Ray Drew got involved with SBA lending at the age of 21 and has spent the last decade providing small business owners with SBA capital. Ray’s current role is Managing SBA Business Development Officer at Fund-Ex Solutions Group, an SBA Preferred...
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Ronald Skelton 0:06
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.
Hello and welcome to the how to exit podcast. Today I'm here with Ray Drew. Ray got involved in SBA lending at the age of 21. And has spent the last decade providing small business owners with SBA capital. Ray's current role is managing SBA Business Development Officer at fund X Solutions Group, an SBA preferred lender and one of only 14 non bank lending companies licensed by the SBA to offer seven day loans. He's also the host of art of SBA lending podcast and recently lost the, launched the SBA Ray YouTube channel. Welcomea Ray, and thank you for joining us.
Ray Drew 1:08
Thanks for having me.
Ronald Skelton 1:10
Cool. We always start at the same spot. And I always kind of joke around like, Hey, man, you were born, he ended up on my show, could you fill out that little gap in between? So kind of how did you get into this space?
Ray Drew 1:21
You know, I, I told my story many times, and I normally start at 21 when I fell into SBA, but I want to take it before that for a second. Because before this, I actually haven't told anyone this or been public about this. But talking to more and more entrepreneurs and hearing their stories, I feel like it might resonate with someone. And for that reason, I want to share it. You know, my family, my my parents moved me down to Florida when I was young, they got a divorce early. And my dad was a mailman. My mom was a waitress, and we were living in Boca Raton, which is a very rich area. But we were not rich, quite the opposite. actually growing up, there was evictions, car repossessions didn't have money for much, I managed to get to college with a scholarship. And then that's when I fell into SBA through an internship my senior year. And I say that because that story resonates with a lot of other people that have become very successful. And I feel like having that chip on your shoulder gives you that extra push to really make it to the next level later in your career. So I'm thankful for the experience. And I felt so lucky to land into SBA lending, because it's actually a great job for folks like myself that you want to build your own thing. But you also don't have the risk tolerance to be an entrepreneur 100%. So you have the base salary, the benefits, and then unlimited upside, but you are working for someone. But the good news is I get to work with entrepreneurs every day, and I just love it.
Ronald Skelton 3:06
It's interesting, he was like, you know, he's talking about risk capital, I think it's a lot more like it's a lot more risky and a lot harder to start a business from scratch, just because it's a whole different skill set. Just figure out if you have market fit, find out if your product product even gets adapted into the market space. And like if you just look at statistics, you know, the majority of those fell like very, very few if, you know, somebody asked me like, Hey, you started so many businesses, why don't you just start a different one now that you're looking for something to do, why are you buying businesses? And I said, if I want to guarantee that I create a business that hits a million dollar mark, statistically, I think the number worked out to where I'd have to start like, think as close to 2000 businesses, if I just follow just pure statistics, right? I you know, seven out of 10 businesses fail after so many years, and then a few more fail after that many years. And after five years, just like 5% of them are left. And out of those 5% only a certain percentage of those hit a level of significance, which is a million dollars a year in revenue or more. You look back like I don't I'm 50 I'm not going to start fit do 2001 businesses to hit that one right now. So
Ray Drew 4:17
And no one's gonna lend you the money to do it either, by the way, because I mean, we always just had an SBA conference last week and the one of these guys out of Washington, he basically said 75% of the SBA loans right now through the seven eight program, which is the flagship program, and this is about it. This year, we'll probably be about a $24 billion program. 75% of that volume of SBA, which you can use SBA for a number of things, but most people are using it for either business acquisition, or commercial real estate. And startup is very difficult. So not only is it a safer bet to buy an existing profitable business But also, if you're going to look for financing to do it, you really you, you don't have much of a choice. Acquisition financing is very active right now, startup is not.
Ronald Skelton 5:12
Right. I mean, it depends, like, there's a lot of people who say, Well, if I'm in software, there's always the angel capital and venture capital rock. But the what they don't understand there is the game they're playing is a very cutthroat game, you know, I would still even if I was starting a software company, I would go out and find something that's both profitable, has a customer base that would align with the one I wanted to create, and then maybe add my idea on as an additional product, rather than to create something from scratch, with no funding sources, no capital coming out of it, and try to create a tool. And, you know, I came from that space I came, I was in that, you know, when all my buddies were making millions in the.com, I was a defense contractor. So I jumped out to the.com side, now, unfortunately, I got to see it crash and burn. It was about 2007 2008. But uh, you know, I've seen both sides of this, and I just think you have a higher probability of being successful buying existing businesses.
Ray Drew 6:19
I agree. And the SP portfolio, you know, kind of confirms that because the overall default rate is relatively low. And, yeah, and again, we're doing I'm doing deals in the one to $6 million range. So obviously, deals go higher than that in the world. It's just that that would be outside my wheelhouse in SBA. But, you know, if you're looking to buy or start something in this small space, you're gonna have a 10x easier time getting acquisition financing.
Ronald Skelton 6:48
Let's jump right into that. The requirements. So if I'm either buying and or selling a company, what is the window that SBA will fund and finance?
