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Dealing with Increasing Interest Rates in Small Business Lending
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Mar 24, 2025
In this insightful video, our expert guest Chris Hurn, Founder and CEO of Fountainhead Commercial Capital, discusses the impact of recent interest rate hikes on small business lending and shares valuable advice for business owners. With the Federal Open Market Committee's decision to boost interest rates by 75 basis points, borrowing costs have risen considerably, affecting many small business owners seeking loans. Timestamps: 00:00 - Introduction 00:35 - Recent changes in interest rates and their impact on small business lending 01:42 - The effect on Small Business Administration (SBA) lending 03:14 - Financing options for small business owners 04:12 - The shift in sources of credit during economic downturns 05:50 - How interest rates affect business loans and their pricing 07:21 - The role of SBA lenders in the lending market 09:21 - Advantages of SBA-backed loans for small businesses 11:29 - Top reasons for choosing SBA-backed loans 13:27 - Importance of flexibility in loan terms during economic slowdowns 14:29 - Wrap-up Key Takeaways: Small business lending, particularly SBA lending, is directly impacted by the rising interest rates. Refinancing high-priced options can help lower effective borrowing costs and monthly payments. SBA loans offer lower down payments, longer repayment terms, and more flexibility compared to conventional loans.
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0:00
hi I'm Sean hessinger and this is small
0:01
business 15 the show where we bring you
0:03
small business success in 15 minutes or
0:05
less please like And subscribe if you
0:07
enjoy the show
0:08
[Music]
0:13
a recent decision by the Federal Open
0:15
Market Committee to boost interest rates
0:17
by 75 basis points could have a huge
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impact on those seeking small business
0:21
loans Chris Hearn founder and CEO of
0:24
Fountainhead commercial Capital returns
0:26
to the program to talk about what this
0:28
could mean for small business lending so
0:31
Chris let let me start by asking
0:34
basically what has changed with interest
0:37
rates in the last couple of weeks and
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and why
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well the the Federal Reserve increased
0:44
their overnight rates again 75 basis
0:46
points so it's it's gone up considerably
0:50
um since even six months ago and the
0:53
reason that's important is because
0:54
there's think of them as sort of the
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pace centers for all the other indexes
0:59
that are out there that determine
1:00
interest rates whether it's consumer or
1:02
business or otherwise and so um you know
1:06
you've gotta everything sort of Falls in
1:08
line with what the FED does and um so
1:11
we've seen treasury yields go up for
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instance we've seen
1:15
um Soper which is now the the new Libor
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interest rate index which you know uh
1:22
oftentimes a lot of the business loans
1:24
that are out there are priced off of
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that and obviously the The Wall Street
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Journal Prime indexes also follows in
1:30
line an increase just exactly when the
1:33
Federal Reserve increases and all this
1:34
means that borrowing costs are are
1:37
rising considerably how does this um
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affect small business lending
1:42
specifically since that's your kind of
1:44
your area
1:45
yeah well so most small business lending
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at least uh SBA lending small business
1:51
administration lending is based off of
1:53
crime and so Prime has gone from three
1:56
and a quarter to six and a quarter in
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about six months already this year so
2:00
that's 300 basis point movement three
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percent has been added to
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um the the borrowing costs of a typical
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SBA loan so it's it's moved up
2:09
considerably it's almost doubled
2:10
obviously in that time frame and while
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most business owners can probably handle
2:16
that a little bit particularly because
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you've also have this ripple effect of
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uh with inflation of business under
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increasing their prices for their
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products and services the issue is going
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to be you know it's it's a delicate
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balance and the higher interest rates go
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uh the more likelihood there is for
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defaults for this really causing trouble
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to the small business owner in terms of
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being able to meet their monthly debt
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obligations so that's where lenders like
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myself banks credit Unions that's where
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we all start to get a little concerned
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is this something that a typical small
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business owner will be able to handle
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will be able to digest and keep their
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business still healthy going forward for
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business owners that you work with what
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would be your achievement for anybody
3:00
watching this show what would be your
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your main piece of advice yeah I mean
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the biggest thing I always say to small
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business owners and they don't tend to
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look at this until
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um I don't want to say it's too late but
3:12
they tend to look at it in the latter
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stages is you know there's a lot of
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different financing options that are out
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there for a typical small business owner
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not everybody has a bank loan not
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everybody has an SBA loan some people
3:24
Factor the receivables some people have
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virtual cash advances some people have
3:29
hard money loans but anything that's
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sort of above conventional pricing so
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any of those ladder three
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ought to be things the typical small
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business owner looks at refinancing now
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even though rates are going up
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um you're going to feel it much more so
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with those higher priced options so if
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you can take a look at refinancing your
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interest rates yeah you know it's going
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to be higher perhaps than some of them
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but you'll also probably will be able to
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lower your effective borrowing costs and
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you'll be re-amortizing uh the debt as
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well which means that your monthly
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payment should go down and that's and
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that's something that'll really help
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cash flow monthly cash flow for a
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typical small business owner the other
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thing I would tell you Sean is that
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Times Like These are when a lot of the
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conventional lending options sort of go
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to the sidelines the banks the credit
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unions they they get they get very
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nervous when the economy is slowing down
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which is clearly what the FED is trying
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to do here because in slowing down the
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economy will reduce inflation so as the
