E243: Why SBA Loans Are Key to Small Business Acquisitions – Ray Drew Tells All - Watch Here

About the Guest(s):

Ray Drew is a distinguished SBA lender with a career spanning over a decade. Beginning his journey at the young age of 22, Ray has carved a niche for himself in the small business financing sector, emphasizing SBA 7(a) loans. Throughout his career, he has facilitated millions in financing for small business acquisitions. Currently, he is a leading figure at Trueliant Federal Credit Union, a nationwide SBA lender. Ray is also known for producing educational content on his YouTube channel, SBA Ray, and hosting the podcast, The Art of SBA Lending.

Episode Summary:

In this episode of the How2Exit Podcast, host Ronald Skelton reconnects with Ray Drew, a preeminent figure in SBA lending. Ray, who has seen a significant rise in SBA-backed business acquisitions since the onset of the COVID-19 pandemic, shares his extensive knowledge about the SBA loan process, the prerequisites for borrowers, and the evolving landscape of small business purchases. They dive into the nuances of acquiring businesses, the importance of relevant experience, and the due diligence required to ensure successful financing and acquisition.

Ray provides an in-depth look at the SBA loan process, detailing everything from pre-approval to closing. He highlights common pitfalls buyers face, such as lack of industry experience and how they can navigate these challenges. Ray also discusses his personal experiences with complex deals, emphasizing the importance of having a supportive and knowledgeable lender. The episode is a treasure trove of insights for anyone considering the acquisition of a small business through SBA loans, offering actionable advice and real-world examples of successful and challenging acquisitions.

Key Takeaways:

• Understanding SBA 7(a) Loans: SBA 7(a) loans are a critical tool for small business acquisitions, offering favorable terms and support for borrowers who may not qualify for conventional loans.
• Importance of Experience: While relevant industry experience isn't always mandatory, having managerial skills and a solid understanding of business operations significantly increases the likelihood of loan approval and business success.
• Thorough Due Diligence: Engaging in comprehensive due diligence and having a clear understanding of the business operations and potential challenges is crucial for any acquisition.
• Flexibility and Creativity in Financing: There are various ways to structure deals, including seller notes and bringing in partners to shore up experience gaps, offering flexibility to buyers.
• Choosing the Right Lender: Not all SBA lenders are the same. It’s essential to work with a lender who understands your business model and has a track record of financing similar businesses.

Notable Quotes:

1. "I've been an SBA lender since I was 22. I'm 35 now. So my whole career has been all about small business financing." – Ray Drew
2. "If you're buying a business, you do need to put some skin in the game. Banks want you to have skin in the game." – Ray Drew
3. "You certainly need to have some managerial experience or some relevant experience or some financial literacy." – Ray Drew
4. "The loan process for an acquisition doesn't dictate the timing. There's so many things running in parallel." – Ray Drew
5. "The SBA 7(a) is an insurance policy that helps mitigate our risk so that we can make these loans which wouldn't be approved conventionally." – Ray Drew

Article:

Navigating SBA Lending: A Comprehensive Guide for Aspiring Business Owners

Key Takeaways:

• Understanding the Intricacies of SBA Loans: The process, pitfalls, and potentials of SBA lending.
• Significance of Experience and Managerial Skills in Acquisitions: The crucial role of background and expertise in securing SBA loans.
• Importance of Selecting the Right Lender: How choice of lender can make or break your acquisition journey.

Unlocking the Potential of SBA Loans: From Process to Pitfalls

In the vibrant world of small business acquisitions, SBA loans are often the unsung heroes that make dreams come true. Ray Drew, a stellar figure in SBA lending, paints a comprehensive picture of this landscape in his conversation with Ronald Skelton on the How to Exit podcast. Dive into the nuances of SBA loans, the significance of managerial experience, and how the right lender can be your guiding light.

Delving Into the SBA Loan Process: Timelines and Preparation

The Step-by-Step Journey

The SBA loan process, while rewarding, is not without its complexities. Ray Drew breaks down the steps succinctly, providing clarity for aspiring business owners.