Ray Drew 6:51
Well the seven day program, like I mentioned, it goes up to $5 million. So you can do a $6 million deal pretty easily. You can even go above that if the seller is willing to hold some paper. So you know, starting on the seller side, you know, because you're setting yourself up to sell 123 years from now, you know, it's important to kind of set yourself up, right? So if you think you're going to be selling it for 789 million, and maybe you would know more than I would but you know, there's there's sometimes a little bit of a gap between SBA and the conventional market. So you may have to hold a little bit of seller paper to get the loan down to 5 million in those situations. But what you really need to know is that the SBA lenders, underwriting your historical tax returns, first and foremost, so three years worth, and then the current year to date, but most of the emphasis will be on your last two years plus the current year to date. And absolutely the last year plus interim has to support the debt at a pretty comfortable level. But different lenders will have different approaches to exactly what they're looking for how much debt service coverage, how many years, etc. But that's a good place to start is just making sure the business tax returns will support it.
Ronald Skelton 8:18
Yeah. First, you said your tax return for you're referring to the business. You're acquiring tax returns.
Ray Drew 8:23
The seller of the business. Yup.
Ronald Skelton 8:26
The seller of the business, they're the tax returns,
Ray Drew 8:28
The business tax returns.
Ronald Skelton 8:29
Yeah, the business tax returns. All right, just wanted to clarify that. So now we can, you know, go 5 million a little bit more if we can get the seller to carry back a note, which is not uncommon. There's a lot of sellers that kind of expect that. And what's the timeline like from I bring it to like, I bring the paperwork to you or I sit down and go, Okay, here's a company. You know, what are we looking for? As far as like, time to close?
Ray Drew 8:57
You know, I'll answer that. But I don't want to gloss over. I don't want to hijack your podcast, either. But you mentioned a lot of sellers are expecting the seller financing. I don't know if that's the case, right? If, if it's your first time selling and you don't have someone in your corner telling you this and you're not listening to this podcast, you may not expect that you may want to just cash out a closing and it is good advice to sellers to say hey, you may you may be expected to hold 10% note. I don't require it. A lot of buyers want it. It's encouraged. But there are a lot of lenders that do require it. So it is important to know that in terms of the process,
Ronald Skelton 9:35
Yeah. So there's there's a so when I say to a lot of sellers expected if they're actively shopping right now, there's a spot right below kind of just what you're talking about that you know the purchase price is five, five to 6 million or less. They're right below where private equity is interested at all. And that's their next that's their next cash buyer. So if they're if they can't grab the interest of a private equity You're even a strategic purchase, which is like a competitor wanting just your customer list and wanting to bolt you on, if they can't get the eyeball of that, and they're looking for an acquisition entrepreneur like myself, right? They're either going to carry some form of note, or like the price is, you know, just, we won't be able to buy it without it, right? There's not a lot of guys, like myself that would leave that kind of cash on deployed. Right? You know, I have a house wide addiction, if there's more than a few 100 grand laying around in any of my accounts, I go buy another property, I stick it in real estate. So, you know, I know for a fact that I would have to scrounge if it was, you know, if somebody wanted the entire amount in cash. And I know that most of the investors I come across are like that they're not sitting on a huge amount. Now, they might be holding money back for a downpayment. I've got two guys right now that want me to help them find businesses, and they've held back enough, as far as the 10%, down to max out what the SBA would lend. So now we're just looking for the right business. So but yeah, I think there's a there's a spot and you're right, most of the guys out there, you know, that just day one, start to think about selling, I'll be honest, they don't, they don't have much in order, he said that, you know, you should be prepared to sell for three years. Mostly guys, if I talk to him, and they haven't been working on it for a while they're not prepared. Right? They don't have their account their accounts readily. They're balanced statements ready. They can give me their tax returns, if you know, of course, but a lot of the stuff that you are, I would expect to see is almost created once you ask for it. It's just part of it. Yeah, part of the nature of, you know, what I call as accidental entrepreneurs, these guys didn't go to school, get an MBA and decided to create a business, they were really good at making a widget, somebody wanted the widget. And then so they made them one and somebody else wanted one in the next day. And they know they're producing widgets and make it three or 4 million and time to retire. They go to sell it and the only books and accounting they've ever had to do is enough to appease their tax accountant. Right? Which
Ray Drew 12:08
Yeah, and that's the majority of these businesses that are selling right now are like that. And it's the baby boomer phenomenon, because they're all approaching that age of retirement and they're selling. And that's exactly right. Which I think it's cool that you're doing this podcast, because this is how would you have known this stuff if 10 years ago, right, but you have have to have maybe been introduced to a business broker. Now, you have a lot more access to this type of information, which I think is great. By the way, you mentioned like with the strategic buyers, private equity, sometimes, correct me if I'm wrong, but they'll buy a portion, keep the owner there for a number of years. Important distinction with the SBA is that the seller has to fully exit the business after closing. In fact, they can only stay on for a period of up to 12 months as a consultant to help transition the business. That's important, because often you see an LOI drafted that says they're gonna stay on for two years. That's an eligible so then they have to rework that which is usually not a problem. But in some of the cases where they want to stay on for five years. Like that's absolutely a non starter for SBA.
Ronald Skelton 13:21
There is an education process for the both the seller and the buyer, right?
