Jason Watson, CPA, and Quentin Leighty, President of First National Bank in Monument, Colorado, continue their discussion about how to qualify for small business loans.
In segment #2 of Business Banking, Jason Watson, CPA, and Quentin Leighty, President of First National Bank in Monument, Colorado, continue their discussion about how to qualify for small business loans. Topics in this episode cover basic business lending options including collateralization, business acquisition lending, IRA loans, and SBA loans. Special thanks to Axe and the Oak Distillery for hosting our Bourbon and Business podcast series!!
This material is based on content from our website and our book, Taxpayer’s Comprehensive Guide to LLCs and S Corps.
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WCG Inc. (formerly Watson CPA Group)
2393 Flying Horse Club Drive
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00;00;14;04 [Jason]: All right, well, welcome, my name is Jason Watson,
Managing Partner of WCG Incorporated. We are formerly Watson
CPA Group. I'm here with Quentin Leighty, First National Bank of
Monument. We're hosting our Business, our Bourbon and
Business. Sorry, I'm gonna mess that up. Bourbon and Business
series of, for our podcast. We're at the Axe and the Oak, here in
Colorado Springs, and they're gracious enough to host us. We, in
our previous segment, we discussed your role in the bank and also
00;00;49;24 community banking. Can you just kind of summarize that again for
us real quick?
00;00;53;10 [Quentin]: Sure, yeah, I'm the CFO of the bank, President of the
Monument and Flying Horse offices. I, I do manage a loan portfolio
and we're a community bank that's been around 118 years and
going strong and, and really focus on small business in the state of
Colorado.
00;01;09;29 [Jason]: Yeah, that's awesome. So we, we talked, you know, last
time about, the Federal Reserve and how your bank's older than
the Federal Reserve. So, I just watched Hamilton for the first time
ever and I'm learning how much of our banking and in our financial
systems came from Alexander Hamilton. So it's kinda neat.
00;01;27;25 [Quentin]: Yeah, it's pretty cool. We actually have, this is a little
known fact to you, that we actually printed our own notes before the
Federal Reserve took over printing all the Federal currency.
00;01;36;12 [Jason]: Money, really?
00;01;37;10 [Quentin]: So, we have in, in our main office we've got notes that
were printed by the First National Bank.
00;01;42;25 [Jason]: Ahh, man.
00;01;43;04 [Quentin]: Back in the early 1900s.
00;01;44;16 [Jason]: Thats cool.
00;01;44;27 [Quentin]: Pretty cool.
00;01;45;12 [Jason]: Yeah, I bet that's valuable like from a
00;01;47;12 [Quentin]: They are they are yeah.
00;01;48;29 [Jason]: Yeah, well that's great. Well, hey, thank you for joining us
Quentin. And we're talking about community banking, how it relates
to business owners. This is the Bourbon and Business series, so
we might as well talk about business banking, right? Tell us a little
bit about how somebody qualifies for a loan.
00;02;09;04 [Quentin]: Sure.
00;02;10;00 [Jason]: You know, that's probably one of those general questions
you can talk on for, you know, forever about it, but just tell us some
of the basics.
00;02;15;24 [Quentin]: Yeah, we look at, financial statements and so those,
hopefully they're working with the CPA firm to put those together or
they have someone on staff that really understands their business
and what they do. But, so we're looking for net worth within the
business and the individuals that are backing the business that are,
that are the owners. And then tax returns are a big piece of it too.
We use that for the cash flow analysis, a lot of times that I think that
makes small business owners nervous. But what we're doing is
we're going in and adding back cash flow. So things that you can
expense, that the IRS allows, we'll add those back
00;02;49;00 in certain scenarios like you know, depreciation
00;02;51;25 [Jason]: Yep
00;02;53;11 [Quentin]: amortization, so that we can strengthen their cash flow,
to where we get a true picture of how much cash are they
generating and then match them up with the right debt product
that's a good fit for what their capacity is.
00;03;02;03 [Jason]: Yep, and when we do business valuations, we look at the
same thing. Seller discretionary cash flow. We look at owner
compensation, we add that back end as well
00;03;10;19 [Quentin]: Yep
00;03;12;08 [Jason]: depreciation, amortization, interest expense, all that. How
much cash is this business generating?
00;03;16;21 [Quentin]: Right
00;03;17;08 [Jason]: Ultimately is what we're looking at, not net income,
although we might begin from there, but we're like you said, piling
on a lot of those deductions and expenses that the IRS allows. So,
00;03;25;23 [Quentin]: That's right.
