Can An SBA Loan Help Your DTC Brand Scale?
Episode Summary
In this episode of the Free to Grow CFO Podcast, Jon Blair and Roxann Burns delve into the intricacies of SBA loans, exploring their benefits, criteria, and common misconceptions. Roxann shares her extensive experience in SBA lending, emphasizing the importance of understanding cash flow and structuring debt appropriately for business growth. They discuss the nuances of using SBA loans for various purposes, including partner buyouts and business acquisitions, while also addressing the significance of finding the right lender. The episode concludes with practical advice for entrepreneurs looking to navigate the SBA lending landscape effectively.
Key Takeaways
It's important to have a solid financial foundation before applying for an SBA loan.
Permanent working capital needs should be financed with long-term debt.
SBA loans can be beneficial during growth spurts for businesses.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Roxann Burns- https://www.linkedin.com/in/roxannburns/
Free to Grow CFO - https://www.freetogrowcfo.com/
Meet Roxann Burns Aguilar
Roxann Burns Aguilar is the SBA Lending Executive at Fremont Bank, where she oversees all aspects of SBA Lending. With extensive leadership experience in strategic, administrative, credit roles within the U.S. Small Business Administration specialty, she has dedicated her career to supporting the growth of small and medium-sized businesses.
Roxann Burns Aguilar has been actively involved in SBA Lending for over 30 years. With experience in both the 7a and 504 programs, her duties have included responsibility for loan volume, asset quality, financial and risk management for SBA lending in large and small institutions. She has extensive experience in all aspects of SBA lending, including credit underwriting, closing, servicing and liquidation. She has managed SBA loan portfolios in excess of $1.5 billion and national SBA lending departments on both the east and west coast.
Ms. Burns Aguilar earned a Master degree in Public Policy and Administration and a Bachelor of Science degree in Economics and Business Administration from California State University, Sacramento.
Transcript
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00:00 Introduction to SBA Lending and Roxanne's Background
03:04 Understanding SBA Loans: Basics and Criteria
05:45 The Role of SBA Loans in Business Growth
08:57 Permanent Working Capital vs. Revolving Capital
12:01 Strategic Debt Structures for E-commerce Brands
15:07 Common Misconceptions About SBA Loans
32:56 Understanding SBA Loan Processing Times
35:36 Negotiating Terms on SBA Loans
36:45 SBA Loan Limits and New Programs
38:54 Challenges in Manufacturing Financing
40:18 Financing Raw Materials and Work in Process
41:53 Importance of Cash Flow in Loan Approval
43:40 Building Relationships with Lenders
46:31 Refinancing SBA Loans
47:27 Business Change of Ownership and Partner Buyouts
Jon Blair (00:00)
Can an SBA loan actually help your DTC brand scale? Today's guest is an SBA wizard, and she's gonna help you decide.
All right. Today I'm here with my good friend Roxann Burns, SBA lending executive at Fremont Bank. I call her the SBA Oracle or the SBA Encyclopedia. If I ever have an SBA question, she's immediately the first person that I reach out to. I've known her for quite some time. I met her when I was at Guardian Bikes, actually, when we got a couple of SBA loans, learned a lot about the program, some good lessons, some tough lessons and
I'm excited to have her on today. Roxann, how are you?
Roxann Burns (00:38)
Great, thank you for having me, I appreciate it. I'm excited to share.
Jon Blair (00:41)
I was telling Roxann
before we hit record because we've known each other for a long time and we've had lots of philosophical conversations about debt versus equity, when to use it. And I said the hardest thing about today's episode is going to be to keep the conversation to less than two hours because we've had plenty of those ⁓ really long conversations. But before we dive into talking about whether or not SBA loans can help,
a DTC brand scale. Can you just give us the brief story of who you are and what really got you into SBA lending?
Roxann Burns (01:14)
So I have a master's in public policy and administration. And I did an internship in grad school for the state with the state of California and got introduced to SBA lending in that role as an intern. Literally got a stack of financial statements and was told to spread them and had a, know, you know, credit, credit underwriting manual.
and I spread, this tells you how old I am, I was spreading with a pencil and paper, okay? Modus Notes was the kind of the new thing. So yes, and once I got the bug, I mean, I dropped my master's thesis, I changed everything.
Jon Blair (01:43)
That's great.
Roxann Burns (01:54)
And I wrote my master's thesis on financial literacy as a direction in small business development policy. Because even at the very beginning, I could see I'm over here underwriting, you know, your financial statements and realizing that the person on the other side doesn't have the knowledge of, you know, what those financials are telling me. So you're telling me this and your financials are telling me that. And this is a common theme.
All these years later, that analysis still is true. It's probably one of the gaps. You see this a lot.
Jon Blair (02:30)
Yeah, Roxann and I have, I'll try not to go on a tangent. We've had numerous conversations, I'm smiling, because I'm numerous, about the need to educate the marketplace on understanding balance sheets and the interplay of the balance sheet with the P &L to ultimately understand cash flow. I knew when I met Roxann that she was not like most other bankers.
she understood or had a passion for understanding how the business actually works. And that was definitely where we hit it off. Much more entrepreneurial than ⁓ I'd say most if not all bankers that I've really dealt with in my life. And so I'm excited to dive into the topic of SBA loans. So to set the stage before I ask you my first question, what I want the audience to understand is SBA lending is...
something that the reason we're talking about this is because it comes up lot. Like entrepreneurs early stage, lower to middle market, SBA is this enticing form of capital you can raise and you tend to hear either like horror stories or success stories but a lot of people don't really understand how SBA works. I know that I didn't until I met Roxann and so just to start out like basic bare bones
What are SBA loans and what are kind of the major criteria that helped a company either qualify or get disqualified?
Roxann Burns (03:56)
So there's a couple of SBA programs, but the general concept in the major loan program is called a 7A loan. That's based on the regulation or the statute, and it's a guarantee.