Ray Drew 13:26
Well, yeah, and the buyer has, I mean, this is in part why I started the YouTube channel because I was searching, I was seeing like, what's out there. And every video I listened to had incorrect information now, I'm an SBA lender. I'm a direct lender, I have been for 11 years. Most of the folks on YouTube are intermediaries. They know enough to be dangerous, but they're putting out information as if it's fact. And I constantly see misinformation out there. But even beyond that, when the buyers start talking to SBA lenders, they're still getting information that's a little iffy. Because every this is important to know the SBA seven APR, I mean, it's not like an FHA loan where it is what it is. It's, it's like clay, and every lender can mold that program into what they want to do in terms of how they structure the loan, what they'll require, what they'll approve what they won't approve, and what their process will look like. It could be day and night. I talked to a buyer, you know, last week and we do a lot with the trades and there's sometimes the special licenses like a track license, for example. And one lender said, you have to have the license holder who's a non owner guarantee the loan. Okay. Another lender says the license holder has says have to have equity in the loan. You know, we say something different than that. So now they're talking to and some of these lenders are saying that's what the SBA requires. They're saying that's what the SBA requires. And so, I've talked to a lot of folks where I have to clear up that kind of misconception that No, it's not the SBA, it's that bank. And there's a lot of other options available sometimes.
Ronald Skelton 15:07
So the SBA is just a guarantee or authority on that. Right. They're guaranteeing up to like 70% of the loan, you know, after the bank has underwritten it, and you know, so there's some, there are some guidelines that you have to follow for SBA. Right, but everything else is left up. You know, the decision making process isn't approved by the SBA, the bank has to approve it. And then it goes over for them to like, check, is that correct?
Ray Drew 15:31
So it's a guarantee 75% of the loan. If you're a preferred lender, which I highly recommend you work with a preferred lender, then they're doing everything in house on behalf of the SBA. Okay, they have delegated authority. And so like for us, we underwrite, we approve the loan, we close the loan, the SBA never sees the thing, only in the case of default, do we bring in the SBA, then they check our work. And if this key is not, you know, cross, they can say we don't have to honor this guarantee that right there is why your lender is pissing you off with all these tedious requests, by the way, right? Now, then they then they do offer the the 75% guarantee on what the loss would be for the lender. And that's what allows the lender to make these loans with minimal collateral on these long term 10 year repayment schedules. 10% equity injections. That's the key right there.
Ronald Skelton 16:24
The one of the one of the I guess, I don't know if it's a rumor or fact is that the SBA requires you to kind of stay in your lane. So they want to see relevant experience in the industry that you're buying. Is that true? Or is that a is that a myth?
Ray Drew 16:37
Great question. Because yes, some banks will require direct industry experience, some will require transferable, some will require relevant somewhat prior management, like it really just runs the gambit. I mean, the folks that are in the space, like myself, that are here working with searchers, you know, eta professionals, like the folks that really are savvy, but come from private equity, or come from corporate America, and they want to buy the business. Yeah, there's a home for you at a shop like ours, or some of the other folks that you know, I compete with on a daily basis, because you know, how to manage people, you know how to manage a p&l run a budget, and maybe you were in a field that was similar, even as a service based industry, maybe something makes it makes sense, kind of, but it doesn't always have to be we see a lot of private equity buying landscaping, for example. A lot of banks can't wrap their head around that. But we've done a few of those. So it just varies depending on what the SBA lender is wanting.
Ronald Skelton 17:46
Okay, so what are the you mentioned that there's myths floating around on YouTube and stuff? What are the ones that bugged me the most?
Ray Drew 17:53
Oh, boy. Oh, so one would be equity requirements. And seller financing. So I heard somebody say that, you know, the seller has to hold it a 10. year note for ARM sorry, seller note for 10%, which is, like I said, encouraged. But that's not written into the SBAS SOP. There's also an interesting situation where if you own a business, and you want to buy another business in that same exact industry with same exact ownership percentage, the SBA and this isn't written in black and white, but are basically lobbying arm of our industry has clarified that this is acceptable, you can finance that transaction at up to 100%. So if you own a cleaning business, and you want to buy a second cleaning business, same NAICS code, same ownership percentages, the SBA will allow that to be financed at 100%. Now, of course, I'm gonna look at the equity on the balance sheet to just make sure it's not overly leveraged. Because again, I mean, at least 10% equity somewhere, you know, it's fine. But that was one we're at when I put that out there on Twitter. No one everyone was like, really? I've never heard that before. And it's true.
Ronald Skelton 19:24
Awesome. What else is uh, so if you own a business and you're buying, say, a competitor, and as you know that competitors pretty much lined up when you said same amount of equity. What does that mean? Like, you own 80% of the cleaning company and you're buying 80? Yeah, the cleaning company
Ray Drew 19:41
Same owner don't need the same percentage. So you can form a new entity, but it's going to be the same makeup, Cap structure, all that. I also saw one, I mean, one guy went through, and he was like, you need to and this. This isn't maybe fully relevant to m&a, but you need two years in business to get an SBA loan? Well, that's not true because you can technically do a startup, you need a 660 Fico. No. He was just saying you need these things. And it just wasn't true.