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economy starts to slow down traditional
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lenders get a little nervous
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um you know they don't necessarily want
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to be taking on a bunch of new credits
4:41
in their portfolio when the economy is
4:43
souring and then the other piece is what
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we talked about a few minutes ago which
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is as the borrowing costs increase the
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likelihood of defaults Rises
4:52
considerably and that's a that's a real
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factor and that's where you're going to
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see
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um more and more of these traditional
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lending sources sort of pass on a
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transaction or or just frankly just
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decline it and say that you know we
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don't have
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um you know the ability to approve that
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loan which frankly kicks people in our
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direction to SBA lenders SBA lending
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almost always thrives when you have an
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economic downturn it's and partly it's
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because it's one of the few options that
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are available to a healthy growing small
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business owner how are interest rates
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how do interest rates directly relate to
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small business lending what what how
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does that affect what kind of loan you
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get what kind of loan you should be
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looking for that sort of thing well it
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mostly affects it directly in terms of
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the pricing so every every business loan
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is going to typically be priced on an
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index an interest rate index such as
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prime or sofa or you know five-year
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treasury yields or something like that
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plus a spread and that's how you get to
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the interest rate the effective interest
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rates that that borrower is paying so as
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you can tell anytime you're increasing
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the indices even if you're not changing
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the spread over those indices you're
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going to have higher borrowing costs
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it's it's frankly pretty simple yeah you
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can still expect this uh the the change
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the increase in interest rates to have a
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major input impact on the on the number
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of small business loans uh approved or
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or the number that are even applied for
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well I don't think it's gonna I think I
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don't think there's a diminishment of
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demand yet
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um obviously there will be if if the FED
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continues to March forward on this
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aggressive of a rate peace uh the rate
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hike Pace uh but I don't think we're
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quite there yet and even in slower
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economic growth times you always have
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demand for for borrowing from from the
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business Community frankly we're we're
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an economy you know a whole globe Franks
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is is built off of credit so that's not
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going away anytime soon but the sources
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of that credit is what's going to change
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so you know the number of businesses
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that can get approved for a loan from
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traditional sources will shrink okay
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because a lot of those folks I was
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talking about before traditional lenders
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like Banks and Credit Unions have a
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tendency to tighten up what they will or
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won't approve during terms like these
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and so that's that's also why some of
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these business owners end up being
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diverted to SBA lenders like ourselves
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um because we still tend to be pretty
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aggressive during these times you know
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SBA provides a government guarantee or
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think of it like insurance on the
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commercial loans that we make and so
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therefore
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um you know we have a broader credit box
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of what we can approve or not approve
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and again this is I'm making some
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generalities here Sean because the truth
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of the matter is some of the most active
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SBA lenders are banks okay and they
7:49
happen to have an SBA Department the
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issue comes in that they tend to Overlay
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their internal conventional Bank credit
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policy on top of the sba's credit policy
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and therein lies where you have you hear
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these you know this these stories about
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well I went to my One bank and they they
8:08
turned me down for an SBA loan and they
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said it was sba's fault but then I went
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down the street and applied it another
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bank and they approved me well that's
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because everybody's a little bit
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different and everybody's looking at the
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the risk of these credits a little bit
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differently but non-bank SBA lenders
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such as ourselves there's relatively few
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of us we tend to operate based on the
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sba's intention the SOP we're not making
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traditional conventional commercial
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loans so we don't have anything but our
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SBA credit policy to to give us our
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guidelines on what credits to approve or
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not so you're going to see movement
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towards SBA lenders
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um for sure I mean it happens every time
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I've been doing this over two decades
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and I've I've been through about three
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of these cycles and every time I see it