So I make a loan to the business for $100,000. I get a 75 % guarantee. Now that is not a fixed guarantee. It's a loss guarantee. So let's say something happens and I have to liquidate that loan. Whatever loss the bank takes.
I'm going to get 75 % reimbursement from the SBA as long as I follow the program requirements. So unlike in the mortgage secondary market and the mortgage guarantee world, all SBA lenders have skin in the game. And I think that's why this program has been around since the 50s and still going strong today.
Jon Blair (04:34)
Mmm.
So, it's very interesting, right? So the lender has skin in the game, there is, the lender has followed the protocols, the SOP set forth by the SBA, if the loan defaults and you end up having to basically foreclose on it, you can get a 75 % guarantee from the government. So from the lender's perspective, of the loss, of the loss, yes. So from the lender's perspective, how does that...
Roxann Burns (05:06)
of the loss. Yeah, of the loss.
Jon Blair (05:11)
How does that change your, like how does that change the box for who can get an SBA loan versus a conventional loan?
Roxann Burns (05:16)
Yeah. Yeah. Well, let's
just go to the first question you asked me in that, or what is the major criteria? The number one major criteria is you have to be small. And this seems like, ⁓ it's made, if you do research, you know, there's industries and there's number of revenues and there's number of employees. But at the end of the day, SBA has an alternate size standard, which I think is easy. It's a tangible net worth of 20 million or less.
It's a very big company. And its average profits, two year average profits after federal income taxes of 6.5 million. That is a pretty big company that can qualify for an SBA loan. So it takes you from, I guess, startup all the way to something that big.
Jon Blair (05:53)
Absolutely. Interesting.
Are there any qualification criteria around like the net worth of the owners or is it specifically around the net worth of the business?
Roxann Burns (06:11)
That initial criteria of what is considered small is the business. So we're looking at the business and I would say the business and its affiliates. So if you have affiliated business where there's ownership control, you know, of two companies or more, those would be considered affiliates.
and then there's a size standard. But that size can apply. But from an individual standpoint, the SBA does have what they call a credit elsewhere test. And that's another fundamental concept. The credit elsewhere test basically is the lender cannot make this loan to this business if they can reasonably get credit.
from another source on similar terms. Okay. So that's the key in that is the similar terms. And the third criteria, main thing about SBA loans or the advantage is you have a lower down payment or a higher advance rate and a longer term. So what we might do on a non SBA loan, a five year term or a
Jon Blair (06:51)
Mmm.
Roxann Burns (07:11)
you know, a 25 year amortization on real estate due in 10, with the SBA guarantee we could do it fully amortized on like working capital equipment, business change of ownership, we can do a 10 year fully amortized loan and on real estate we can do a 25. So you're, really.
Jon Blair (07:26)
Yeah, see that's
huge because basically what Roxann is saying is if you compare say a 7-8 term loan that you're gonna use for general working capital purposes versus one that you would get a traditional term loan outside of the SBA program, you're gonna have to pay that traditional loan back faster, generally speaking. Oftentimes in like five years or less as opposed to 10 years. And I remember,
I remember someone, one of our advisors at Guardian Bikes, when we were looking at that 7A loan that we did with you, he was like, and interest rates were obviously a lot lower back then, but he was like, hey man, a 10 year term loan, he's like, that's, if you factor in inflation, he's like, that's basically like, it's basically like Free equity dollars, right? Now, yeah, it is, it is, it's equity light.
Roxann Burns (08:14)
That's why I it's equity like. Because you just have, yeah. And it
really, that longer term also reduces those payments and from somebody who manages portfolios, right? So I have the accountability for the ⁓ quality of the SBA loan portfolio. The default rate on, generally on my SBA portfolio compared to the non SBA portfolio is about the same.
because that longer term enables businesses to, even when they're struggling, to keep eking out those payments versus if they had a much larger monthly payment to make.
Jon Blair (08:50)
Interesting, I'm reading a book right now about real estate investing called Start With Strategy and it talks about financing strategy. And one of the first concepts that it goes through is time is your best friend when it comes to financing real estate. And what he was getting at is that like if you can wait, right, if you can wait out a market downturn or you can wait out
Roxann Burns (09:05)
Yes.
Jon Blair (09:13)
a change in interest rates. If you can wait out conditional changes and still continue to make your payments, time is on your side and eventually you can usually come out of those adverse conditions, right, and keep servicing the loan. But it's true, and so like the longer time, another, one thing that we talk about a lot of Free to Grow CFO, because a lot of brands are looking to purchase inventory
with debt, right? And so one thing, we've come up with a bit of a framework that I've trained our team on, and it's basically like assess the risk, right, in your sales forecast. And in simplest terms, we equate risk with uncertainty. So like the more uncertainty there is in the demand forecast you're using to, ⁓ you know, calculate that P.O., the more uncertainty, the more risk, and the more risk when we think about debt, right?
There's a couple things you can do to try to align the use of debt with risk. The first one is, generally speaking, the more risk there is in your sales forecast, use less debt and more equity, right? Because there's less certainty. But the second thing, like you just mentioned, is choose debt with a longer time horizon. The most risky thing you can do is have a lot of uncertainty in your demand forecast, place a big PO,
and have short-term debt that's due in say 90 days. That's super risky. But if that debt's due in two years, you can miss your sales forecast, but have two years to figure it out. Right? And so the time horizon, I'm just trying to give a practical example of why time horizon matters. And so I'm curious, you and I, I think both have some very clear opinions and or stories we can tell about this, but what are your thoughts on if and when
Roxann Burns (10:35)
Yes, that's right.
Jon Blair (10:53)
SBA loans are a good idea for a fast growing e-commerce brand.
