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Episode 106 of 133

[FF] Entrepreneur Joshua Kim on Cracking the Credit Matrix: The ROI Online Podcast Ep. 106

station description Steve Brown believes you, the entrepreneur, are the invisible hero of today’s econo... read more
The ROI Online Podcast
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Duration: 40:17
Are you trying to grow your business but getting nowhere fast? Maybe an SBA Loan can be what you need to get to the next level. On this Feature Friday episode of the ROI Online Podcast, Steve talks with entrepreneur Joshua Kim about SBA loans, what they are and why they can help you grow your busine
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Are you trying to grow your business but getting nowhere fast? Maybe an SBA Loan can be what you need to get to the next level. On this Feature Friday episode of the ROI Online Podcast, Steve talks with entrepreneur Joshua Kim about SBA loans, what they are and why they can help you grow your business.Joshua is the founder of 7a Accelerator—where they consult and educate business owners on capital solutions through the Small Business Administration. Most business owners don't even know where to start for getting an SBA loan for their business, Joshua and his team provide education, resources, and concierge-style assistance to help you secure the right lender.An SBA loan is one of the greatest small business financing options available in the US. You can use it to purchase a small business—even if you don’t have a ton of collateral or personal cash. Banks like them because they carry very little risk with the guarantee. And they provide a small business owner with the capital they need to buy, start, or scale their small business.Among other things, Joshua and Steve discussed:What SBA Financing isWhat you should know about SBA Loans The do’s and don'ts of applying for an SBA LoanThe characteristics of a successful SBA loan applicantBiggest misconceptions about SBA financingThe main requirements every lender will askYou can learn more about Joshua here:Follow Joshua on LinkedInSend Joshua an EmailLearn more about 7a Accelerator here: the books mentioned in this podcast:The Golden Toilet by Steve BrownThinking of starting your own podcast? Buzzsprout’s secure and reliable posting allows you to publish podcasts online. Buzzsprout also includes full iTunes support, HTML5 players, show statistics, and WordPress plugins. Get started using this link to receive a $20 Amazon gift card and to help support our show!Support the show ($stevemfbrown)
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so quickly. What are the top three myths that surround SP? A financing, I think. The biggest one. Uh, it's kind of what we touched on it. It's kind of a bit of a two and one. And, you know, not all lenders are created equal and SP finances getting hard. Getting SP financing is hard. A lot of people think SP financing is hard, but it's because they're talking to rock banks. So they're kind of an interwoven, you know, the reason there is why people have issues doing it. And we touched on that before. Um, I think some of the other ones are that you need a lot of cash or you need a lot of collateral. That's the biggest one I hear from people, and a lot of times that's because they go talk to, like again. They go talk to a big bank and the big banks like well, you know, you want one. You need a million dollars for your business. Um, you know that million dollars that we would give you would be would be 75% government guarantee, but we want to see a million dollars of equity and cash between your house and your you know, your personal other finances, you know, it doesn't make any sense at all. I mean, the whole point of the S B A loan program is to be able to provide loans for people who don't have full collateral coverage for something like that. It actually says explicitly in the S P A S S O P. Lenders should not decline alone solely on the basis of lack of collateral if it has cash flow. If it has managerial experience and you know the borrower's otherwise creditworthy, you can't decline alone because there's a shortfall collateral. And so that's one of the That's one of the big things that people really miss out on. Um uh, just to be sure, But that's one of the big things that people just totally clips over it. I just don't think about there's something about that because they talked to wrong the wrong thing. Um, I think, you know, as far as like, you know, what's what's the other third big myth? You know, you need a ton of cash or collateral. Um, yes. Okay, Yeah, that's that's a good one. You know what's what's another? What's another big myth. Um, I guess you have to be big and successful. Yeah, you know, it's just there's so many just general like, I've got a P P p loan and I've got a I've got another credit line with the bank and, uh, you know, I'm going to get declined because that's a lot of a lot of potential debt. Yeah, yeah, so I mean issues like that. Well, the thing is, so yeah, that's That's one of the tricky things. It's alone until it's not right until it's forgiven. They have to underwrite it as if it's not going to get forgiven so that that kind of can screw you up to some degree. Um, but I mean, as long as it's in prosecuting forgiven, it's not a big issue, but yeah, I mean, I think the other big misconception I hear is that it takes a long time, and it takes a