Ronald Skelton 20:11
Yeah, I was told you need a 650 or 680 score or higher by a couple of guys that have been in the industry for 20 plus years, maybe their lenders requiring that?
Ray Drew 20:22
Correct. Correct. The SBA requires us to assess the sponsors character, and their credit history is one way of doing that. But in no way does SBA put a score on it,
Ronald Skelton 20:33
what's the lowest score you've ever seen financed?
Ray Drew 20:37
This week, actually, I just got an approval. And I don't want it shouldn't be like marketing at like, I don't want everyone with horrible credit to call me after this, just like, but I'll tell you this was a real estate purchase for these three individuals who started a behavioral center, ABA, things like that. Children, and they anyway, they leasing this two storey building in Michigan, they've just constantly been taking over more and more of it. Now they have the whole bottom floor, they want to buy the building, financing it, they don't have enough, they keep reinvesting to build up more space and expand the business. So they don't have a lot of liquidity, and the real estate's being sold for 3.7. So they came to us because you can finance real estate at 100% financing, which is another myth. I mean, I just had a bank reach out to me yesterday, who's an SBA lender, well known shop here in my state of Florida. And he's like, can you tell me how you're doing this? Because my credit, people think you need a 10% injection on real estate. And I said, well show me where it says you need that, you know, because it's not there. So anyway, we're doing this deal now, right? Before we put it into underwriting on Monday of last week, we run the credit. And one score is 595. Okay, there's a story behind there, that you that we listened to. The other two owners had good credit. And we got that approval on Friday. So five days later, we fully underwrote it approved, it got comfortable with the credit, and gave him a commitment letter. So that is probably the lowest score I've seen under 600.
Ronald Skelton 22:22
So I think you just dispelled another myth, I had it in my head. And I don't know where I got this, that you can't go in partnerships with somebody and buy a business through the SBA, its single owner, or single entity like my LLC buys this. But, you know, if I can't be a 50% owner on an SBA loan,
Ray Drew 22:42
You can't buy into a business. You can't use an SBA loan to buy 50% of a business. That's that's the rule, but you can form a business accompany an LLC 5052 partners, and then go buy a business and buy 100% of that business.
Ronald Skelton 22:58
Okay. And then that they check the credit worthiness of both parties parties on that?
Ray Drew 23:04
Yeah. And and you know, if one is 620, and the other is 800, you know, that's probably a good reason to be okay with something like that. Because you average it out. I mean, if you remove the 620, then yeah, it looks better, right? One way, but how can adding a person that's willing to guarantee the loan, pledge all available collateral, and help in the business? And there I assume adding value in one way or another? How is adding, subtracting to me? I don't believe in that.
Ronald Skelton 23:36
Yeah, I was always told that, uh, like, if you have a low score, then we can't give you more than, you know, we had, we've had companies like this where the they were told that if you got a low score, we can't add you on is more than 20% owner because they'll have to pull a background on you and your credit worthiness will keep us from getting loans and bank financing. So
Ray Drew 23:57
Exactly. You see that often, and if there is something really problematic, then yes. You know, I mean, for example, if you've defaulted on a government loan, you're ineligible. So student loan, FHA SBA loan, even if it's 1000 years ago, you're you can't get an SBA loan, you'd have to make the government hold before you got an SBA loan, right from the pickle check.
Ronald Skelton 24:22
Interesting. So that was a new one. So if you've defaulted on a student loan, which I know people who have, so that would that would forego that. So that's cool. Good to know. What else should we know? Like, let's just go from us. I guess to start from the seller's perspective, I've got my business. I'm looking to sell it in the next year, two years, three years. What is it that I want? I want a big check at the end of that. I don't want to like owner finance the whole thing now. And you know, so I want to I see listings all the time and say they're pre approved by the SBA. What is that and how does the seller go about the process of getting that started?
Ray Drew 25:00
Yeah, so these these are on market deals typically, and the brokers will work with someone like myself who will look at the sellers, financials, tax returns, and the sim, and basically opine on whether it's eligible and qualify for SBA and what the ballpark terms would look like. I'll look at basically debt service coverage. And I'll also just read the sim for any potential red flags like customer concentration, supplier issues, supply chain issues, anything like that. And I'll usually go back and forth with the broker upfront to iron out some of those wrinkles to make it a little smoother for the seller. And then buyers will now know this is an SBA deal. And ultimately, what that means is that it has tax returns that show profit, the one the other 50%, of deals, brokers are listing don't. And so those are going to be cash seller financing.
Ronald Skelton 25:57
So a business owner, you know, if he's out there, and he's trying to, that's another thing to point out, though, is a business owner who has been running his business to minimize taxes for the last few years, he's starting to think about selling it, you really need to start showing a profit, most of us buyers are looking at paying you based on some format of your sellers, discretionary income, and or a more advanced for a term that's EBITDA. But the whole point is, is a we do it. Well, I mean, there's ad backs and stuff like that. But there's also ways for you to run a company cleaner, make the numbers look more realistic, as opposed to just like you're trying to save taxes, and you get more more for it. And we get the better picture of how how efficient that's run. There's a rumor or I guess there's some notion out from my side of the fence here, the acquisition entrepreneurs that the it's that the SBA alone does some of its own due diligence. So it kind of helps us to make sure that we're buying something, you know, that would qualify, right, there's a there's a qualification process, it's almost a due diligence, due diligence of its own. What does the SBA look for as far as legal liabilities and other stuff that would happen during the due diligence process?