Roxann Burns (10:58)
You know, I think that in some ways it's kind of like where you and I met, right? When I always say businesses don't grow in this nice straight line, they grow like this, you know, and they have these little spurts. You spurt something, you know, something comes or a customer comes along. There's some opportunity that you have a growth, you know, a growth spurt. And what I think SBA loans can be very helpful is in those growth spurts to again,
Jon Blair (11:02)
Yeah, yeah, totally.
Roxann Burns (11:25)
You know sort of flatten out some of your your uncertainty in that your forecast and I really loved your piece on Forecasts versus projections and I think that that is a great place so whether it's I need to invest in you know I'm gonna grow by this percentage and when you grow and you know this from the balance sheet. There's a part of those
⁓ trading assets, your receivables and inventory that are as you as your revenues continue to get higher, there's a piece that's never going to revolve, right? It's there's and that's where permanent working capital comes in. That's where that little bit of SBA financing can come in. And I would tell you that the better you have your arms around your cash flow cycle,
Jon Blair (12:00)
Yeah.
Roxann Burns (12:14)
and your cash flow forecast 12 months, 18 months, the easier it is for a lender to say, look, you need $375,000 in working capital to get you from this sales level to your forecasted sales level. And that's usually why people have a hard time because they can't do the analysis to help a lender get to that yes.
But I think that's when, and it could be even you need to buy a piece of equipment. So if you're a manufacturer or you need to find a piece of equipment, and even if you're a service business, let's say you have an opportunity to expand. I have a client who does daycare and her expansion is getting the next location. And she likes to buy the real estate, right? Because she's got that asset for long term.
Jon Blair (12:37)
Yeah.
Roxann Burns (13:02)
This is another thing too is that sometimes you expand by location Sometimes you add a product sometimes you add to have people and you know working capital could be used for ad spend too You know, there's there's that's kind of like just cash right that you borrowed for ten years and the SBA's Minimum kind of term for working capital seven years, but we go to ten And so that's very common for us to underwrite a ten-year term on that
Jon Blair (13:11)
Mm-hmm.
Roxann Burns (13:30)
But yeah, that's really the best time to.
Jon Blair (13:30)
Okay, so.
Well, I just, thought
of something. just remembered something as you were talking. I, I'm smiling because, this is something that I talk to people about a lot. And I just realized that I, this idea came from you, during our time at Guardian Bikes was this idea of permanent, like, like permanent working capital versus, revolving fluctuations we'll call it. Right. And so, so I want to break this down a little bit because this is key.
Roxann Burns (13:52)
evolving. Exactly.
Jon Blair (13:57)
I, so what Roxann is saying is like as you're scaling, right, if you think about, let's talk about inventory plus AR, that's your kind of major sources of drivers of working capitals, the levels of those, right? So you may have, as you're scaling, your,
increasing inventory levels and AR and let's say you're also seasonal, which most brands that we work with are, right? So the seasonality component is what's driving this revolving need, meaning like there's the, think of peaks and valleys of your cash needs. Generally speaking, you have a valley of cash balance and a peak of cash need when seasonally your accounts receivable and your inventory need to be really high because of seasonality. And so you need to borrow
during that kind of working capital peak, right, so to speak. But it's revolving because when that seasonal spike goes away and you collect on that AR and you draw inventory levels down, you now have a trough of working capital needs and you have an excess of cash at that time. So there's this revolving piece, but as Roxann is saying, as you're growing, there's always, you find this permanent minimum.
Right? This permanent minimum inventory level, you never go to zero, right? Generally speaking, AR never goes to zero. And so if you actually break out your projections of AR and inventory into like, here's my permanent minimum, but then here's my revolving peak and valley, right? That oftentimes is driven by seasonality or some big order on the wholesale side of your business, whatever. What you can do is you can have a piece of debt capital.
Roxann Burns (15:09)
Yeah.
Jon Blair (15:37)
the term loan for example, which is not gonna revolve, it's not gonna go up and down with your needs, right? You're gonna pay back evenly over 10 years, but that can be the source of capital that finances that permanent minimum, right? That minimum working capital need that your business always has. And actually Roxann was savvy enough to suggest to us at Guardian Bikes that we have that term loan, and then on top of that,
we had a revolving line of credit was the thing was called a cap line, right? And we could draw that up and pay it down with our seasonal needs. So now you're financing permanent working capital needs with a more, with a, what this comes back to is a principle that I learned in school called maturity matching, which just means finance assets or working capital needs with debt or we'll just say capital, but in this case debt.
Roxann Burns (16:06)
Yeah, and it was seasonal. That's right.
Jon Blair (16:28)
that matches cash flow. You wanna match the cash flow generation from those assets with the pay down of the debt, right?
Roxann Burns (16:35)
Exactly.
Yes. And I think, you know, with DTC brands, I don't see this mismatch, maybe at the smaller and when I think small, I think small and medium enterprise, you know, for me, there's any company less than a million, you know, and those are pretty young companies. A lot of them don't have employees, but when you get over a million, like a million to five,
Jon Blair (16:50)
Mm-hmm.
Roxann Burns (16:58)
That's like a very interesting time for a business of any time, even a DTC brand. But I will see people buy fixed assets with their line of credit. And you have to pay that line to zero, generally, at least annually, if you want the lender to keep revolving it. If you, what we call evergreen it, meaning you've draw it up and you leave it there, they'll eventually, you know, either term it out over, you know, a few years, which is still not.
Jon Blair (17:08)
yeah.
Roxann Burns (17:26)
easy. You just won't be able to sit at that interest only for 10 years with the line of credit if you don't resolve it. You have to use it for the right asset that you're financing.
Jon Blair (17:36)
Well yeah, and so what you were just mentioning there, fixed asset, long term asset, right? Fixed asset produces cash flow over a long term period, multiple years, financing with a line of credit, which is short term debt, right? That typically has to be paid down to zero every 12 months, generally speaking. So you're not following the maturity matching principle. actually what...