00;03;26;01 [Jason]: What, what happens, and I'm sure it's not the first time
when a tax return doesn't match up with the financials, because the
financials are built for maximizing value,
00;03;35;17 [Quentin]: Yep
00;03;35;21 [Jason]: on some levels and tax returns are built to minimize tax.
00;03;39;17 [Quentin]: We do try to understand where the differences that are
coming from. A lot of times though, the tax return is cash based and
if they've got an accrual method on their financials, there's going to
be a pretty big
00;03;50;27 [Jason]: Yep, that's easy
00;03;51;17 [Quentin]: discrepancy there. I've seen that a lot in companies that
have large accounts receivable, that have a spin that's maybe a
little bit longer and, and so we, we understand how that works and
we can back into, okay, yeah, I see, I see how these would jive.
There are times when we looked and we say, "something's wrong
here."
00;04;08;24 [Jason]: Right, right.
00;04;09;18 [Quentin]: It's sure nice to have a, a CPA firm that knows what
they're doing. They just say, well yeah, here's, here's the deal and
here's why that made sense to, to report it that way, or, or Hey, we
weren't working with them back then, but we
00;04;21;09 [Jason]: Right.
00;04;21;14 [Quentin]: now, we're going to fix that issue. So, but yeah, it is
important and the, the other piece that we looked at is the
projections, right? I mean you probably help put those
00;04;29;23 [Jason]: Yep
00;04;30;22 [Quentin]: together but, a lot of times they're coming to us because
they're wanting to expand the business or they're wanting to get
into a new business line that they haven't done and so we need to
be willing to and look at the proformas and see, do those make
sense? Does it seem like they have the capacity to do what it is
they're wanting to do here?
00;04;44;07 [Jason]: Yup. No, that's awesome, I when, when I discuss, and I'm
not a, a lender or a banker, but when I discuss lending to people,
from my perspective, I see it as a loan having two major
components. It's the collateralization and then the debt service.
00;05;01;14 [Quentin]: Yep.
00;05;01;26 [Jason]: And the collateralization is typically either something that
you can touch, a physical asset or something like that or the
promise to pay or maybe some intangible asset like future cash
flow or something like that. But those are two of the components.
Correct? For collateralization, generally?
00;05;16;23 [Quentin]: Absolutely.
00;05;16;28 [Jason]: is some asset and your promise to pay
00;05;19;03 [Quentin]: Thats's right.
00;05;19;13 [Jason]: as an owner?
00;05;19;26 [Quentin]: That's right.
00;05;21;06 [Jason]: Okay.
00;05;21;17 [Quentin]: Yep.
00;05;22;17 [Jason]: And then debt service is also then in there as well as the
other, component. And that's where you're looking at the cash flow
to make sure they can serve the debt.
00;05;30;27 [Quentin]: That's right. And then I guess the final piece to that is the
net worth. So what have you done over your career, over your
lifetime?
00;05;36;21 [Quentin]: Have you socked it away or has it all fallen right back out
the door? Are we early in your stage and you're on a growth pattern
or are you, kind of at a pattern where you want to continue on at
where you're at and maintain that and, and what's happening to
your business net worth? How much is being retained at that level,
but also at the personal level, how much is being retained and how
do you manage your personal affairs. So
00;05;59;07 [Jason]: Right.
00;05;59;17 [Quentin]: we look at that piece on top of the two that you
suggested. And, and to us that's a big piece cause it tells the
longer, the longer term story.
00;06;08;07 [Jason]: Right.
00;06;08;23 [Quentin]: And you can't have one without the other. We have to
know at all. But those are, those are definitely the three areas we
focus.
00;06;13;23 [Jason]: So if I take a big distribution to go buy a brand new razor,
are you okay with that though? [Both Laugh]
00;06;20;05 [Quentin]: It depends.
00;06;20;10 [Jason]: If it adds to my note. [Both Laugh] I know I'm buying a
depreciate asset.
00;06;23;20 [Quentin]: I liked it better when it goes into a CD and my bank, but
you know.
00;06;26;21 [Jason]: [Laughter] Well, we can't have it all, right? All right, well
thanks. So that's kind of the general gist of the qualifications
financially. Tell us a little bit about some of the basic business
lending options. I mean, there's a ton of things that you can
leverage, going back to the components, right? Asset, promise to
pay, and then your debt service. Talk about some of those asset
components then.
00;06;47;09 [Quentin]: Sure. Yeah, I mean, in this market, in this area, a lot of
it's real estate
00;06;50;18 [Jason]: Okay.