Ray Drew 27:28
Yeah, a couple of things. So, you know, we're going to underwrite the deal. So we're going to ask those same types of questions that you're probably asking due diligence, about customers, key employees, suppliers, cash cycle, all of that. So you just have a second set of eyes really a second and third, because me and then my underwriter. But sometimes the buyer often goes deeper than we do. So I wouldn't say we're, this is outsourcing your due diligence by any means. I think you should keep doing that, then we do a third party valuation just to come up with a valuation for the business. That's another added layer of protection. You know, if that comes in low, it gives you the option to renegotiate. Now, I will say this, and it's probably going to help sellers more than buyers. But I'm just I'm just transparent, so I'm just going to give it away. The SBA only requires the valuation to meet or exceed the loan amount. So if you have cash coming in from the buyer and a 10%, seller note, and the appraisal, the business valuation comes in 10 15% Low SBA is probably still fine. buyer could technically overpay, the lender themselves may not approve that, I mean, I typically try and be as business friendly as possible, but like there might be a lender just as just as I'm not okay with that, but just know that the SBA allows that, okay. Once the loan is approved, the lender myself would do searches on all entities, uncover liens, tax issues, judgments, things of that nature. And all that will have to, for the most part be cleared before closing. So that also helps ensure that the buyer is most of these are asset purchases anyway, but you still want to clear up any of that noise before closing.
Ronald Skelton 29:29
Okay. You mentioned that like you do a check on for liens and taxes and stuff like that. You do that for both the buyer and the seller. Make sure there's no okay. That's cool. So now we've got the sellers kind of pre qualified, we know what what's there. And we know that you as an underwriter will take a couple of looks at it, and that we still should do our own. What is there any other myths out there? I know that I mean, there's just So many different people doing, you know, these SBA loans, that I think that the general public has an issue with, like getting straight information.
Ray Drew 30:14
Yeah, well, the process is, is a big one. The process is and you asked me this earlier in the episode, we got sidetracked, I'll tell you about the process, because this is the part that's probably going to vary a lot from lender to lender, I look at the process in three parts. There's the pre approval part where we're kind of getting familiar with the transaction, getting a package, getting the story behind the transaction, and just understanding the business, essentially, you want the BDO, or loan officer, whatever the person that is, in my seat is calling themselves to have a full understanding of this business so that when they go present it to their credit counterparts that they're doing so in a holistic manner, and they're not missing anything, because when they put out the term sheet or the proposal, you want that thing to hold weight. And that's a big, huge misconception. Because I got someone reached out to me yesterday, they said, Hey, I'm shopping for term sheets, I wanted to slap them. Because you're not shopping for the term sheet, you're shopping for a loan for a lender, okay, and I could, there's half the lenders out there can create a term sheet on their own without anyone else seeing it and putting it out there to real someone. And you can make it look as nice as possible. But when you go get the final approval and the commitment letter comes in, and it's slightly different. Now that credit has looked at it, the buyers gonna say WTF, and or if that doesn't turn into an approval, which happens all the time. So hold your horses, let's make sure you're finding the right partner that actually knows what they're doing and knows what they're talking about. Because there's like five of us. And to so then you go and you get the proposal out. And when I do it, I have a 97% approval rate. So that's as good as gold. And that whole process, when we're all cranking three, three days, okay? Then we go into final underwriting, okay, this is where you're going to work towards getting a commitment letter, that's when you know, the financing is 100% committed to. And it's really just a matter of getting a bunch of paperwork, the business valuation as well, you know, things like that. But that's kind of where you want to get to as quickly as possible because you're under contract, and you need to know that the lender is on board. That's where we've disrupted the industry. Because we're getting there. I just told you, I submitted a one on Monday committed letter came on Friday. Okay, that's four days. That's, I think unheard of, to get to a commitment letter in that amount of time. And the reason we're able to do that is because we just have a different model. Like I put a I put a a poll on LinkedIn, into my industry last week. And I said, how many deals does your underwriter have on your desk at a time? And, and 56% said four deals or more. So that means when you're sending your deal to underwriting half the time, it's behind three other deals. So we and also the poll said basically there's a second poll, it basically said we have three underwriters for we have three lenders like myself for every one underwriter. So that's why that's happening. Okay, we have one to one, so that we don't have the bottleneck, and we get to the commitment letter sooner. That's all. That's all people care about. That's all you need to know, is step to get your commitment as fast as possible. And then we go into closing. Closing is is rough, okay? There's no way to sugarcoat it. You're not you've never been through anything like an SBA closing, okay? You just want a team that's responsive, knows what they're doing. And the timeline is very much predicated on the borrower, supplying the lender with everything that is needed, which there may be 30 items, and maybe half of those are third party situations, and so the buyer can get in there. And this is important for the seller, and the buyer can get in there, be very active, get everything they need to do within 10 business days, but you're now you're waiting on the IRS or you're waiting on your accountant and you're waiting and you're waiting. And so that stuff starts trickling in, and then you get to the closing. And honestly from the point of commitment, on average 30 to 45 days.