Roxann Burns (17:40)
Exactly.
really thinking
about what is the term, you what is your inventory turn and what is your receivable turn, right? ⁓ And this was the sort of the tricky part where I saw that Guardian needed a, they needed a fixed piece of working capital. And then you needed that revolver to get you through the, you know, the, that time that you had to order your product until you got it on shore. And then on top of that, you have this very short
Jon Blair (18:02)
Totally.
Roxann Burns (18:22)
intense sales window. yes. ⁓
Jon Blair (18:24)
Totally. Yeah, I know. First it was like spring, summer, right? When everyone
gets back outside and then it was the holidays and we always had to load up on inventory before that. But guess what? Sales were in a trough seasonally when we had to place those orders, right? And so I think the point that I want everyone to take away here is that if you're talking about an SBA term loan, again, that's something that's amortized me and you pay it back in...
in even payments, right, over some time horizon. That can work if you're financing assets or working capital needs that follow that same timeline. So what I generally see for an e-comm brand, let's call it an e-comm brand that's seasonal, because so many of the brands we work with are, right, is that tends to be, where I tend to see it be helpful to have a 10-year SBA 7A term loan is fixed asset purchases, like equipment.
and real estate, and then the other one is equity buyouts. If you're gonna buy out, yeah, so I wanna talk about, so, but it's because those are longer term, you think about the time horizon of those asset purchases, those follow a longer time horizon, and usually inventory for most econ brands, you need a line of credit that can revolve, because your inventory needs are revolving in large part.
Roxann Burns (19:24)
Yeah, we'll talk a little bit about that next. Yeah, that's a whole other animal.
Yes.
Jon Blair (19:45)
And that's, don't want, I don't want people to think that like they can't use a term loan, but if you're growing and you're seasonal, it's very hard at, at Guardian, we ended up having to refinance out of it because we were growing so fast and, we ended up having to move on to actually an ABL. We had to move on to an ABL after that.
Roxann Burns (19:58)
Plus.
wasn't enough. Right.
And you could keep that term bit in place and pay over time because the other thing we did is that, and this is another important concept about SBA loans, is lean position on those creating assets. So generally, if you're not doing a revolving facility, SBA encourages lenders to
not take a lien on the trading assets on inventory and receivables because they want the business to have the ability to go out and get a line of credit. And if we take the whole thing, then somebody is going to come and say, hey, I need a line of credit. Can you subordinate that lien? And lenders are like have a really tough time releasing collateral. So I have a philosophy. And also, any time I do that, it's an expense, right? Anytime I have to modify a loan down the road, it's expense.
Jon Blair (20:46)
for sure.
Roxann Burns (20:53)
So I try to say, how can we set this business up for success and not have to come in, do modifications down the road? And that's my personal philosophy and how I run my lending operations. But I do think that ⁓ this idea of allowing the trade, if you have a line of credit, any revolving facility, they typically need, I don't care if you're asset-based.
borrowing base, no criteria at all other than a first lien on your trading assets. So that's what we did. We gave the line, the first lien on receivables and inventory, and we just took fixed assets of the business in the second position. And what I'm doing with an SBA loan there, I'm relying on the guarantee instead of collateral. Okay, that's the trade off right there. Because I didn't really have you...
Jon Blair (21:42)
Yeah, for sure.
Roxann Burns (21:47)
after the receivables and inventory, there wasn't much to the fixed asset bucket. So the other fundamental principle of SBA loans besides being small is reasonable assurance repayment ability. That is the law. That's in the law itself. And I think that this concept sometimes lenders, even my own underwriters, they get all, you know, football, we don't have any collateral. And I'm like, let's start again.
Jon Blair (21:53)
Totally.
Roxann Burns (22:13)
Do we have reasonable assurance of repayment ability? Talk to me about that and talk to me about the balance sheet and then let's go talk about collateral. But I'm not your typical lender.
Jon Blair (22:22)
Yeah. That's for sure. Well, and I think
another thing that you just, as you were talking that I just thought of, I think that for the average DTC brand, that's why if there are fixed asset purchases or equity buyouts, it actually could be, you correct me if I'm wrong, but like if you buy equipment, let's say that you're vertically integrated, you buy equipment or you real estate, maybe you do an equity buyout.
There's more there to, there's more of a rationale there to sit down with the lender and say, I need you to carve out inventory and AR for our line of credit because you're going to have rights to the real estate as collateral. You're going have a lean on the real estate. You're going to have a lean on this manufacturing equipment. And having that, those hard assets be the collateral for the SBA loan and having them carve out the AR and inventory for an asset based lender.
Roxann Burns (22:58)
Exactly.
Jon Blair (23:17)
There's something more tangible there.
Roxann Burns (23:20)
And I think that's an important part of, you know, CFO work is helping businesses navigate that concept because it's not intuitive, you know, it really isn't. And, you know, the other thing I want to say is that not, you know, I had mentioned not all SBA lenders will, you know, approach the business the same way. I feel very saddened that
Jon Blair (23:28)
Totally. Totally.
Roxann Burns (23:43)
The SBA has given us a couple of different programs for revolving facilities and lenders struggle with that. ⁓ was at a conference and we talked about the cap lines and I said, what is the issue? The borrowing base seems to come up a lot. I said, is it the business that has a problem with the borrowing base or the lender? And guess what? It's both, right? So lenders struggle with the concept of borrowing base. In fact, you helped...
Jon Blair (23:51)
I know.
Roxann Burns (24:12)
build my borrowing-based certificate, right? Because we were going on this journey together and you helped me develop that borrowing-based certificate, which was great. But I think the other thing that I've noticed is that a lot of, when you borrow a line, when you get a line of credit, and let's say it's under $500,000, you know, it usually starts at 50 and maybe you get 100 and then you go a little higher as you grow. The thing is, is that on those smaller lines of credits, there is no control.