lot of paperwork to close an SP alone. Um, I have a friend of mine. He's I'm helping him actually get like a He's getting a large SP A financing to do a partner by a total financing about is actually eight million. So five of its coming from S B A three of its coming from conventional. And, um, he recently just bought a you know, before getting the SFO and actually recently bought a house for, like, a million bucks or something. And he told me the amount of work that you put in for the mortgage was like 10 times that of the loan application, the paperwork for the bank, for the businessman. So you know, that's That's one of the things that I think a lot of people have misconceptions about as well is that it takes a lot of work. And no, how long does it take to close in on an average, probably 45 to 60 days? You know the reason that it usually takes longer, though, is it's usually on the borrower. It's the bank's goal is to turn an approval around and within, you know, 34 weeks Max. If you give them a full application, they should be able to get all the questions back answered and that approved within three weeks. But the reason closings take time is usually the borrower doesn't have their ducks in a row. You know they're missing their missing attacks turn. They're missing a lease. Takes them too long to go fix their insurance things for the business, whatever the case might be. So that's That's what I would also say for people like, That's another big misconception, I think should continue to be broken. It doesn't take a long time to do it. Doesn't make a lot of paperwork, you know, just makes you have a good lawyer and a good accountant. Help you get it all done. It can. It can get done pretty quickly, so
So, what are the characteristics of a successful S B A loan applicant? Yeah. So the great thing about this is that you know, the great thing about the S B a application process is that bucket can be actually pretty wide. Um, obviously, the ideal borrower makes you know $34 million here in their business, has very little debt and an 800 credit score. Obviously, that's not the case for everybody. Um, you know, in most in most situations, folks in that position don't have much of a need for recipe financing. Uh, but what I would say, like an ideal borrower is going to have at least a 6 50 credit score. And they're going to be in a position where they have a legitimate need of capital for their business. And either the business, uh, like to start up. They've got a very clear path of getting to being cash flow positive, or the business, as it already has, has enough cash flow to cover the loan. The main requirement that every letter is going to be looking for is they want to make sure that the cash flow of your business is sufficient to cover the service of the debt just like any rental property, right? If you're going to get a mortgage on a rental property and you know you're, let's say you're expected least monthly net on it is $1800. You know, you're gonna want to make sure your mortgage is below $1800 with a comfortable margin. So, you know, probably 14 $1500 is kind of what you want to see. The general rule of thumb with SP is they want to see at least 1.25 to 1.5 times. So if your if your bank your bank payment monthly is $10,000 a month, the bank is going to want to see generally at least probably 12.5 to $15,000 a month of profit, on average over last 12 to 24 months. So that's how I would describe it. You know, they have decent credit, they have legitimate need of capital in the business. And, um, you know, obviously there has to be cash flow that's sufficient to cover the amount that they want to borrow
in this p p p experience that I went through, I realized I really needed someone to help me to make sure that my application was correct, that my numbers were right. You know, I wanted what I filled out to be forgiven. Yeah, but you know, if you make a mistake or you calculate wrong, you're you're at significant risk. So how how to apply for it s B. A loan is like a big barrier. Yeah, So is there like they would go to you, and then you're going to make sure that all their i's are dotted, their t s are crossed, and they're reducing that risk of just making a mistake on an application? Well, yeah. I mean, here's Here's what I'll tell you. The PTP application is, um uh the The whole component of tpp is different than typical 70. I mean, if you actually look and I'll I guess we can kind of talk about it later. You know, some of the big myths about S B A financing and stuff, because I know we wanted to talk on that, but one of the biggest myths that people have is like, you know, like you know, you go to the bank and they give you this mountain of paperwork. If he fell, it's actually the only. There's only two SB eight points for a regular 781 Its actually two forms. One of them is a personal financial statements. So it's a very simple form. I mean, you got to feel how much cash you have, how much you have in your real estate. You know, life insurance, stocks, equities, whatever. Very simple form. So you just fill that out. Um, and then the other forms you got fell out is, um, to borrower Information Chief. So you just list out personal information. Obviously, your Social Security number, your date of birth. Um uh, just basic information about you. The way the SP gauges how well that they're doing from a diversity coaching standpoint is actually this form. So, like, you know, you