Pre-Approval Stage

The initial phase is all about vetting and pre-approval, where your lender gets a sense of whether the deal can move forward. As Ray explains:

"Think of the process in three parts. The first part is pre-approval. This is where you're talking and having those initial conversations with the lender, and they're just trying to understand, is this something we can do?"

Underwriting and Closing Phases

Following pre-approval, the underwriting phase dives deeper into the financial validation and creation of the SBA credit memo. As Ray points out, the complexity and detail of this process can vary greatly:

"Underwriting, I would expect to take place within about two weeks. And once it's approved, you get a commitment letter."

Once the commitment is secured, the closing phase ties up all the loose ends, from negotiating purchase agreements to obtaining necessary insurances. It's an orchestration of various elements that culminate in the final sale.

The Imperative of Experience and Managerial Skills

The Role of Operator Experience

The conversation continually underscores the necessity of relevant experience and managerial skills in securing SBA loans. For many aspirants, this becomes the deciding factor between approval and rejection.

"I would say 99% of the time, there are some exceptions, but certainly, by and large, banks want you to have skin in the game… You've got to have the right type of experience."

Ray highlights that lenders are not just evaluating the business but the person driving it:

"If you're buying a business, you don't need to know exactly how to operate that specific business… you certainly need to have some managerial experience or some relevant experience or some financial literacy."

Navigating Industry-Specific Challenges

Different industries come with their own set of challenges and required expertise. For example, construction and restaurant industries demand specific knowledge and background:

"I'm buying this huge $8 million revenue business. So it was a little bit of a leap I passed on it. But, you know, these deal guys, they just won't take no for an answer."

In cases where direct expertise is absent, structuring the deal to include experienced managerial staff or holding extensive seller notes can mitigate risks. However, as Ray points out, this is often a risky path that requires careful consideration and robust planning.

The Critical Choice: Selecting the Right Lender

Not All Lenders Are Created Equal

The choice of lender is paramount in the SBA loan process. It is essential to align with a lender who not only understands your business model but is also proactive and transparent throughout the journey.

"The loan process for an acquisition doesn't dictate the timing… all of these different things, lease, landlord, consent waiver, which is another document. All these things have to get buttoned up in the closing process."

Ray’s insights reveal that lender capabilities and specializations vary widely. It's crucial to inquire and understand a lender's previous experiences and comfort zones.

Navigating Through Complex Scenarios

Complex scenarios, such as refinancing or dealing with larger sums, further underline the need for a seasoned, adaptable lender. As Ray observes:

"They were short a million and a half dollars. And you're having to search the country for someone who's willing to lend in second position, like, without a tremendous amount of collateral to support."

Having a lender seasoned in SBA intricacies ensures a smoother ride through the challenging terrains of business acquisitions.

Ensuring a Successful Acquisition: Insights and Implications

The comprehensive discussion between Ronald Skelton and Ray Drew sheds light on the multifaceted world of SBA lending. The key themes of understanding the detailed process, the necessity of managerial experience, and the importance of choosing the right lender are critical takeaways for any aspiring business owner.

The implications of these insights are profound. They highlight a roadmap not just for securing financing but for achieving sustainable business success. Decisions made at every stage of the SBA process—from pre-approval to closing—carry significant weight.

Moreover, the personal anecdotes and real-world examples shared by Ray illustrate the broader impacts of these themes. They vividly depict scenarios where aspirants transformed challenges into successful acquisitions by leveraging experience, persistence, and strategic planning.

Navigating SBA lending successfully involves more than just meeting qualifications; it requires a holistic strategy, right from choosing the right lender to intricately understanding your role and the associated risks. As Ray Drew eloquently sums it up, the SBA loan program, while a phenomenal opportunity, demands an all-in commitment from prospective business owners.

With the nuanced insights shared in this conversation, prospective borrowers are better equipped to approach their SBA loan journey with confidence, ensuring not just approval but eventual success and growth in their business ventures.

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