Jon Blair (24:14)
Yeah, I know, I know, I remember that.
Roxann Burns (24:39)
Right? The lender is not, you know, it's usually like one and done, their credit score, that kind of thing. But as you do bigger credit facilities, lines of credit, there's going to be more analysis at the front end. But also, some lenders are going to require some sort of monitoring, and depending on the size. You know, I think we were over a million at that time, so we did quarterly. ⁓ And that's kind of consistent.
Jon Blair (25:00)
Yep. Yep.
Roxann Burns (25:04)
across most institutions, you know, maybe over 500 or over a million you're going to and also the bigger institution, things are a little different. But that is the monitoring of the borrowing base is really helpful. And I think it's helpful to the business too. I really do. I think that is underappreciated by the owners.
Jon Blair (25:19)
Totally.
So to draw a couple things out, one is the cap lines are, I guess I'll say in simple terms, ABLs through the SBA program effectively. And we had one that Roxann helped us put together and we had Guardian Bikes. I haven't found another bank that does cap lines. And I know there are others out there, but I know there's very few. But what I want the listeners to hear is that if you...
want to look for a revolving piece of debt, a line of credit akin to an ABL in the SBA world, what you should be asking for is the cap line program. That's what you should be asking for. ⁓ And what we had at Guardian was a 7A term loan that like was financing our permanent working capital and then on top of that we had a cap line that was based on an advance rate against our inventory and an advance rate against our AR.
Roxann Burns (25:56)
Yes, I'm searching for that.
Jon Blair (26:12)
that allowed us to borrow more than the term loan seasonally, then pay that cap line down as we went from like a peak working capital need to a trough. And so... ⁓
Roxann Burns (26:23)
And I think we structured
it with like a nine, after your peak, we structured it with like a 90 day, you know, to give you time to, you know, process all that business and get back to your job.
Jon Blair (26:29)
Yeah.
Exactly.
Exactly. But I think the point is, like I would say the takeaway from from this that I want people to hear is like putting together debt structures is a strategic endeavor. It's not just like I think what one thing that I hate about just the lending that's available to econ brands is that brand founders are getting all this cold outbound like LinkedIn messages, phone calls, emails, and just saying like you're approved for this amount of money. And here's the thing like
We have to graduate from just, I get the money I need to buy this? To, can I get the right structured debt, right, for what my needs are now and I'll say in the medium term, like future. And all of these things we've talked about are things that you have to think about. And a good CFO understands what banks' credit boxes are.
for different products, right, and different classes of lenders, and they understand what is possible and what isn't possible, and then they come back and look at your business and say like, okay, I know a couple lenders where we're in their box, and I think we can structure this with this with this, and it's gonna give us what we need to grow, but mitigate risk at the same time. That's the thing, you can't just take on debt. You have to take on debt and align it with
the risk that lies ahead because debt, I always tell people, people ask me like, is debt good or bad? Debt isn't good or bad, it's a tool. And if you use it incorrectly, it can put you out of business, it can create more risk. But if you use it correctly, it can enhance return on equity and it can help you get to your goals. But a CFO can help you use debt properly. One thing I wanna do, I wanna do like a sort of a little like,
lightning round here on common misconceptions. Because there's some things that come up again and again and again when I talk to founders about SBA loans. And I want to debunk some of these myths. So common misconception number one. I can get an SBA loan without a personal guarantee.
Roxann Burns (28:18)
Okay.
Yeah, that's a myth. SBA loans and most commercial loans until you get into very, very large, you know, size companies. The owner, any owner that has 20 % or more ownership is going to have to provide a personal guarantee. Now, sometimes that personal guarantee may be depending upon where you are in the time of your business where we are required to take, if we have a collateral shortfall, the SBA does say,
Hey, if the owners have equity in their personal real estate, you're obligated to take that. So those are two things that are true. Absolutely true. But are they the personal guarantee is all the time, 20 % or more owners and the taking lien on your house really depends on the collateral available to secure that loan. And if you have equity, if you don't have equity, we don't take it.
Jon Blair (29:24)
Yeah, for sure, for sure. There's
no point. That's just a lot of work for nothing. Here's another common misconception that I want to get alignment on. It's gonna take me four months to get approved because I've got to submit my application on the SBA's website.
Roxann Burns (29:38)
That's not true at all. You submit your application to a lender. Okay. Now we're. Yes.
Jon Blair (29:41)
Yeah, so I learned that working with you. I thought
that myth and I met the guys at True Jerky who, who introduced us to you and they're like, dude, it doesn't, you don't have to get a loan through the SBA's website. He's like, you go to a bank. ⁓ and I was like, you go to a bank? And then when I met you, you said, yeah, we're preferred. We're part of the PLP. right. Is that what it's called? PLP preferred lender? Yeah.
Roxann Burns (29:48)
Yes.
link. Right.
Yes.
lender.
Preferred lender program, yeah. Or they
now call it delegated authority. So we have a delegated authority to originate a loan. And in fact, the loans that typically take that longer time are due to, I think, two or three things. Number one, typically, the business is not prepared to borrow money. You don't have a balance sheet. You don't have tax returns. You don't have income statements. You don't have a forecast if it's required. So those are things you have to
Jon Blair (30:06)
Okay, got it.
Roxann Burns (30:29)
provide. And if you don't have that available, that is typically a big drag. The other thing is, is that if the lender is not a delegated lender, they do submit a package to SBA. And that package has to be more complete at the time you go to SBA than I would have to do to make a credit decision.
and there's a couple SBA forms that I need to have in hand, and I basically log into the SBA system and I put you in there. Now there are a couple of new things that's happened since we last did a deal together, and that is that SBA has put in some risk mitigation tools, and this really came out of a fraud and PPP program. And the risk mitigation tools allows them, they do searches, and if there's anything that comes back, the business might have to clear that search or...
clear that issue, that risk that they've identified. And they worked with the lender to do that. But generally, I try to set the expectations that we do a non-real estate loan, non-CRE, commercial real estate loan, within 30 to 45 days, and real estate loans, 45 to 60 days. If you have construction, it's gonna be a lot longer.