Ronald Skelton 34:37
It's been what I'm hearing from a lot of people. A lot of people are telling me it's 60 to 90. So,
Ray Drew 34:42
I usually tell people to go under LOI for for 60 I mean 90. And let's shoot for 60 and that's from the point of signing your LOI. That to me is is doable, but I mean yeah, a lot of lenders are very much backed up right now. And I get a lot of messages like hey, this is Dragon with this lender. This and that. it and you know, we jump on it, we that's that's you know, our model is just kind of more based on speed and process. And we charge for it don't get me wrong, you know, all of our deals are priced at the ESP's maximum rate, which is prime plus 2.75%, which most other lenders are charging that anyway, we're just trying to do it and add value. So that's 6.75%. Today to adjustable rate, and the rates are going up. And that's all very important to know as well.
Ronald Skelton 35:28
So it's an adjustable rate rates are going up. What is the loan? Typically, I know, it's different if you have real estate involved or not real estate involved. But what is the loan typically, amortized over so people know how to calculate the debt service that they need to be able to cover?
Ray Drew 35:41
Yeah, that's true. It's a 10 year am. Okay, fully amortized, no prepayment penalty, which is great. And then yeah, if it's if the real estate is 51%, or more of the proceeds, you can do a 25 year, which is incredible for cash flow. And there is a prepayment penalty on that three years, but it's super worth it. And you'll have more rate options as well, I'm doing I've done acquisitions like that, where they're buying. And by the way, it's based on the proceeds not the appraisal. So the contract the purchase price allocation, and the contract will say real estate, 1 million business 900,000, boom, 25 year term, you're golden. I did, I'm doing one right now for an auto nuts and bolts distributor, something like that. And it would bind the real estate in the business. But the real estate was not 51%. So we offered a pretty creative structure that basically involved two loans. So one was 25%. And we moved as much there as possible to just help with the cash flow. So we're and that that by the way that came from my credit team, that that's that idea. That's the way they think here as a non bank lender, it's a lot different than banks. And so I was like, Oh, wow, that's super creative. And it's coming from credit who sometimes gets a bad rap in the industry, but they're, they're not here, you know, they they're great to work with here.
Ronald Skelton 37:02
All right. Is there any? Like, like, you know, I used to be in the real estate space and people go, I'm pre approved. Is there anything as a buyer that we can do to get kinda pre qualified to know that we? If we're going to a seller, and they're like, Hey, I would like you to use SBA loan like we are pre approved. Are there a process we can go the the know that we're clean and ready to go?
Ray Drew 37:25
Yeah, I do do that. The especially the last couple of years, because it's been so crazy. It's been a crazy seller's market. And the brokers want to know, you're serious, the sellers want to know, you're serious. So I do it. But I do it in the context with the disclaimer that this is, this is useless, okay. But if it helps you go for it, I basically said you have cash to do it. For this amount, this range, you have some experience in something that will work for the business as you're looking for a think, and your credit is good. That's basically all that is, but 70% of the underwriting is based on the business. So that's why, you know, we can't really do much until they find the business but
Ronald Skelton 38:13
So also what else there for you just because I'm curious, it's one of my friends and potential client. I have a friend who is if you're listening, you know who I'm talking about. I have a friend who is just finished law school. And he's about to pass the bar, but he's buying up auto related business. He owns a tow truck company now and we were looking at a tent and detail company with a big yard beside it that we could use as a impound yard for the tow. But is, you know, we were talking about staying in your lane, the SBA wants to see you have industry experience, this guy will have a business law degree in contracts and papers, right like that, you know, negotiations and contracts is kind of his focus out of his law school. But a is because because it's a law degree. Is that enough? I mean, it's like an accounting degree. If you have an accounting degree, can you buy a bakery? Or are they going to look at it go industry experience, you've never baked a cake in your life?
Ray Drew 39:06
I mean, I probably decline it because they chose to go to law school. That's probably a bad idea. But now the I don't know. I mean, do you know anything about a p&l statement? If you graduate law school? I don't know. Have you ever managed a person? I don't know. So I would probably start there with those two questions, because those are two very important skills, you could probably get the deal done really well. But then they want after you know, you buy the business. I don't know what that looks like.
Ronald Skelton 39:33
What about most of the most of the guys I work with our number one jaw jaw rule is we don't buy ourselves another job. So we're looking for buying things big enough that we're more of a chairman of the board. And there's a general manager in place 10 or more employees than we are looking for why something so small that I have to show up every day and know that industry? Is that a problem with an SBA loan with like, you know that the owner is gonna be one step removed like he owns other entities and other stuff to run?
Ray Drew 40:02
It's a very critical question with SBA because SBA won't allow us to lend to passive businesses. Not that I think that's passive, but you have to be very careful in your approach. So if you're, if you have a large operation, until you have management layers, that's fine. Everyone reporting to you, you have control over the business, ultimately. And you have that infrastructure in place, that is fine. But control is the key word with SBA. So does that GM have autonomy to fire, hire, manage the money, everything like that, that could be an issue, okay. But if they're reporting to the owner, and there's weekly check ins, and the owners making the big decisions that could work.
