.
You should do a little bit of due diligence on your lender. You never want to be someone’s guinea pig. And just because a bank or a credit union is allowed to make an SBA loan, it doesn’t mean they have made when recently. This is really a niche area of business finance, that she really needs to be doing this daily, to have some reasonable level of competence. So that would be the first thing I would say.
By the way, pre-pandemic, there were about 11,000 financial institutions who could make an SBA loan. But only about 1700 actually had made one in the preceding 12 months. So this is a really small world in this space.
Even during the pandemic — during PPP — only about 5500 of those 11,000 — so roughly half — actually made a PPP loan. But as I said, the vast majority of them are not going to do another SBA loan, for a variety of reasons.
So specialization is key. Borrowers need to ask: how frequently do you make SBA loans? Are you one of the top 100 most active SBA lenders in the country?
Are you a preferred lending partner of SBA? That also helps a lot because that’s a lender who’s actually been given designated underwriting authority. So that means they make their own credit decisions. And they have to live with those decisions, of course, but again, only about 10% of the SBA participating lenders actually are PLP lenders again.
You’ve got to be really careful. Even if your cousin works with the community bank and you want to try and give them business, it doesn’t necessarily mean that you’re going to be treated as well as you can be treated with somebody who specializes in this.
So to leave a final message for your listeners: when you’re looking at business lending, make sure you’re dealing with an appropriate lender for your request. If you want an SBA loan, deal with somebody who does SBA loans for a living.
Don’t deal with one of the big bank household names just because you’ve seen their commercial on TV. And don’t deal with a bank just because your cousin or your brother-in-law works there. Work with people who do this for a living,
Doris Nagel
Chris, how can people find out more about Fountainhead if they’re interested in getting a loan through you, or just generally more interested in in learning more?
Chris Hurn
They can visit our website: fountainheadcc.com.
We’re also on all the social media channels. People can follow us and read all of our posts and stuff on LinkedIn, Facebook, Instagram, Twitter, and YouTube.
Our YouTube channel this is pretty voluminous. We’ve got a few 100 videos, and a lot of them are how-to videos explanatory videos. So that would be a great place for them to visit.
Take a look at what we have out there. Our general inbox is info@Fountainheadcc.com if they want to reach out to us directly. Those are the best ways to get ahold of us.
Doris Nagel
Fantastic. Chris, thanks so much for joining me this week. It was really a delight having you.
And it was really helpful to learn more about SBA loans. And I hope that will benefit some of my listeners. So thanks again for your time and for appearing on the show.
Chris Hurn
My pleasure, Doris. Thank you for having me.
Doris Nagel
In the few minutes we have left I want to talk about a topic that I’ve been thinking about a lot lately and have heard other entrepreneurs talk about: focus.
You have to think like a startup in order to be a successful startup. So how do you think like a startup? What are the mental markers for success? To win the game of building a startup, you have to focus on the most important things. But what areas, though, you ask?
Well, through my own experience, as well as successes and failures of my own, and friends, and a tip of the hat to an article by Neil Patel, co-founder of a company called The Crazy Egg that appeared in Inc Magazine, along with Michael Gerber, who’s the author of the seminal business book “The EMyth Revisited”.
I offer four areas where I think entrepreneurs need to really focus their attention or not focus their attention.
The first one is, and if you’ve read the E Myth, you know you need to focus on working ON the business, not IN the business.
Too many of us entrepreneurs and small businesspeople allow ourselves to get caught up in the day to day busy work of the business. A recent survey showed that on average, we spend 40% of our day on that busy work. It’s the stuff that Steven Covey calls urgent but not important. And it takes time away from key strategic activities that are needed to keep our business focused on overall direction and strategic moves. So what are some of these busy work things? I think most of us have a pretty good idea, but it’s administrative tasks, things like payroll, accounting, putting together slide decks, paperwork of all different kinds.
Wayne rivers nails it in his article in the Wall Street Journal called four ways entrepreneurs waste their time. Here’s what he wrote:
“If entrepreneurs devoted a few more hours each week to business development, long term business planning, communicating their vision and values with their teams and their stakeholders, rigorously evaluating their talent and getting super competent new hires onboard and import proven quality, they’d see the dividends and the impact immediately.”