And that's another thing, you can finance leasehold improvements with an SBA loan. That's another thing that comes up. It's just like a little mini construction loan. So there's certain things that can push your turn time, but I think most lenders try to do working capital, business change of ownership, we'll talk about that, partner buyouts within 30 days.
and commercial real estate within 45 to 60 days, no construction. Construction always just takes long. Startups, if you're a new business and you can find a lender who will do a pure startup, that's going to take longer because it's just more piece moving parts. Yeah.
Jon Blair (32:20)
Yeah, for sure.
So here's the next misconception I want to ask you about. I can't negotiate any terms on my SBA loan.
Roxann Burns (32:30)
Yeah, you can negotiate certain terms. There's things that you cannot negotiate. So the SBA, the maturities, you know, the actual maturity of the loan, that's more dictated by the program. Interest rates. So the interest rate on a 7A loan is always peg to prime. And the spread, there's a maximum spread. And these rates, when you think about a credit card,
you'll go, wow, that SBA loan's a good deal. You know, on a small loan, 250 and less is prime plus four and a half. You know, 250 to, I think it's 500 is prime plus four. And anything over that, it's prime plus three and a
Jon Blair (33:11)
Interesting inch yeah Yeah for sure Okay, so the another one that comes up a lot. I can only borrow five million dollars on SPA loans
Roxann Burns (33:11)
Not 12, not 25, not 100.
That's generally true. So your maximum exposure for your business and affiliates. know one of the things that I had talked to one of your investors about, they were like, hey, can you give me one of these SB loans for all the businesses that I have an investment in? I'm like, well, eventually you're so SBA requires that we input all owner data into their platform 100%. So they really can know.
Jon Blair (33:37)
Yeah. ⁓
Roxann Burns (33:48)
It's not just this company that has a maximum of five, it's the owners of the company. So if you have multiple businesses, we saw this a lot in the early days with hotels, right? So hotels are a big ticket item. And you know, if you're a hotel developer and operator, you know, you can only get so many SBA loans under that $5 million cap. There is a real estate program called 504, and there's ways that certain public policy objectives that could get you a little higher than five.
Jon Blair (33:54)
Got it.
Mm.
Roxann Burns (34:17)
⁓ The one thing that's interesting today is that the Trump administration has developed, they haven't launched it yet. And I just pinged the SBA to make sure it wasn't out, but they're developing a $10 million program for manufacturers. It's consistent with the move, you know, like we're going to help smaller companies get access to capital to, you know, to, to manufacture in the U S so yeah.
Jon Blair (34:31)
Interesting. Yeah.
That makes sense. mean, I'm glad they're doing that because, you
know, today Guardian Bikes has a manufacturing facility and, you know, the company since has done a little bit of equity raising, but also just recently did a $19 million, you know, deal with, ⁓ with JP Morgan Chase that was announced in the news.
But the point that I'm making is it takes capital, right, to get that going. It takes time and capital, not just one or the other. And so to put these tariff policies in place that give an incentive to manufacture domestically without the access to the capital can be a challenge, And so...
Roxann Burns (35:09)
Right.
Yeah. Right. And I think that
is a really, you know, I mean, I've always felt that you know, from a, you know, public policy or economic development standpoint, know, manufacturers are really, you know, decent job creators, right? And ⁓ that's one of the policy objectives is to create jobs. And this, they're the hardest to finance because the investment of fixed assets is significant. And then
Jon Blair (35:36)
for sure.
Roxann Burns (35:47)
you know, your raw materials, your inventory cycle, you know, you know, those are pretty expensive assets to finance and it's hard for them to, you know, manufacture scale. So I like this. I hope that I know it's in the, you know, the next appropriations bill for next year that they want to, you know, make that a, expansion for manufacturing. So that would be awesome if that happened.
Jon Blair (35:50)
Totally.
Well,
the other thing that I wanted to mention too is raw materials and work in process, generally speaking, ABL lenders will not finance that. They'll make that ineligible. so if you may, exactly. it's like, it's a consumption of cash that's not it's a real consumption of cash, right, of inventory, but not at the finished good level. And ABL lenders, they only lend against,
Roxann Burns (36:18)
Yes.
Exactly. Permanent working capital, right?
Yes.
Jon Blair (36:36)
finished goods, generally speaking. You can get, I've gotten exceptions for, you know, an over advance for a season, right? But it's because their collateral is finished goods inventory and they want something that's readily available, requires no more investment or processing to liquidate to make their loan whole. And so when you're converting to manufacturing, you're gonna have to start taking on raw materials and work in process, which
Roxann Burns (36:36)
and skits.
Right.
Jon Blair (37:02)
is not financeable. You may have an ABL at that time, things are going great at the finished good level, but not at these other levels of inventory. So I'm curious, go ahead.
Roxann Burns (37:11)
Like
I was gonna say, that's also why it's hard to finance, you know, those types of trading assets because there's no collateral. And I just will say this, this is really important. Don't take no, you know, push the fact that you have the lender has the SBA guarantee. We, if you have strong cashflow, you have a good time in business, you have
Jon Blair (37:20)
Totally.
Roxann Burns (37:35)
your arms really around your cash cycle and you can show that, demonstrate that, man, don't take no. Just say, hey, what about the fact that you can't decline, that lenders are discouraged from declining SBA loans for collateral deficiency alone? It can be other stuff that caused you to say no. But again, it's the same thing. I really have to work with my teams and wherever I've worked, other institutions.
Jon Blair (37:52)
Mmm, interesting. Yep.