put your ethnicity down, and then that way, the SP is able to track. Okay, well, you know, we were able to lend, you know, this many dollars through this many loans to minorities, like that's that's, you know, that's that's a big That's a big thing of what they want to do is they want to make capital bill to, you know, to communities that are otherwise kind of blocked out of the typical banking world. So, um, you know, I'd say, you know, you know, realistically, And the reason I know this is because I've had correspondents. Um, yeah, I'm kind of uncovered something really shady with with the business that I purchased and there was a hole, there was a whole, like, package of stuff I sent over and they looked into the guy who did some of the funky stuff. Um, you know what I would tell people? You know, as long as you're not, like, blatantly dishonest in your forms, you don't lie about, you know, your personal financial situation. You don't put a fake social Security number, anything. You'll be fine. I mean, if you have a minor mistake here, they're they're not gonna care. Um, now, if you you know, if you if you forge a bunch of paperwork and you have fake tax returns used to go get a million bucks and then you go, you know you move to Bali. Yeah, they'll they'll come after you for that, But as long as you're using the money for, like, a legitimate business purpose. You know, a mistake here. There's not gonna be a big issue back to your point about, you know, how do you apply technically And and this is this is kind of, you know, the premise of what I do, how I help people. There are 3500 plus lenders in the U. S. The U. S. B loans. You're free to go to any single one of them asked them, You know, Hey, can I get application paperwork? Can I go apply? But where people stumble with with getting SP financing, it's kind of a twofold thing. One, they don't know where to start, Like what we're talking about earlier. They don't know where to start at all. And so, uh, they just they never try and, you know, or they've heard myths about how hard it is. It takes a lot of paperwork, takes a lot of times, they just they never go ahead, do it. So what? What we do with 70 accelerator is we We help a business owner by evaluating initially what kind of business they have. And so you know what business they have what the capital needs are. And so, by doing that first were able to help help really figure out where to best put them. And what I mean by that is like, You know what, Leonard? Apparently I'll share a story, and this is This is, um this is kind of a funny one because it's It's the most oblivious example of just lenders being ridiculous in this program. The biggest misconception that I had when I first got my first thought was that all lenders are created equal meaning if you go to one bank, well, it's the same SB government program. They're all going to have the same underwriting islands. And I found this was very much not the case. Um, so just as an example, I was talking to a A medical professional. He has six locations, you know, six clinics, locations. Uh, guys clearing about 2.5 to $2.8 million. Here. 800 credit. Perfect situation, strong financials. He went to the bank and he wanted, you know, alone about 1.21 point $3 million to go purchase a building for one of his locations. Um you know, he wanted to buy the building that he was in because it would be cheaper to have the mortgage than the Lisa, right? The banks actually turned down. And the problem that he that the mistake that he the only mistake that he made was that he went to Bank of America, BB and T and Chase, all of all these big banks. And, you know, here's the thing. The problem with this big Banks that they just don't care. The guys are perfectly creditworthy, Borrower. He should have been able to get a loan, but they declined him for like, completely dumb reasons. That made no sense. They're like, Oh, we want 30% down. It's like I don't have to put 30% down. I only have to put 10% down. Why are you asking me to put down 30? And so that's gonna where I help people. So I'm actually helping him because I'm like, Oh, this is easy. I mean, you he had one of the easiest deals in the world that should have been able to get approved, but because he went to three big banks to make it hard. So I'm in process of just helping him. I refer him to another lender that will probably be able to do the deal without any cash down. Because he, you know, he's got so many locations, everything so strong they're going to finance the building for 100% in certain circumstances. With SV, you can actually do that. But that's that's just a typical situation. What happens with a lot of borrowers? They go applied the wrong banks and they get declined. And then they have this misconception that Okay, well, SPS heart. You can't get an SP alone because this that the other it's not that you can't get an SP alone. It's just you can't get an SP alone at that bank because that bank has a really dumb and backwards system on doing S B A loans. So that's really the biggest key of of kind of like how, you know, like to your initial question, How do people apply? Well, you know, it's it's really good to work with someone such as myself. I say that self seeking Lee, obviously, because you know, this is what I do full time. But, you know, if you were to go out there on your own. You're a business owner, and you really need that loan to go buy that building