NEWSLETTER
February 2023
Do I Need to Sign a Personal Guarantee to Get an SBA Loan?
Small Business Administration (SBA) loans are actually administered through intermediaries, such as banks and credit unions. Since the Federal Government offers a guarantee on a portion of the loan—not the full amount, they require banks to follow similar guarantee and collateral requirements as they would for non-SBA loans.
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Banks frequently require personal guarantees from owners for small business loans, particularly if a company is fairly new or lacks a solid or good credit history. Lenders may also ask for collateral or put a lien on an owner’s personal assets as security for a loan.
An SBA loan requires at least one personal guarantee which can be unlimited or limited.
An unlimited guarantee ensures the business owner (or an individual who holds more than 20% of the company) will repay the loan in full or forfeit personal assets if the business fails to repay the loan. A limited guarantee limits the amount of debt that an owner has to repay—provided they own less than 20% of the company. A lender may secure a limited guarantee with collateral, including personal assets.
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The SBA requires personal guarantees from individuals, trusts or trustors who own more than 20% of a company or spouses whose collective ownership of a business exceeds 20%. The SBA may require multiple guarantees if a company is owned by multiple people, if each owner holds less than 20% or the primary business owner isn’t considered a good credit risk.
While small business owners may be daunted by signing a personal guarantee for a company loan, they should keep in mind that SBA loans are considered one of the best lending products available. As they’re partially backed by the Federal Government, SBA loans offer low-interest rates, long loan terms and high amounts.
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For more information about personal guarantees with SBA loans, contact The Funding University or your preferred lender to learn more about your options.
Sources:
Fundera: Do SBA Loans Require a Personal Guarantee?: http://bit.ly/3XOz1ZO
NerdWallet: SBA Loan Collateral vs Guarantee: http://bit.ly/3JekulJ
Small Business Administration: US Government Information: https://bit.ly/3HvPxs8
Are All Tangible Assets Valued Equally?
Tangible assets are the most valuable to a business or lender. However, all tangible assets aren’t valued equally.
A tangible asset—also called a “hard” asset—is a physical object which holds value and can be sold or transferred. Tangible assets are things which a business needs to carry out operations and generate income. These can include property, machinery, equipment or inventory. Lenders value hard assets as they can be liquidated if a company defaults on their loan.
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The second type of asset is referred to as intangible. These assets can include intellectual property, copyrights, patents, brand recognition, business reputation or trademarks. While they’re not physical items, they contribute value to a business and usually can’t be used as collateral or easily sold.
Business owners value tangible assets for three reasons:
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1. Depreciation: asset depreciation (or decline in value) offers tax benefits
2. Liquidity: hard assets can be sold if the company needs cash for investment, new products or to repay loans
3. Collateral: hard assets can be used as security for loans
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Tangible assets are divided into two categories: current and fixed. Current assets are those which can be used or turned over within a short time period—usually a year. These include cash, inventory, and accounts receivable. Fixed assets—also called long-term assets—are those which a company considers long-term investments and include buildings, property, vehicles, and machinery.
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However, tangible assets aren’t valued equally. The liquidity of current assets is greater than that of fixed assets, given that current assets can be converted to cash faster. Therefore, current assets, such as accounts receivable or inventory, would be more desirable to a lender as security—or to a buyer—than land and buildings.
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Knowing the difference between tangible and intangible assets, including fixed and current assets, you can have a better idea of the role they play in business financing as well as an understanding of what lenders are looking for in collateral. The more you know about how your assets are valued, the more successful you can be negotiating the right kind of financing to meet your business needs.
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Sources:
Corporate Finance: Tangible Assets: http://bit.ly/3Rv11Q6
Indeed UK: How to Calculate Tangible Assets: https://bit.ly/3Ymf2BJ
Investopedia: The difference between tangible and intangible assets: http://bit.ly/3X4uUHZ
Revolving Line of Credit vs. Amortizing Loan
When seeking funding for your business, very often two sources come to mind: a revolving line of credit and an amortizing loan. What’s the difference? There are big differences and by familiarizing yourself with these options, you can choose the best fit for your needs and avoid costly mistakes.
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A revolving line of credit is a type of loan which allows the borrower to access funds up to a certain specified credit limit. Borrowers can use these funds as needed, make payments as they are able, and redraw money if necessary. Examples include credit cards and credit lines. There is no fixed repayment schedule. The borrower only pays interest on the funds actually used, and the credit limit can be renewed once the outstanding balance is paid down.