Roxann Burns (38:01)
Let's start with repayment ability and then let's worry about capital once we get our minds around the income statement and balance sheet.
Jon Blair (38:09)
That makes
sense though that they discourage denying a loan for collateral deficiency only because 75 % of the loss is guaranteed, right? And so that would kind of defeat the whole purpose. But if they have cash flow, if they have cash flow history that demonstrates they can service the loan, that seems to me like a great use case for like, okay, so the SBA is going to plug the gap, the collateral.
Roxann Burns (38:19)
Yes.
Jon Blair (38:34)
deficiency gap with their 75 % guarantee, but there's still strong cash flow that can be used to service the loan. And so it that kind of advances, I would say the mission of of the SBA program, right?
Roxann Burns (38:46)
of the agency, yes.
And I think the other thing too is that, you you're not gonna get this type of financing by going online. You're just not, that's not what those, the SBA lenders that originate loans online are doing small working capital loans. That's it. So you're not gonna get what you need in that. And one of the other things I would say is, and this is a new thing that I'm seeing, people bank over here with some online bank, which is really great.
but they can't lend you money. You know, and you need to build a relationship with the bank and you need to shop for a bank that can grow with you. And sometimes that might mean going to a bigger bank right off the top, but I will tell you that there are a just, you know, hundreds of excellent community banks that are big enough to grow with you. I mean, even when I was at, you know, California Bank Commerce, it was a million dollar or billion dollar bank.
Jon Blair (39:20)
Mm-hmm.
Roxann Burns (39:39)
and they were willing to trust that there was something here. But I do feel that this is something that as you walk around and if you're getting a line of credit, they're gonna want your operating accounts at the bank. But you kind of have to make sure the bank works for you from online banking, the banking side, but also works for you from a debt side. And I think that is really important.
Jon Blair (39:44)
Totally, totally.
Totally.
Totally.
Roxann Burns (40:06)
It's another part of your scaling journey on that sweet spot.
Jon Blair (40:09)
Absolutely. Well, and
it can, can, you know, I know some founders, there's a couple of founders I can think of that we work with that have, you know, decent sized businesses, 50 million or so, very profitable. And they have their operating accounts and their credit cards and their line of credit all with JP Morgan Chase. And the reason why it's really helpful is because, and the owner owners also do their personal banking there. And so when you have everything there,
Roxann Burns (40:28)
Here we
Jon Blair (40:37)
your ability to negotiate or just structure. I don't wanna say negotiate because you are negotiating but the bank is like, hey look, we're trying to keep this whole relationship in house, right? So like they will make offers that they can't make to someone who has no other business with them, right? And if you think about their risk too, it's like, hey look, your personal bank accounts are here, I can see how much money is in there, you're your brokerage accounts are with us, I can see what's in there.
Roxann Burns (40:37)
Yes.
Exactly. Right. And particularly
your business operating accounts, because if we start seeing, you know, issues with operating accounts, we know that the loan is in jeopardy. So, you know, now we want to go out and talk to you and say, OK, you know, what's going on? Something is happening here that's not not new. but that is, you know, banks can be very helpful.
Jon Blair (41:16)
for sure.
Roxann Burns (41:24)
on the upside, if something does go wrong, if you have that whole relationship, there's much more willingness to understand what's happening and what can we do within the criteria that banks have to work with to do modification or debt restructuring. And that's another piece that SBA can do. We can refinance debt that is not on terms that you...
Jon Blair (41:31)
Totally.
Roxann Burns (41:49)
that are reasonable for where you are today. The only thing, and this is new, but it's also new because it was a huge loss for the agency, is they will no longer refinance factoring lines and they will no longer refinance MCA contracts, merchant card advance contracts. They just, too many losses, huge losses last year. You know, on that.
Jon Blair (42:04)
Yeah, interesting.
Totally, that makes sense.
One last question, can you refinance an SBA loan with another SBA loan?
Roxann Burns (42:16)
You can, there are conditions that you have to have. So you have to get a decline basically from the lender who your current SBA lender to say, you know, they are not willing to extend you any more credit for whatever reasons. The other thing is, that, and this is another part of understanding the SBA marketplace is that we sell our loans in the secondary market.
So an investor buys the unguaranteed portion of our loan and you want, you you need to do something with that loan. You need to restructure the payments or something. We have to get their approval to do that. Right. And so that's another time when it makes sense for SB to refinance, you know, an SBA loan with another SBA loan. It's not as hard as it used to be, but it still, you know, requires a little extra work. But before we finish,
Jon Blair (42:54)
Mm.
Roxann Burns (43:08)
I really want to talk about, you know, partner buyouts, business change, business acquisition. So there's three pieces to this business with the SBA calls a business change of ownership. There's a hundred percent change of ownership. You're selling a hundred percent of your company to someone else or you're buying a hundred percent of a company. Right. So that's a hundred, what they call a hundred percent change of ownership.
Jon Blair (43:12)
Yes, absolutely.
Roxann Burns (43:30)
Then there's what they call a partner buyout. And it's not just partners, it would be members, shareholders. But let's say you and I own the company 50-50 and I want out and you're going to buy 100 % of my share. That's a complete change of ownership. I'm out, you take over my shares. And then they have what they call a, they allow now a partial change of ownership. Which allows, let's say you have a dozen investors.
and two or three of them want out, but some of the other ones are willing to pick up their ownership. Now, the key thing about these changes of ownership that you have to think about is the debt goes on, the abogor is the business. And interestingly, co-borrow with the individuals. So it's the only time an individual can borrow money from the SBA is when there's a change of ownership. And that is because
Jon Blair (44:15)
you're seeing.
Roxann Burns (44:23)
The business is really the source of repayment. It's not, you're buying, you're selling interest, you're selling equity. so, that is, the business is still the one that is gonna be generating the cash flow to repay that debt. And it makes sense.