Ronald Skelton 40:49
That's more what we would be looking at is like, you know, weekly, and, you know, weekly check ins, weekly financial reports, quarterly goal planning, you know, oversight, but like I said, more of a chairman of a board than then actually like the CEO show up every day and go out and help you make sales is what a lot of the acquisition entrepreneurs that I talked to is what they're looking to do, right? If you look at somebody like me, I have a pest control company, I've a mastermind company, I have real estate holdings, and like, I don't need a 40 hour job, but I'm looking for another company to acquire as matter of fact, I'm kind of looking at another industry right now. I'm trying to figure out how to get into but, you know, sounds like it may or may not be a fit for, like me to use SBA to do that. If I've made controls,
Ray Drew 41:38
I think it could be a fit for you, um, have you, you know, the question is, have you Do you know how to run the business, right? If you know how to run the business, but you've elevated yourself to that level where you can have multiple holdings and managers in place, I think I'm, as an SP, ln, are more inclined to do it than somebody who's, let's say, graduating law school. And they've never done it, and they want to hire someone to do it. That to me is more of an issue.
Ronald Skelton 42:08
I think you, I didn't tell you the full story, the guys my age, right. He's, he went to law school in his 40s. He's on, you know, a couple of different businesses that were on high six figures and owns it. He's a private lender in the real estate space. You know, he just went to you know, he's got significant holdings right now, but like I said, he just went back to law school, kind of on a dare we were like, myself and a couple other people, you started talking about doing it and like, what are you afraid of just do it, and you keep talking about it go after it. And I said that to him of wife said that to him and a few other people said it to him one day, he just took the LSAT and went to law school.
Ray Drew 42:48
Okay, well, you and your friends are weird. My friends do do there's a totally different way. But whatever works,
Ronald Skelton 42:57
I almost went with him is one of those. My wife's like, why don't you go I was because I have five college degree and seven majors. I don't need I don't need a law degree. Right. I am schooled out. Oh, boy. A lot of them are like I say that just kind of jokingly, but a lot of them are like associate's and dual major associates and dual majors bachelors. So it sounds more impressive. As I always joke around say I have more education, the average folks that have but uh, I learned recently like in the last 15 years, I got a better chance of learning from somebody out in the field doing it than I am from going back to get another degree in something. So now I just hire mentors, people in space, I interview brilliant people like you and ask good questions and take notes and watch my shows later.
Ray Drew 43:39
You know, that's the new way to do it. Because, you know, I, a lot of my barbers have MBAs. And so I always toyed around with the idea of getting one but I mean, I don't know if it's worth it. For me. I like reading books and consuming content, podcasts, all of that. And I feel like I can learn anything. But I, I've been told there's more beyond just learning the content of an MBA program, but I'm leaning against No, but I'm just because I am not sure if it's worth it for me. I don't know if you
Ronald Skelton 44:10
have any real reason I did mine or main reason is I'd hit a spot in my career where I either needed to learn I was I kept hitting senior director, like, you know, I got a VP title for a few months and then I quit. But I couldn't like that executive VP was elusive to me. I either needed to learn to play golf and go hang out with these people, or getting my master's degree. And I just figured an MBA was a lot cheaper than learning to play golf. So I'm good at school. So I quite literally, I'd actually I actually started law school I actually got accepted to a part time program ended up going to about three or four classes and ended up in a divorce and couldn't afford the alimony the you know, all the bills and all the other stuff and law school so I backed out, and the reality hit me was like, I really didn't like the classes I took and I really, I went through about a half dozen the turn least before I found one I even like because like, I don't like these assholes, why do I want to become one of them? Like, I thought I wanted to do intellectual property law. And one day, while I was making that shift, I actually set with the IP lawyer at one of the startups and watch what he did. And, you know, talk to him, you know, I worked beside him, I moved my desk beside him to see what this guy does and did my project management right beside the IP lawyer. And I realized I didn't want to do that. It's just you just need even paperwork doesn't talk to people all the time. He's just researching, researching, researching. But uh, you know, here I am researching businesses now. So, yeah, that's different. Yeah. So I would say you don't need it as I think the natural progression for you if you asked me was to become an acquisition entrepreneur, alright, go buy another business, right? If you build your portfolio,
Ray Drew 45:50
so yeah, I'm, I want to stay in the I don't want to do anything different than what I'm doing. I want to stay in the industry and kind of change it from within. But no, all right, fine, then, you know, you heard it here, I'm going to not get an MBA per the advice of Mr.Skelton.