or whatever You might waste 3 to 4 months of your of your life calling around at all these different banks just saying, Hey, do you do S B A loans? And of course, all we're gonna say, Yeah, we do s B A loans, But until you really dig down into the hard questions with the lenders, like how many deals like this do you do annually? What kind of credit score requirements you guys have, what kind of industries you went to until you know what questions to really ask them, you're not gonna be able to filter out. So, you know, it'd be like shopping for shopping for a house. But, you know, you just tell you, really I need a house. You just give them a price range. You're not giving them Well, I need a pool or I want this style or this Is that, um and so that's that's really where a lot of borrowers place time. They just they just they talk to the wrong lenders. Um, and a lot of time the lenders will string them along for for months, you know? And then just at the last second, Sorry, we can't do it. The client, you know, and I tell I tell people your best getting a note from a bank within a week or two of talking to them just to save your time. So you know not to waste your time dealing with them, just go work with someone else. So anyway, that's that's what I would say. You know, how do you apply? You can technically apply to any lender, just, you know, call them, talk to nest. A lender having sending the checklist and the forms you gotta fill out. Um, you know, But usually it's best to make sure that you're working with someone who can make sure you get set up with the right letter to begin with. Because if you get set up with the right lender to begin with, and you know we all know for a fact that can get your deal done, you'll save countless hours and months of your life wasting going back and forth
What? What should we know about an S B? A loan? Yeah. So what? I would say the most important thing. Snow or there's there's There's really kind of two or three categories of loans you have what are known as the seven A loans, and that can be either just a regular seven a or seven express. And then you also have five or four loans. Section five or four loans. These are these are purely for real estate. Um, and you know, it's purchased construction. Renovation? Um, you know anything for anything for real estate that's exclusively for your business. You can't use it to flip houses or anything. But the great thing about SV, the seven A loans, you can pretty much use them in any kind of for profit business in the U. S. There's there's a few restrictions like you can't use it for, you know, like I said, buying rental properties. You can't use it for if you have, like a you know, a medical marijuana dispensary. There's there's certain restrictions on industry, but, you know, 99% of the businesses out there are going to be eligible for S P A financing especially businesses, are online. I'm actually working with someone right now. He's got a software company he works with. His software is the backend software for several online Amazon e commerce style businesses. And so we're actually partnered with them because a lot of business owners that work online either through e commerce marketing, they they're not used to the concept. They can go get bank financing for their business. Um, you know, I have a friend of mine. He makes about $300,000 a year on a couple of Amazon stores, and he had no idea. You know, he's always complaining about, you know, he's got great credit, 100,000 credit cards, but he's like he's sometimes max them out to go buy inventory. And so, um, you know, I'm helping him get a more permanent long term working capital solution through through an S B a line of credit so that he can draw down on it, buy more inventory and so forth. So but yeah, I mean, you know, breaking down, What can you do with that? You can, you know, you can use it for pretty much any legitimate business need that you have, uh, whether it's just to grow by inventory, refinance debt, you can actually use it for partner buyouts to, um so you know, if you want to buy out a partner, you can use it for purchasing real estate, construction, real estate. There's a lot of different purposes that you can use for it. But you know, what I tell people is, you know, if you have a for profit business in the US and you need to borrow money at any time to grow your business, you should really look at S B A because you're not gonna be able to find any terms that are even close to it. Um, you know, from any private lender, whether it's a credit card line of credit or anything else, they're just not gonna be able to match it because s violence come with a government guarantee. So Well, let's revisit that. So our government s B A loans government backed. What does that mean specifically? Yeah, So what that means is, So when you go to a bank, let's say you go to you know, ABC Bank. We'll just use a note, a bank, for example. You go get an S B A loan from them for a million dollars. Okay, the way it works, and I'll get into it specifically right now, the guarantee percentages, actually, 90% normally at 75. But let's just say it's 75. So you would go to the Ms. Okay, I'm gonna go get a loan for a million dollars needed to, you know, buy a building or by a bunch of trucks. Let's even a commercial contracting business in some sort electrical contracting. You buy a bunch of fire trucks, you know, by a bunch of trucks, equipment, whatever. So