So what are those kinds of things that we ought to be spending more time on, that are truly important, but not urgent?
Things like planning, prep time, clarifying our values, researching visioning, listening to customers, taking time for ourselves, either exercising or other forms of recreation, hobbies, journaling, and relationship building. So why do we do so many of these busy work things and conveniently avoid the more strategic activities? I think it’s a few reasons, I’d be interested in your thoughts. The urgent busy work gives us a sense of immediate accomplishment. They’re short, easy tasks to check off our list, and other people around us obviously, need us it must be important. The strategic stuff, though, is hard. There’s no Intuit and it doesn’t really feel important. Nobody’s on our case to make sure this piece gets done. The urgent stuff, at least for some of us also feeds I think our ego at times, it validates we’re needed and wanted, the business can’t run without us. And yet, we need that business to largely run at least day to day without us in order to grow. Yeah, you heard me right, the business needs to be able to run without us in order to grow. And I think if you think about it that way, it may change how you spend some of your time. Anyway, I would recommend mapping out how you spend your days, journal it then really push yourself to find ways to off source AF, offload, compress those urgent but not important things. And then the hard part apply a lot of discipline to use the time you freed up to focus on that strategic stuff. The second place that I think needs more focus is
focus on customers and selling your products and or services, and not on pitching for funding.
Alexander MIT Kyle who’s the CEO of the Funders Club says he sees entrepreneurs doing all this time. Many first-time entrepreneurs obsess about fundraising and it let it take priority over what actually matters: building products and talking to customers.
There is something more important than fundraising: it’s selling your product! Investors are going to want to see someone who’s good at selling a product, not selling a business idea. Put the horse first not the cart.
Many entrepreneurs have been burned by chasing money to the detriment of their business. Don’t let this process consume you. Your business is your customers, not your investors.
Yes, yes, yes, you might say, but I need money. Otherwise, I’ll have to stop this business or go get him a McJob. Well allocate some time to fundraising, but never, never let it get in the way of building and selling your products.
- The third way to focus is doing things that empower you, not discourage you.
When you feel empowered, you are more likely to be successful. A study from the Quarterly Journal of Economics explained that the confidence in one’s abilities generally enhances motivation. So in order to experience that confidence, you have to do the stuff you’re good at. So find ways to outsource, offload or stop doing the things that you hate doing that demotivate you that suck your energy and discourage you. And the final area of focus is listen to customers, not just critics. So to grow your business, you need to listen to the right stuff. Most people will tell you advisors at least will say listen to your customers. But not many advisors will tell you to plug your ears when the critics come to provide their input. Listening to everybody’s opinions or advice can be absolutely debilitating. And you’ll hear some of my past guests talk about just exactly that. The quickest way to do something stupid for your business is to take the advice of someone who doesn’t know anything about your business. There does exist a group of people who understand your business in the most important way they know a side of your business, you will never even fully understand yourself. And this group of people is your customers. So listen to them and ignore most of the rest of the advice you get.
So in summary, there are millions of things to do in a startup or small business that’s trying to get off the ground. But most of those tasks are waste of time. The true essential folk things to focus on are building your business, not busy work. Focus on selling your product, not fundraising, focus on doing things that empower you, not discourage you or demotivate you, and focus on listening to your customers, not just your critics.
Before I leave you, I want to do a little plug to check out my new dedicated YouTube channel called The Savvy Entrepreneur Radio Show. There you can download recent past episodes of the show, you can listen to past shows and like them and even comment on them. Follow my channel so you’ll be sure to catch future shows as they’re posted. I promise you will find lots of helpful free tips from my many amazing guests as well as be inspired by their journeys, which they share from the heart.
Plus, you’ll be supporting the work of the savvy entrepreneur, and the work of lots of your fellow entrepreneurs and all the great things that they are doing. Maybe one of those days you will be a featured guest on the show!
My doors always open for comments, questions and suggestions where if you just want to shoot the breeze, email me at dnagel@thesavvyentrepreneur.org. You’ll always get a response back from me.
Be sure to join me again next week. But until then, I’m Doris Nagel, wishing you happy entrepreneuring!
Leave a Reply