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SBA lending booms and it's kind of
8:56
interesting because of course SBA has
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been in the spotlight for the last
8:59
couple years with with all the pandemic
9:01
efforts so this is another opportunity
9:04
that you're going to see you're going to
9:05
hear a lot about SBA lending going
9:06
forward maybe you should explain again
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when we talk about SBA backed loans kind
9:11
of what they are and maybe why they have
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an advantage yeah so the biggest the
9:16
biggest Advantage is that it may be one
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of the few options available to you at a
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reasonably priced uh you know interest
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rate
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um you know you still have those other
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options that I mentioned earlier you
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know hard money loans and MCA merchant
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cash advances factoring receivables you
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know business credit cards all sorts of
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things at much higher priced than what
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you need an SBA loan for
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um so that's that's what occurs I mean
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um SBA lending tends to be uh for all
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sorts of uses of proceeds much broader
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than I would say uh ordinary traditional
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lending so the sba's Marquee program is
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the SBA 7A and they're in that program
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you can do just about any business loan
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purpose meaning you can buy another
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business business Acquisitions are often
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financed with an SBA 7A loan up to five
10:08
million dollars you can do the business
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debt consolidation that I was talking
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about earlier you can get working
10:14
capital you can buy out a partner you
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can get equipment financing commercial
10:19
real estate financing if it's owner
10:21
occupied or operated for the business uh
10:24
just a variety of different franchise
10:25
financing leasehold improvements all
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sorts of things the second biggest SBA
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loan is what's called a 504 and that
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program is a bit more limited in that
10:33
it's only available for commercial real
10:35
estate and for happy equipment so you
10:38
know but again back to the point I made
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earlier you know there's always demand
10:43
for commercial credit and it's a
10:46
function of where do you go to fulfill
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that demand and I've seen this movie far
10:51
too many times oftentimes some of these
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folks they come to SBA years and it's
10:57
it's kind of ironic because you know 20
10:59
plus years ago SBA was I used to joke
11:01
was sort of a four-letter word but it's
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it's not in times like this you know
11:05
entrepreneurs business owners are very
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eager to look at SBA options because
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sometimes we're one of the few left
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standing and still competitively priced
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and that's and that's the other piece is
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the terms oftentimes are much more
11:19
advantageous to business owners than
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ordinary conventional commercial loans
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even in good Economic Times And what I
11:25
mean by that is a lot of those use of
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proceeds that I was talking about for 7A
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for instance those are oftentimes
11:31
financed on a fully amortizing 10-year
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term if you went to your bank branch you
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might be able to do a business
11:38
acquisition but I don't even unusual
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that they would Finance it but they
11:41
might give you a three-year term or a
11:43
five-year term uh SBA lenders such as
11:46
ourselves would typically ask for 10 of
11:48
a down payment you go to a Traditional
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Bank who's looking at that they might
11:52
ask for 30 or 40 down payment so it
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makes a huge difference if a business
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owner is concerned about preserving
12:00
their precious Capital which they should
12:01
be as the economy slows so those are
12:03
some of the advantages that you
12:04
oftentimes see with with
12:06
SP so Chris what are the some of the top
12:08
reasons that that people gravitate
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towards SBA backlines
12:13
well the first one is as we talked about
12:15
before in tough Economic Times they tend
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to be one of the last options standing
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but the biggest reasons even in good
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Economic Times that people tend to get
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seek out SBA Loans you always have a
12:25
much lower down payment
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when you're doing one of these business
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loans oftentimes it's half maybe even a
12:31
third of what in order to Conventional
12:33
lender would want you oftentimes have a
12:35
much longer repayment term
12:37
and that's really important from a
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monthly cash flow standpoint so instead
12:41
of having a three or five year term with
12:44
an ordinary Bank you might have a
12:45
10-year term with an SBA loan or if
12:48
you're buying real estate instead of
12:49
having like a 15 or maybe even a 20-year
12:51
amortization you'll have a 25-year
12:54
amortization with an SBA loan so it
12:56
makes a big difference because the
12:57
longer the repayment term obviously the
12:59
lower the monthly payment which means
13:01
the more positive your cash flow and
13:03
that's a makes a big difference for a
13:05
growing small business the other piece
13:07
that doesn't get talked about very often
13:08
is frequently there's not prepayments
13:10
penalties on SBA Loans and most
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importantly is especially in a in a
13:17
difficult economic time that I think
13:18
we're into there's no loan covenants
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with SBA Loans and the reason that's
13:23
important is you know small business
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owners are going to start to feel about
13:27
pinch where their banks are nervous
13:30
about the Financial Health of their
13:33
portfolio and oftentimes a small
13:36
business owner will get that you know
13:37
that app on the shoulder or that email
13:40
that says hey you know we no longer like
13:42
your anyics code your industry and uh it
13:45
probably has nothing to do with that
13:47
small business owners company it just
13:49
means maybe they got the bank got stung
13:51
somewhere else in their portfolio but
13:54
nevertheless now they're nervous and now
13:56
they're giving you notice that you've
13:58
got 60 days to get off the portfolio and
14:00
that becomes a a problem and those
14:02
things are oftentimes triggered by these
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loan covenants where it could be debt to
14:06
worth ratios it could be debt service
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coverage ratios it could be uh you know
14:11
minimum FICO scores all sorts of
14:12
different things that'll oftentimes
14:14
trigger a default a non-monetary default
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on a loan
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um and it's it's a problem and people
14:21
don't usually listen to me about this
14:22
Sean during during good Economic Times
14:24
but uh but boy do they whale when it's
14:27
when it's more difficult because they
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realize this is something they may be
14:30
considered and SBA Loans are just much
14:33
more flexible in this regard and that's
14:35
it for another edition of small Biz and
14:36
15. thanks again to Chris Hearn and
14:39
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14:40
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14:42
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14:43
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