you go to them and say, Hey, I need a million dollars, okay? Cool and right alone to give you a million dollars, 750. Granted, it would be guaranteed by the government that case. So in the event that the loan default and goes bad, let's say, you know, uh, your time gets sent by a tornado. Your insurance denies payment on all the trucks, and, you know, you have to you know, the businesses destroyed whatever, you know, worst case. Now, the way that the bank looks at is like Okay, well, we're really risking $250,000. And it's actually less than that, because what they do is most banks. They will take the government guaranteed portion, and they will actually sell it at a premium to an investor, like a pension fund or whatever. So their downside risk is actually a lot less than 250 K mechanics that are probably more complicated. Anyone cares to know, But that's usually what happens. So the banks they just look at and say, Okay, well, you know, we're gonna get a premium. I'm selling this portion. We're only going to be risking, I guess in circumstances described, they would probably only really risking like 116 170 grand of of money instead of 250 grand. So on a million dollar loan where they're only really risking 170 grand, it's not a bad deal for them. So it's just obviously a numbers game, you know, as long as they have a certain above a certain percentage of the lungs that paid and go find their good, Um, but that's that's what it means by it's got a government guarantees in the event that the loan goes bad, they would file guarantee request with the S P A and yesterday cut him a check for that 75% of the loan. Right now. Because of the incentives available through December stimulus package, the guarantee percentages actually temporarily increase to 90% and encourages lenders to make loans that they might otherwise not make because they know right now there's a lot of uncertainty. There's a lot of, you know, kind of economic, um, you know, distress. And basically they through through doing that they want they want to encourage lenders to take more risks, more capital out there, you know, they know they're obviously going to have more defaults and losses from this period of time. But to them, like you said, it's it's about, you know, back in the the invisible superheroes of the economy of the small business owners
we're more familiar as, uh, as a group now with P p. P. We've gone through a certain process and have been exposed to that system. But it's still, like, you know, isn't s B a loan a good idea? Yeah. So what you were talking about earlier, with the cards being stacked against people, That's that's really, you know, for for the smaller instrument, that's the case. If you go to a regular bank and you're just looking for conventional financing for your business and it's just based on cash flow of the business, the profitability you know, most banks aren't really going to touch you until you're doing, like, $4 million a year of profit. So the question is, how do you get from zero or wherever you are today? $24 million a year in profit. Like what? How do you get there? And so you know, obviously, most businesses don't actually make it to that $4 million a year of profit number. Plenty of business owners. They build it up 2 to $3 million a year profit. They're happy with it. They take the cash from that they invest in properties. They do other things diversifying brother wealth. Um, but, you know, the whole reason that the SK was actually created back in the 19 fifties like post World War Two was the government recognized that the chips were in fact, stacked against the small business owner. And so when they formed the S B A, um, they did a few things they did. They put certain initiatives in place to make sure that a certain portion of government contracting dollars would would go to, you know, either small businesses or, you know, veteran owned small businesses. So that was one of the big initiatives. But also they set up, you know, the I guess the beginning of what we know today is the seven AM five or four loan programs. And so the way those work and the reason that they're great for the smaller entrepreneur is the government through the S B A. Works with, you know, thousands of banks across the country who participate in the program, and they guarantee a significant fortune alone, very much like a government guaranteed mortgage or student loan. Um, where, you know, you have private lenders that are actually doing the loans they retain a small portion of the risk, but the majority of it is guaranteed by the government. And, you know, when you have a government guarantee on 75 to 90% of alone, obviously the terms on that loan are going to be much better than if you just went to a lender. Who's going to give it to you, you know, 100% on their risk, because they're going to charge you a much higher interest rate. The terms are going to be much more restrictive. So instead of paying 14% on alone and you know you've got a three year payback, you've got a 10 year payback with a maximum interest rate of 6% right now on an S B A loan. Yeah, so but yeah, that's that's exactly why the SP was created. You know, chips are in fact, stacked against small business owners, and the way the government decided to mitigate this was actually form a former government agency that that could help with it. And you know, that's that's
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