Jon Blair (44:26)
Mm-hmm.
And so is it, it's from my understanding,
it's underwritten based on the cash flow. Basically the business, the business's ability to repay the loan from its cash flows. That's really what the underwriting is about, right?
Roxann Burns (44:46)
Right, right. And if I'm
financing, let's say someone comes to me and they're buying a business and I'm underwriting the cash flow of the seller. But two things, and this also blows people's mind. No surprise. I want an opening day balance sheet. Can I just have an opening day balance sheet for the buyer? And I would like two years forecast. You know, just.
Jon Blair (45:08)
Yeah, well what's
interesting, you know what's interesting about this? I've never done one of these deals before, but I've always thought that it would be interesting to use an SBA loan to buy businesses. I think this is maybe like a later stage in my life, like when I'm done with Free to Grow CFO, or maybe while I'm still doing Free to Grow but I wanna like buy some brands or something. What's interesting about bringing in debt financing, if it's underwritten based on the,
Roxann Burns (45:22)
Yeah. ⁓
Jon Blair (45:34)
you know, the seller, the company's ability to pay the loan back. It almost introduces this third party to basically underwrite the price of the deal, right? Because like, I'm sure that you guys run into people who are under contract to purchase a business and you're like, the price is too high that if we finance this with an SBA loan, business actually can't service the debt. Does that happen?
Roxann Burns (45:45)
Exactly.
Yes. So think about it. We're already doing a 10 year term on those change of ownership loans. 10 years. And if it doesn't cash flow over 10 years, something's wrong with that price. But additionally, we are required to get a business valuation. And you know, a lot of these firms that do these smaller SBA type transactions, they're very fluid in the metrics for a lot of different industries, right? Because we do so much of it. But yes, I mean, it's just,
Jon Blair (46:07)
For sure.
Roxann Burns (46:26)
It does give you a independent third party who's taking a look at this deal and saying, oh yeah, we could finance that. The other thing to keep in mind on changes of ownership, if it's a complete change of ownership versus a partial, if it's a complete change of ownership, you're gonna have to put at least 10 % down. So SBA,
startups and changes of ownership stipulate a minimum of 10%. You know, I personally wouldn't do a true, true startup, you know, for less than 25. But, you know, I've learned the hard way over the years that I've been doing this. And, but I do think that that is a strategy that you kind of need to keep in your back pocket than an SBA loan can help you acquire or buy a partner who wants out. You know.
Jon Blair (47:15)
Yeah, absolutely.
Roxann Burns (47:15)
today.
Jon Blair (47:16)
So, I wanna recap a couple things before we close up here. So one, you can use an SBA loan to help scale your DTC brand, but it's important, and this is where a CFO can really help, to be clear about what you're financing, right? And what the cash cycle is of that piece of your business that you're financing. And understand that a 10-year term loan, which I would say is the most common because
The revolving lines of credit through SBA just aren't that prevalent in the marketplace. Those are best served to purchase fixed assets, like including equipment, real estate, and equity buyouts, whether that's a full acquisition of a business or it's buying out a partner. If you want to finance inventory with an SBA loan, you need to find a lender who is ⁓ offering cap lines, SBA cap lines, which are like
Roxann Burns (47:42)
Yes.
Thanks.
Jon Blair (48:07)
ABLs and then going back to the misconceptions I asked Roxann about, you're gonna have a PG if you do an SBA loan. You can get it approved on a normal underwriting timeline if you find a preferred lender. There are things that can be negotiated but there are things like the PG that can't be negotiated. You can have up to five million dollars in exposure.
Roxann Burns (48:23)
Mm-hmm. Right.
Jon Blair (48:28)
to the SBA program and under certain conditions you can refinance an SBA loan with another SBA loan. So Roxann, what final thoughts do you have for the audience, anyone who is intrigued by this conversation, what final thoughts do you have for them?
Roxann Burns (48:35)
Pretty good.
Yeah, I really feel it's important that you understand that not all lenders are the same, right? And even someone who does a lot of SBA loans may not be the right lender for you. The other thing is that I feel that not all lenders have the same talent on their team for underwriting. And it's important to try to find the right one. And if you get told no,
Jon Blair (49:03)
Totally.
Roxann Burns (49:09)
and you have a viable business, don't stop, knock on the next door. And you could ping me on LinkedIn. And if I know of a lender who can do what you need, because I lend only in the San Francisco Bay area, but if you need somebody, and I've been in this industry for 35 years, sometimes I know someone to call.
Jon Blair (49:13)
I love that.
Roxann is very well networked in the SBA world. Don't let her downplay that. So, Roxann, where can people find more information about you and Fremont Bank?
Roxann Burns (49:40)
Well, Fremont Bank, can get us at FremontBank.com. And for me, I'm on LinkedIn.
Jon Blair (49:45)
Definitely check out, feel free to reach out to Roxann if you have any questions about the SBA program. If you're in the San Francisco Bay area, she actually might be able to do a deal for you. Roxann, this was great. I've been wanting to have this conversation on the show for a while. This is honestly just like, this was sort of like just a short snippet of what many phone conversations I've had with Roxann end up being about. So.
Roxann Burns (50:06)
Yeah. Yes.
Jon Blair (50:10)
I'm super excited to be able to share this with our audience and I'm so thankful that you came on today.
Roxann Burns (50:15)
Thank you, appreciate working with you always.
Jon Blair (50:18)
Absolutely. Well, until next time, everyone, scale on.
Don't forget, if you liked today's episode, please hit the subscribe button wherever you're listening and leave us a review. It helps us reach more people like you. Also, if you want more tips on scaling a profitable DTC brand, follow me, Jon Blair on LinkedIn. And if you're interested in learning more about how Free to Grow CFO can help your brand increase profit and cash flows you scale, check us out at freetogrowcfo.com