00;06;51;04 [Quentin]: so whether it's a owner occupied building, so you're
wanting to build a building for your CPA firm and operate out of that
versus paying rent to somebody. Or could be just an investment
property like the one we're in right now. I mean multiple tenants and
redoing a use of a building that you'd hate to see go down. We love
doing those kinds of projects.
00;07;09;07 [Jason]: Okay.
00;07;09;12 [Quentin]: So the real estate gets pledged, the cash flow off the real
estate gets pledged through assignment or rents. There's different
ways to, to secure those collateral positions. But we do, we do
large equipment, we do new, commercial construction, residential
construction, and those are very hands on. Those projects, you
know, we're doing draws and we're seeing it go up and we're
inspecting it and it's very, hands on time with the borrower where
we get to know each other pretty well. I think you're smiling for a
reason.
00;07;39;00 [Jason]: Well, it just, I'm just laughing a little bit because you know,
you look at construction loans and you're really kind of floating
some money out there on a dream, right?
00;07;48;22 [Quentin]: Yeah.
00;07;48;28 [Jason]: You know, cause you had a hole in the ground and got
foundation, you got some sticks and it's still worth zero.
00;07;54;04 [Quentin]: Yeah.
00;07;54;12 [Jason]: No One's going to buy that. Some would even say I
wouldn't, I give you, you know, less than what you paid for because
I don't want those kinds of
00;08;03;06 [Quentin]: You customized it.
00;08;03;21 [Jason]: Yeah, exactly, you already wrecked what I could've done.
00;08;05;09 [Quentin]: Right.
00;08;05;20 [Jason]: You know. So, it's just interesting cause yeah, there is
some hope that, I shouldn't say hope it's finding out the right word,
but there is some, um, uh, I'm kind of at a loss for words actually,
but.
00;08;18;19 [Quentin]: Well, it's, it's a, there's a lot of unknown going into it
because you're looking at the surface of this thing and you've seen
the drawings. But the second the shovel goes in, everything
changes, you know.
00;08;26;29 [Jason]: Yeah.
00;08;27;03 [Quentin]: Something pops up.
00;08;27;28 [Jason]: Yeah.
00;08;28;11 [Quentin]: Oh Hey, we didn't know that there was this issue. And so
you would, going back to knowing your customer and having that
relationship base, we gotta be ready to roll with the punches, right?
We can't go into a construction loan and assume that there will be
no issues or nothing will pop up. And so we just need to make sure
we're dealing with people that are passionate about what they do
and want to continue on with this. And a builder who is willing to
00;08;51;18 [Jason]: Yeah.
00;08;51;28 [Quentin]: take it to the finish line and explain things and
00;08;54;25 [Jason]: Yeah.
00;08;55;04 [Quentin]: be there along for the ride. So yeah, it's, but it's one of
the most fun,
00;08;58;03 [Jason]: It is.
00;08;59;21 [Quentin]: of, of lending products too because you do get to see
something go from nothing to this awesome project that's being
used for business and for good for
00;09;09;00 [Jason]: Yeah.
00;09;09;19 [Quentin]: for the community. So I love it.
00;09;10;11 [Jason]: No, so, and you're right. And, and full disclosure, Quentin
Leighty, First National Bank of Monument has lent us the money to
build our office building, which should be done in three weeks,
which in contracting terms means three months.
00;09;25;17 [Jason]: [Both laugh] I'm not sure what's worse, contractors lying to
us or us saying, we believe you. And you're what, 4 months behind
us, right? So we're, we're kind of like in the same
00;09;35;28 [Quentin]: We better not be 4 months. Depends on which terms.
00;09;40;07 [Jason]: Right, right, exactly. Oh you're, you're 2 months, right?
00;09;43;12 [Quentin]: Yeah, that's right.
00;09;43;20 [Jason]: According to the contractor.
00;09;44;27 [Quentin]: Yeah.
00;09;45;16 [Jason]: So, so you talked about some real estate and that's, I
mean, how many of your banking loans for businesses are
leveraging real estate? You think?
00;09;54;26 [Quentin]: Probably at least 70%.
00;09;55;29 [Jason]: Okay.
00;09;56;02 [Quentin]: I mean it's significant.
00;09;57;06 [Jason]: A big chunk.
00;09;57;11 [Quentin]: It's a big, it's a big portion.
00;09;59;12 [Jason]: Okay.
00;09;59;17 [Quentin]: Of the business side and it's driven by the market that
we're in. I mean, we have real estate that's growing in this area.