An amortizing loan is a loan for a specific amount, delivered in a lump sum at the beginning of the term. It requires scheduled, periodic payments that are applied to both the loan's principal amount, plus interest. The loan amount, payment amount, and interest rate are generally fixed. This is similar to a mortgage or car loan. Payment amounts are first applied to the interest for the period, then the remainder of the payment is applied to the principal. Payments are scheduled until the loan is paid off.
There are pros and cons to each loan type. For revolving credit, the benefits include the flexibility to borrow as needed, pay back as able, and the relative ease in securing credit. A drawback is how the loan can negatively affect your credit score if not paid back quickly, plus interest rates compound each month on unpaid balances. Your credit score also may be at risk—if you consistently carry a high balance, which could also negatively impact your credit score. In addition, revolving credit often includes lower loan amounts and higher interest rates.
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For amortized loans, many people appreciate the consistency of predictable payments over the course of a long period, and how the principal is gradually reduced through installment payments. You also receive the full amount on signing, and interest rates are lower than revolving credit. Conversely, it can be more difficult to qualify as these types of loans require in-depth credit applications, and you may not able to simply pay back the loan balance. Many loan agreements will have penalties for early payoff or you may inadvertently agree to pay interest even if you pay the loan off early. It pays to read the terms and conditions of your lending agreement.
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The best loan for your business will depend on your specific needs and financial situation. Speak with your prospective lender and ask questions. Some lenders will even allow you to participate in term negotiations. An informed borrower has options and understands better than anyone what kind of repayment plan they can afford.
Interest Rates:
The Real Cost of Doing Business
Becoming well-versed in the subject of interest rates can be a real asset to your business. Interest rates vary and definitely affect the cost of doing business.
With interest rates on the rise, consumers pay more interest to lenders and your business may find customers have less disposable income to spend. Businesses with variable interest rate loans may find themselves in tough situations and it may be difficult to take out new loans to manage expenses or expand the business.
Funding Strategies Conference Presents
INTEREST RATES:
The Real Cost of Doing Business
Thursday, March 9, 2023
2 PM – 3 PM ET
A $29.99 Value!
Register for FREE using the code INTEREST23.
www.fundingstrategies.net
Tune in for tips and strategies to help offset rising interest rates and get a better understanding of how interest rates really affect your business.
By participating in this webinar, you will learn:
1. Details about different types of interest rates
2. How to use interest rates to your advantage
3. How to manage loans during interest rate hikes
4. Do interest rates really matter?
5. Variable or fixed rate loans and what’s best for my business?
6. Funding trends for the next 18 to 24 months
About. Seth Block CPA
Seth Block is a founder and board member of ThermoCredit, LLC. Seth has been working with the management and development of service based companies for more than 30 years. In his time with ThermoCredit, Seth has coordinated the funding for hundreds of companies in the Communications and Technology verticals. Prior to starting ThermoCredit,
Seth was a cofounder at Smoke Signal Communications,
one of the largest pre-paid competitive telecommunications carriers in the US. At Smoke Signal, Seth was CFO for two years and Senior Vice-President for 5 years. Seth’s areas of expertise are corporate development, consulting, regulatory affairs, provider relations, start-ups, and delivering funding solutions for hard to finance companies. Seth holds a degree in Accounting from Southwest Texas State University and is a licensed Certified Public Accountant.
Seth is a well known and respected speaker at industry events, sharing insights about funding and funding options. During his career Seth has been involved in hundreds of business funding opportunities, with a total value in excess of one billion dollars. He is also the author of the soon to be published book about business finance.
“I’ve been in the world of finance for a while and I’ve acquired the business acumen to be able to share what I’ve learned. Most companies have financial leadership that understands accounting, but not the nuances of funding. There are significant differences between Banks and Credit Unions when it comes to financing. The SBA has 11 different programs. How do you know which one to utilize or even if you should utilize them? Schools teach about debt and equity, but I created The Funding University to teach companies how to leverage debt and equity in the real world, using easy to understand methods. There’s a big difference between what we learn in school and how the world of finance really works. The Funding University is here to close that gap.”
—Seth Block, Founder and Host of The Funding University