Ronald Skelton 46:06
Your parents are gonna call me to kill me, my number is on the website, you can call me I'll apologize. All right. So let's go back into the SBA stuff. So we're kind of coming close to the top of the hour. Are there any other like, you know, man, I wish that like, there are things you know, now about the process, you wish you would have known day one. And you really think that anybody getting into maybe your role, even, like should know about you know, helping people get SBA loans or the process or whatever,
Ray Drew 46:37
I would 1,000% Recommend SBA lending as a career, nobody goes to Job, nobody wants to be an SBA lender, when they grew up, trust me, I think I want to be a doctor or a lawyer. This is much better, and I make more money than doctors and lawyers, you can make Wall Street plus income doing this, just so you know, you also it's like a franchise, right? You I, a bank might send you to a market or you might just be in the market they want to get into. And you get to go to market, how you see fit, call brokers, whoever formed partnerships, and then run your deals. Meanwhile, you do get a base and benefits and some people like that. So I think we would definitely benefit from some new blood into the industry one. And then two, we touched on earlier sellers thinking maybe right now they're having the Epiphany, I want to sell my business, all right, and they've been doing the tax strategies. So, you know, ideally, you're going to sell in 2024. Because 2022, you're going to have clean books, you're going to, you know, talk to your accountant, you're going to set yourself up the right way, 2023, you're gonna have another year, and then 2024, you're going to sell, okay, that's ideal. Then you you're looking at 2021, 2022 taxes, or I'm sorry, 22, 23 taxes, you're gonna get the most for your business. Buyers are gonna be able to qualify for financing, and you're 24 months out, right? Some people don't have that luxury, they have a health issue, or they have to relocate. And so then you're probably not gonna get as much as you want. But you can still go through with the broker and the accountant and kind of identify some expenses within the business that probably won't transfer over to the new owner. Also, maybe they're non recurring. Maybe you just redid your website, you know, there's things like that you can isolate on the p&l on the tax returns. But the key with an SBA lender is to make sure that perfectly documented so that we can rely on them in our underwriting. And we could do it that way too. So I do see kind of a combination of both. But if you have the luxury of waiting, you know, now is probably the time to set yourself up for success.
Ronald Skelton 48:58
How hard is it to do is or even possible to do a refinance? Could I work with a business owner, right, who just needs to exit. Buy the business now with some form of giving him some downpayment, give him you know, have him finance it to me with the agreement that after two years of proper tax returns and bookkeeping and stuff that I can go to the SBA refinancing them out.
Ray Drew 49:21
That's the exact advice I give to folks that they just can't get it done the right way with an SBA loan. So the SBA requires, this is very important because it's very specific in the SOP, it's one of the probably came out like five years ago this rule but essentially, the seller note has to you have to have 24 consecutive monthly payments before it becomes eligible. So the lender is going to ask for proof of 24 consecutive payments, and then you can apply for the refinance. And why that's important is because during COVID, for example, you missed a payment, or they deferred a payment or they forgave it payment. If you're taking the SBA guidance for in black and white as it's written, then you have to wait 24 months from the time you. So if you miss the payment on month 21, you start over. And to me that's, I don't agree with that. And there's probably a case to be made for SBA to reconsider. But that would require sending it out to the SBA, which you don't want to do. So just very important to keep that nice and tight 24 consecutive payments.
Ronald Skelton 50:24
Got it. So we are at the top of the hour, man, I'd enjoy chatting with you this stuff, let's make sure people know how to get a hold of you. We have it on the screen, if you're watching. If you're on the YouTube, you're on my live feed here, you can see that you can always catch our shows live and uncut, raw on YouTube. Sorry, on Twitter, on LinkedIn, I think we've got our YouTube turned on now. So that just happened this time. So anyway, the best way to find Ray is on his YouTube channel. And if you go there, and you look for SBA Ray, you should be able to find him. I did the search right before he started. It's pretty easy. He's got a good channel there started. And that's a great way. Is there any other way you'd like people to reach out to you?
Ray Drew 51:05
Yeah, I mean, if you want to contact me, I guess you can email me at where I work fund x. So that's firstname.lastname@example.org.
Ronald Skelton 51:13
Awesome. Well, I appreciate having you on the show. There's always the last question I love to ask is, what can myself and my audience do for you? What is there a need, we can actually help you fulfill or something we can get the word out about? Or is there just something that you want to finishing note?
Ray Drew 51:31
Oh, I appreciate that. And you know, the channel that I created is I created it because of I felt the misinformation was was out there. And I'm literally just doing it to try to clear things up for people. And my goal is to get to 1000 subscribers by the end of the year. And I need help doing that. So sharing my youtube channel would be my my ask.
Ronald Skelton 51:55
All right. Oh, I almost hope you didn't hear that. I actually started that started with your videos. That accident. I wasn't sure it were on the show live. But we'll do that afterwards. Because it's gonna play music over there.
Ray Drew 52:05
Don't worry, I think went to your headphones. I don't think
Ronald Skelton 52:07
Oh, cool. That's cool. I think Oh, no. All right. So I will share that. And I'll actually share your channel. I'll subscribe to it. I have two or three accounts on YouTube. I'll use I'll subscribe for my personal one and my business one. And we'll get you going. I appreciate you being on the show today. And hang out for a few seconds after the show. And we'll chat.
Ray Drew 52:28
Thank you. I appreciate you having me on.
Ronald Skelton 52:30
Thank everybody that is the show today. Hey, it's your host Ronald Skelton. I want to thank you personally for watching the show today and invite you to call our new hotline 918-641-4150 That's 918-641-4150 Call us and tell us about our show, ask questions, suggested guests or even tell me about a business you have for sale and we'll reach back out to you again that number is 918-641-4150 call our hotline leave us some information. Thank you, the investors and entrepreneurs professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind introduced first in Napoleon Hills famous book Thinking grow rich with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think it's possible. I suggest you take a visit over to tiepm.com That's T i e. P m.com. And check it out the investors and entrepreneurs professional mastermind