There's people coming in, we need more real estate. And those are
markets that every project is just very different, with the tenant mix
that's coming in or you know, what the community's going to use it
for. And so those, those don't lend themselves well to a large
banking relationship, and they don't want to deal with a small
project, small project, you know?
00;10;23;14 [Jason]: Yeah, right, yeah.
00;10;23;19 [Quentin]: So that's where we really
00;10;24;12 [Jason]: A million dollar
00;10;25;21 [Quentin]: Yeah.
00;10;26;12 [Jason]: Building to, to maybe guys like you and I is like, "That's a
big project."
00;10;29;13 [Quentin]: Right.
00;10;29;17 [Jason]: To somebody else, might be like, "Eh, we'll pass."
00;10;31;23 [Quentin]: Exactly.
00;10;32;10 [Jason]: Not enough zeros behind that.
00;10;33;20 [Quentin]: That's right.
00;10;34;19 [Jason]: So, so how does somebody then borrow from banking to,
you purchase. Let's say I'm a brand new CPA, I don't have any real
estate. How do I go out there and buy a small CPA practice, without
having to real estate?
00;10;51;06 [Quentin]: Sure. So, we have those product lines, too. And those,
those can be carved in different ways, but the reality is you're
buying someone else's book of business and there's going to be
some portion of that that's not going to stay around, right?
00;11;03;22 [Jason]: Right.
00;11;04;14 [Quentin]: And so we're going to look at projections with you and
we're going to make sure you've got the staffing and, and people in
place to handle the new growth that you anticipate taking on. But
we're really looking at a future cash flow stream there and, and how
confident are you and us that you can achieve that, and then also
what's plan B? So if, if it's, if we hit some major bumps in the road,
is there another source of repayment? Like your existing practice,
that's maybe it's doing well enough that even if this isn't as
successful as you thought, it's going to continue to push
00;11;36;18 you through and get you where you need to be. Because, you
know, in the banking space and in financing in general, there's a
spectrum of risk that you can go down. A bank's going to be the
least "risk" taking entity you can work with.
00;11;48;13 [Jason]: Sure.
00;11;48;24 [Quentin]: Because we have FDIC insurance, we have depositors
to protect, and then you've got your hard money guys over here
who just want the property anyway.
00;11;55;13 [Jason]: Right, right.
00;11;55;16 [Quentin]: They don't care
00;11;55;29 [Jason]: [Laughter]
00;11;56;02 [Quentin]: You know, and, but they're going to charge a big rate, but
they'll do it. And so we're, we're talking about the spectrum that's
the low risk, you've been doing business for awhile, you're looking
to expand.
00;12;06;11 [Quentin]: That's when we get involved and we, we can help
00;12;08;24 [Jason]: Okay.
00;12;09;14 [Quentin]: through looking at projections, and looking at what you've
been doing, make sure that we feel confident and we're, you know,
that we're willing to take a risk on you. We want to know that our
business owner is really passionate about what they do and they
want to continue to push forward in this, and that they're really
competent.
00;12;22;02 [Jason]: Yeah.
00;12;22;08 [Quentin]: Which is kind of important. You know, and character,
community banks look at character. So, you'll never see in a write
up of a huge project while the character of this owner is great
because a lot of times they're out of the picture, anyway.
00;12;32;23 [Jason]: Right.
00;12;33;10 [Quentin]: And we look at, well, here's what they've done. And you
know, we saw them through a tough time and they came out,
they've worked through it, and here's where they're at. And so we
consider all those factors when we're making those types of credit
decisions.
00;12;44;06 [Jason]: Okay. That's great. When Tina and I expanded our
business, we were in our basement. We had like three people
working for us. I came home one day, I saw a bunch of cars in our
driveway and I'm like, "We need to get up out of the basement.". So
we went and bought two books of business. And I would say the
one thing that we messed up on is that we are under capitalized.
00;13;07;00 [Quentin]: Sure.
00;13;07;19 [Jason]: Because now we had extra labor, we had all this extra
stuff, we had rent now cause we wanted to get out of the basement.
00;13;13;28 [Quentin]: Yep.
00;13;14;06 [Jason]: All these extra expenses and I, we didn't have the working
capital that we needed. And that was kind of scary, honestly.
00;13;20;29 [Quentin]: Yeah.
00;13;21;03 [Jason]: You know, so I'm assuming guys like you are looking at
that like, "Hey, what's, what's the 90 day cash burn? What's your six
month cash burn?" Especially with a lumpy system like taxes,
where you don't get all your revenue
00;13;33;08 [Quentin]: Right.
00;13;33;20 [Jason]: Sometimes.
00;13;34;17 [Quentin]: Seasonal cash flows.
00;13;35;01 [Jason]: Yeah.
00;13;35;11 [Quentin]: And we do, we look at that and we, you know, at the end
of the day, we're going in it with you. We're partners on this deal,
right?
00;13;41;29 [Jason]: [Laughter]
00;13;42;03 [Quentin]: So, um, we wanted to succeed
00;13;44;03 [Jason]: Win, lose, or draw, right?
00;13;44;08 [Quentin]: Want you to succeed. Those are higher risks from a, you
know, from a loss perspective for a bank. And so, we do want to
make sure you have a lot of capital going in, and we want to make
sure that we have a confidence level that, you know, if we get a
little tight on capital, there's another avenue to go to help you
continue on.
00;13;59;26 [Jason]: Right.
00;14;00;00 [Quentin]: To get through that, that kind of tough period when you
start something like that because there's always things, what do
we, what do we not know that we don't know? You know?
00;14;08;17 [Jason]: Right, right.
00;14;09;12 [Quentin]: It's that piece, and so, we've done this for a hundred
years plus and we still have unique deals and so we always just try
to build in some cushion to be able to handle whatever gets thrown
our way.
00;14;19;14 [Jason]: Well that's kind of fun that you said unique cause I, I do, I
guess value that, appreciate that about business banking,
community banking.
00;14;27;12 [Jason]: Like you, is that not every deal is the same, you know?
Every deal has got uniqueness to it. It needs some, some extra
thought and some extra, you know, care, I guess? In a lot of that
stuff. What, how does somebody go about getting a line? You're
thinking of like lumpy, bumpy revenue
00;14;45;23 [Quentin]: Sure.
00;14;45;28 [Jason]: Line of credit, you know, how's that work then?
00;14;48;02 [Quentin]: Yeah. They'll meet with one of our loan officers or myself
and, and bring in the financial statement, the tax returns.
00;14;55;01 [Jason]: Should they match? [Laughter]
00;14;56;18 [Quentin]: [Laughter] They don't have to match. We're just going to
reconcile and see where the differences are. And then tell us what
the plan is. I mean, what, what's causing the tightness in cash flow?
Or what is it that you project that's going to trigger this need for this
cash in flow. And a lot of times we'll take, inventory or receivables
as collateral, or even equipment.
00;15;15;21 [Jason]: Okay.
00;15;16;08 [Quentin]: So there's a lot of companies in the area that have a lot
of equipment that maybe they own it free and clear and that's, that's
not a bad strategy, but then they get some tight cash flow through
some growth or something and we can leverage those things.
00;15;28;05 [Jason]: Okay.
00;15;28;22 [Quentin]: We actually kind of like that big equipment, we get to go
do inspections and check them out and
00;15;32;29 [Jason]: [Laughter] Yes.
00;15;33;22 [Quentin]: See how they're taken care of. And so there's a, there's a
mult, multiple ways that we can take the collateral as our plan B to
help get that capital infusion so that they can, they can make it to
the next step.
00;15;45;10 [Jason]: Okay. Yeah, that's great. I, I lost my train of thought there
on the, when you talk about the big, you know, the big trucks and
equipment and all that.
00;15;54;06 [Quentin]: [Laughter]
00;15;54;10 [Jason]: I'll, I'll have to come back. Oh, with, lost my train of
thought. Talk to us a little bit about your, your biz AQ, your business
acquisition, lending. We talked about that already a little bit.
00;16;05;10 [Quentin]: Sure.
00;16;05;20 [Jason]: But, now you're looking at two financials, two tax returns,
all that stuff. Do, do you just look at the math? Do you look at
culture fits between the acquisition?
00;16;16;03 [Quentin]: So that's where we spend a lot of time in our discussion,
but it's hard cause you can't analytically show that? But it's so real
and it can make the, all the difference in the world. The numbers
can look great but if the cultures don't line up. And we've even seen
that on our side when as a, as an institution over years we've,
we've bought a bank, we've bought a, a "branch" location before,
and, and we've passed on a lot of them over the time because of
the cultural piece because it is such a big portion. So the numbers
have to work. But then that cultural thing is really a discussion with
our business owner
00;16;47;22 that we know, because we have a good relationship with, and we
talk about kind of the hard things, like are you sure this makes
sense? And, and then if we get the confidence, and they have the
confidence, after those tough discussions, then we check that box
and say, "Okay, it sounds like these are going to be a mix."
00;17;03;01 [Jason]: I say that because I made that error. I'll be the first to
admit. When Tina and I went out to acquire 2 books of business, we
had one from a younger guy, he was probably late thirties, early
forties, and one was retiring in his sixties. And you, in a, what we've
discovered, at least in those examples with a personal service
business, is that you're buying that person's peer group.
00;17;28;18 [Quentin]: Yeah.
00;17;28;25 [Jason]: So the 37, 42 year old, all the clients who were younger,
they were hipper, they were used to technology, they were used to
higher fees, as well.
00;17;37;20 [Quentin]: Yeah.
00;17;37;29 [Jason]: And then the older one, the exact opposite. And it was a
mismatch of culture and, and it kind of hurt, honestly, because we
lost a lot of the business that was coming, or that was supposed to
come with us, didn't come with us, and all that. So I mean, it's, it's a
big deal. And you can't, like you said, you can't reconcile that on a
balance sheet. You can't reconcile that with financial statements.
It's just talking to people doing interviews. Is this the right thing for
us? So.
00;18;04;03 [Quentin]: Right.
00;18;05;05 [Jason]: Tell us about, oh, what, this is what I did want to say. We
see it from a CPA perspective when a business owner goes out
there and gets a loan against AR. Or they go out there and get like
a payday loan. On some invoices, you know, sort of like AR, but not
officially based on AR. And then they take all that cash out of the
business for themselves to live on.
00;18;29;20 [Quentin]: Yeah.
00;18;29;25 [Jason]: Because they got to pay bills and eat and all those things.
It actually can become a capital gain. If you take a distribution in
excess of your shareholders, and this is the S Corp world.
00;18;39;22 [Quentin]: Yeah.
00;18;39;25 [Jason]: If you take a distribution in excess of your shareholder
basis, it becomes a capital gain and you can't add on debt basis
unless you, the shareholder, are lending money to the S Corp. So,
the bank lends money to the S Corp, the S Corp owner says, "Hey,
it's Christmas."
00;18;58;05 [Quentin]: Yeah.
00;18;58;14 [Jason]: "Let's go spend it." And then all of a sudden they have a
taxable gain. So that's kind of an interesting side shoot when that
influx of cash comes in. Put it back into your business, right?
[Laughter]
00;19;08;10 [Quentin]: [Laughter] Right. Good points.
00;19;10;13 [Jason]: So, how about IRA loans? You said, you know, that's on
your list as well. How does that work?
00;19;14;05 [Quentin]: Yeah, so those are unique. There, the IRS allows for
borrowing at the IRA level, but there's some uniqueness to it in that
it has to be non-recourse lending.
00;19;26;04 [Jason]: Okay.
00;19;26;10 [Quentin]: Which we don't do non-recourse lending, except for in
the IRA space.
00;19;30;07 [Jason]: Okay.
00;19;31;00 [Quentin]: And, and so the way we mitigate that risk is a lower loan
to value. So, a 65% maximum loan to value, you put in 35% from
the IRA, so it's developed a lot of cash and you want to leverage
that and deploy it. We have products that allow for that and we're
still going to underwrite the collateral. We're still going to want to
make sure that it's a good, good investment for your IRA to have.
00;19;53;13 [Quentin]: It needs to cash flow a little stronger than something
that's owner occupied.
00;19;57;17 [Jason]: Yep.
00;19;58;03 [Quentin]: But, it allows you to go further with your IRA, if you're
comfortable. Not everybody's comfortable leveraging their IRA, but
it's a strategy we're seeing used more and more
00;20;06;26 [Jason]: Yep.
00;20;07;00 [Quentin]: For planning.
00;20;07;17 [Jason]: We see it all time, too.
00;20;08;20 [Quentin]: Do you?
00;20;09;09 [Jason]: Yeah.
00;20;09;23 [Quentin]: And, and especially in, we've been seeing it more heavily
in the bigger Metro areas.
00;20;16;07 [Jason]: Okay.
00;20;16;11 [Quentin]: We're not seeing it as much in the agricultural markets as
we are in, like Denver, Colorado Springs, for instance.
00;20;22;01 [Jason]: Yeah. I mean, sometimes everyone's net worth is all tied
up in retirement money.
00;20;25;18 [Quentin]: Yeah.
00;20;25;29 [Jason]: And you need to leverage it for that investment that comes
long. We see a lot of self directed IRAs being used to buy a rental,
and like you said, to leverage it, you know.
00;20;34;21 [Quentin]: Well, and there are those of us that like tangible assets,
you know. We want to, instead of our IRA being invested fully in the
stock market or the bond market, to have something that you can
go tangibly touch and feel
00;20;46;16 [Jason]: Sure.
00;20;46;19 [Quentin]: And see who's benefiting from that. That's kind of cool.
00;20;49;17 [Jason]: Yeah.
00;20;49;20 [Quentin]: And so there's, there's just more of an appetite for that.
00;20;51;26 [Jason]: Yeah. No, I agree 100%. I mean, you spread your risk. I
mean, people talk about diversifying your portfolio. Sure. But you
also want to diversify your income sources.
00;20;59;29 [Quentin]: Exactly.
00;21;00;11 [Jason]: You know, and if you have that rental or a gaggle of
rentals, you have that IRA, you have other things coming in, it
helps.
00;21;05;14 [Jason]: So.
00;21;05;20 [Quentin]: Yeah.
00;21;06;03 [Jason]: Let's, we got a few minutes here, but let's kind of shift
gears a little bit to SBA lending.
00;21;13;05 [Quentin]: Sure.
00;21;14;09 [Jason]: I've done an SBA loan. I, I think they're a good fit for
certain business owners in certain situations. But tell me, you tell
them, you tell, I guess our viewers and listeners, a little bit more
about SBA lending.
00;21;26;12 [Quentin]: Yeah, sure. And, SBA loans, like you said, can be the
perfect fit for certain scenarios. And, we are such a, we're, we're a
small business and we are not fans of bureaucracy and so
00;21;39;24 [Jason]: [Laughter]
00;21;39;29 [Quentin]: And so we haven't enjoyed our SBA loans that we've
done in the past. We're answering to the government, we're going
through their hoops, and we're filling out their forms. And then when
you actually need them for anything, it gets challenging. And so our,
our take has been, all right, we're going to let others play in that
space. Really, that's not where we want to operate. We recognize
that there's some great products and they can be the right fit for the
right scenario, but that's not the space where we liked to play.
00;22;04;03 [Jason]: Yeah.
00;22;05;04 [Quentin]: So
00;22;05;09 [Jason]: It's like being an expert in it, right? There's, there are
certain banks who are really good at it. They have
00;22;09;28 [Quentin]: Yup.
00;22;10;19 [Jason]: They know exactly what the regulations are, their
bureaucracy, all that stuff. Why do you want to like you learn it
every time?
00;22;16;29 [Quentin]: Yes.
00;22;17;09 [Jason]: Because you only do it once every, you know, once every
couple of months.
00;22;19;25 [Quentin]: And what we've found is we have a lot of success with
people who maybe have done it before and they're like, I'm not
doing that again. And, and then I think some of the biggest hurdles
and the challenges that really make business owners not want to
go back that route, first of all, they're very costly or they can be very
costly from the fee standpoint. There's a guarantee fee that can be
come into play. There are servicing fees, there's up front just cost to
it. The offset is they get really good longterm fixed rates, but there
can be handcuffs put on them. So there can be additional collateral
that gets pulled into the, to the pools, it's not just the asset you're
wanting to work with, but let's go
00;22;52;08 ahead and grab everything you've got. So we've seen that caused
problems. And then there can be big prepayment penalties, too.
Some yield maintenance agreements, which can be unbelievably
high and they can be zero too, but more often than not, you realize
they're there when you really
00;23;08;12 [Jason]: [Laughter]
00;23;08;19 [Quentin]: Can't afford to do that. But also some of them have
prepayment penalties as long as 10 years.
00;23;13;23 [Jason]: Yeah.
00;23;14;06 [Quentin]: And so in a business that's growing, and a lot of times
SBA programs are for newer businesses or for startups, to, to have
the handcuffs on where you can't refinance or you can't sell that
property because you've outgrown that space and there's a better
option over here. That's where it really gets to be a challenge for
those owners.
00;23;30;27 [Quentin]: And to try to unwind them can be so costly that you can't
do it.
00;23;34;05 [Jason]: So, if you were to give one or maybe two pieces of advice
for those who are considering that, a SBA, and let's say they've
gone to their community lenders and for some reason it's not a
good fit, they can only do SBA or that's one of the better options,
let's say. What, what are a couple of suggestions when entering
into SBA borrowing?
00;23;51;21 [Quentin]: I think just, just make sure you know what the long-term
implications are of that.
00;23;55;23 [Jason]: So stress test it at like two years, five years.
00;23;57;28 [Quentin]: Yep, yep.
00;23;58;10 [Jason]: If I want out, how does this work?
00;24;00;06 [Quentin]: Yeah, because you've got a business plan and you know
where you want to go. And so if you run down that road and say,
let's assume I'm going to be successful because I think I am, well,
how does that line up with the debt that you've put into place on the
front end and is there, do you see a potential clash there? And if so,
you might want to double think it. The, you know, the other piece to
it is, if you go that route, how, you
00;24;26;23 know, kind of understanding what the other options are. If you do,
let's say you exceed your growth projections, and you've bought a
piece of real estate, and you're splitting at the seams. Is that, did
you, did you leverage that so much that, that you can't do the next
step because, because of the
00;24;43;08 [Jason]: He can't got out.
00;24;44;09 [Quentin]: Huge debt load there.
00;24;44;22 [Jason]: Yeah.
00;24;44;27 [Quentin]: And so, if that's the case half the strategy of socking
away cash as quick as you can with that growth, which is hard in a
growth spurt to sock away cash. So, it's just really understanding
the documents. I think a lot of times our borrowers come to us after
they'd been an SBA loan and they're surprised at really what all that
entailed.
00;25;02;17 [Jason]: Yeah.
00;25;03;03 [Quentin]: So just knowing.
00;25;04;02 [Jason]: I am. You know, I remember when we had ours and we
were looking to sell a couple of our rentals, we had to, you know,
kinda subrogate that loan and, and, and get, you know, get some of
that, you know, paid off and all those little things that we had to do.
So, so it can be challenging. And like you said, you know, socking
away cash, you know, cash is King. Cash always puts you in a
great spot, you know.
00;25;25;19 [Quentin]: Yeah.
00;25;25;26 [Jason]: How are, just really quick and we will, and we'll wrap this
up, but how are the interest rates with SBA versus your local
community bank? Generally speaking? I know that's probably a
huge
00;25;35;04 [Quentin]: There's a lot of programs and they, a lot of them allow
parameters so you can price it with a maximum of a spread over
prime. Now in their fixed rate, like the 504 program, where they go
into second position, they offer a very long-term, low rate option
right now. And it fluctuates with market rates
00;25;54;01 [Jason]: 504 is with real estate, correct? Is that.
00;25;56;04 [Quentin]: It's right.
00;25;56;26 [Jason]: Okay.
00;25;57;08 [Quentin]: So, owner occupied buildings, so 51% or more, the
community bank that you're working with or the bank that you're
working with comes in and first position at 50%, and then the SBA
comes in with 40% behind you. And that's a fixed rate chunk. That
40%.
00;26;11;19 [Jason]: Okay.
00;26;12;00 [Quentin]: That one can have some prepayment penalties and
some other things.
00;26;14;17 [Jason]: Okay
00;26;14;26 [Quentin]: tied to it and some upfront fees, but it can be a really
good long-term fixed rate product.
00;26;18;17 [Jason]: Okay.
00;26;19;00 [Quentin]: And the community banks in first position at 50% so
they've mitigated their risks if its a
00;26;22;16 [Jason]: Sure. Yeah, yeah.
00;26;25;07 [Quentin]: It's 10, 10% down. So that's where the SBA is really
advantageous. There's less cash that's needed up front and when
you're starting a business and you see, hey, we project this thing to
really go, you're working capital's important. And so it does allow for
that. So there, there are scenarios where they're great.
00;26;40;08 [Jason]: That's great, good. Well thank you. Just to recap, we kinda
talked about the qualifying world, financials versus tax returns.
You're going to reconcile those differences anyway, find how much
cash that we have available to, to service this debt. Looking at the
components of, of lending at the collateralization, your, your, your
asset, whatever that is your promise to pay, then the debt service
on top of that. Some of the basic business stuff that we reviewed.
Real estate is huge, like you said, 70% I think you said something
like that, that, that most of your lending is going to have real estate
as its
00;27;13;01 asset lever, if you will.
00;27;14;29 [Jason]: Then, then of course, inventory and accounts receivable.
And then we also have some IRA stuff that we could work with as
well. So, thank you for joining us. My name Jason Watson with the
Watson CPA Group. I shouldn't say that, now we're WCG
Incorporated. We just got done doing a name change. Quentin
Lieghty with First National Bank and it's always been First National
Bank, or at least no name change recently. [Laughter] We're here at
the Axe and the Oak. This is our Bourbon and Business series of
our, our podcasts. We do thank the fine folks that Axe and the Oak
and letting us use their
00;27;46;24 area for filming and for recording this, and we'll talk to you real
soon. Thank you.