Disclaimer:  Not a political post.

I enjoy writing this monthly blog post; in this crazy hectic environment, it forces me to sit down, focus on a topic that’s important to me, and concisely transcribe the headlines.

Today I dive into possibly the most important topic since this blog started and that is last week’s interest rate cut by the Fed.

By way of background:  Starting in March 2020 the US Federal Reserve quickly and steadily increased its target interest rates (Fed Funds) to thwart inflation caused by COVID-related supply-chain and labor-market disruptions.  Four years later they appear to have met their inflation-rate goal and subsequently took the first step to restore a moderate rate regime, starting with a decrease of 50bps (0.5%), taking the target rate down to 4.75-5%. Additionally, they signaled their plans to reduce the rate by another 50bps by the end of the year, another 100bps in 2025 and finally 50bps more in 2026.  Core inflation is coming in at 2.6% for 2024 and projected to be around 2.2% in 2025.  GDP is expected to grow at about 2% next year and unemployment will likely stay in the 4-4.5% range.

By all measures (see disclaimer above), this is the result of a masterfully executed plan orchestrated by Jerome Powell and Janet Yellen.  It is the first time since the ‘90s that inflation has been tamed without putting the economy into a recession.  

The immediate tangible impact is lower interest rates and monthly payments to our SBA borrowers, present and future.  The rates on SBA 7a loans are tied to the prime rate, which is now lower by 0.5%. It represents a significant savings which business owners can use to fund growth, invest in working capital, acquire real estate and pay down debt.  

Even more important are the less tangible (but real) psychological aspects of the move.  Three things were on business owners’ minds over the past couple of years:  inflation, tight labor market, and high interest rates.  With this week’s move, the Fed has broadcasted that these factors are all being addressed, without an economic slowdown.   

This has me looking into the rest of the year and also into the next couple of years.  We are seeing a significant uptick in activity (meaning SBA loan requests) largely due to optimism and our own marketing efforts and partly aided by other lenders having pulled back or exited SBA lending.  The interest rate environment is giving me additional confidence to invest, and my team and I are looking forward to meeting you!  Let’s talk!  You can find a listing of our nationwide SBA Business Development Officers here: https://gulfcoastsba.com/our-people/. 

Last month I headed to the Eastern Shore of Maryland, where I grew up.  I ran into the son of an old friend of my dad, Frank, and over a cup of coffee reminisced about how my dad became a business owner.  

My dad, a chicken-expert of sorts, immigrated to the US and settled in Salisbury, Maryland where he worked for Purdue Farms.  But his dream was to become a restaurant owner, and while working at Purdue he saved enough for a future downpayment.  An opportunity came knocking when the local Bonanza franchisee (remember Bonanza?) looked to sell one of his locations.  

We couldn’t remember the amounts, but it was a sizable deal for my dad; he couldn’t buy it with his life savings.  Enter Frank. Frank was the manager of the Salisbury branch of Peninsula Bank and he and my dad became friends at the local tennis club. First over steak dinner (at Bonanza!), then the next day at his office, and over the weekend at his home, at Mister Donut, and between sets at the park, Frank (very) patiently explained the process of securing an SBA loan.  He also introduced my dad to an accountant and a lawyer and went on to underwrite a loan.

Fast forward 8 weeks, my dad became the owner of the Salisbury Bonanza.  Four years later he was a multi-unit owner/operator with locations in Ocean City, Cambridge, and Dover, Delaware.  

Old-school banking.

As our shop embraces more and more technology, as most if not all communication is carried out by emails, texts, and the occasional (VOIP) call, I keep reminding my teammates the importance of a personal connection. There are tens of thousands of entrepreneurs like my dad, who have never borrowed and have not experienced the complexity and intricacies of an SBA loan.  We, on the other hand, are doing it day-in-day-out. It is our duty to bridge the knowledge gap. We’re the 2024 version of Frank.

So don’t hesitate to pick up the phone or arrange to meet us in person (we are in over 20 cities around the country).  Let’s talk.  Contact information for our Business Development Officers can be found here: https://gulfcoastsba.com/our-people/ 

When speaking with borrowers and intermediaries, one of the inevitable questions is “why should I consider an SBA 7a loan? What makes it better than a conventional loan?”

I quickly rattle off what an SBA 7a is, then list the differences, which I’d like to summarize here.  A Google search will yield similar results:

What is an SBA 7a loan?  Offered by almost 4,000 banks, this loan is the flagship of the US Small Business Administration lending effort supporting owner/operators.  In its essence, the 7a is a term loan, typically 10-25 years, fully amortizing, priced at a spread over prime rate.  There is no minimum borrowing, and the loans are capped at $5,000,000.  The loans are used to acquire or expand business, to buy real estate, to refinance debt and pretty much any use (except cashing out). The loan is offered by banks, which are in turn provided a repayment guarantee from the US SBA.

Why chose an US SBA 7a loan over a conventional loan?  Foremost and realistically, there is little overlap in availability; we see very few loans that would qualify for a conventional bank loan mostly due to lack of collateral.  Second, US SBA 7a loans (not true for all lenders, true for us) do not require real estate or other “hard assets.” We are required to place liens on assets we finance but are permitted to provide loans to businesses with no assets.  Third, advance rates are higher, and we often do 90% LTV loans. The SBA recently liberalized its policy making it easier to lower the down-payment with cooperative sellers who are willing to remain in some ownership capacity.  Fourth, with the right lender, the SBA 7a is suited for riskier, more complicated uses such as startups, multi-unit franchise businesses, consulting and others.

But probably the most important difference is the level of expertise and attention you get from SBA lenders like us.  That’s all we do. We are experts, we know what it takes to close an SBA loan and we work hard to support your plans (and dreams).  Let’s talk!  Our team of experienced SBA professionals is ready to assist and will gladly answer any additional questions you might have about SBA loans.

The role of entrepreneurs in the success of the American economy has been celebrated throughout history; Edison, Ford, Sloan, Gates, Kroc, Jobs, Walton are just some of the examples. The companies they founded employed (and still do) millions of workers and made untold contributions to the US and world economies. At the same time, and partially because of the success of these companies, the share of Americans working for small businesses has steadily declined since the early ‘80s. As I was approaching my own graduation from business school in the ‘90s, my fellow students and I were heavily recruited by and joined large companies such as Microsoft, Goldman, and Andersen; I can’t think of a single classmate who joined a small business (defined here as fewer than 5 employees).

This trend reversed in early 2020, as COVID created an abnormality in the employment landscape and workers’ attitudes towards “job security.” The pandemic came and went, and the economy quickly regained its footing, yet new business formations continued to climb at an unprecedented rate. Last year, new business formations were 80% higher than pre-COVID levels.

Startups require capital which was traditionally provided by equity; cash infusions from savings, friends, family, and for some industries venture capital and family offices. Debt providers largely eschew startups. 

Except the United States Small Business Administration (SBA). It’s right there in its mission statement: “SBA works to ignite change and spark action so small businesses can confidently start, grow, expand, or recover.”

As a nationwide, direct SBA Preferred Lender, Gulf Coast Small Business Lending fully embraces that mission and regularly provides debt capital (by way of SBA loans) to startups.

My advice to entrepreneurs seeking capital, in general, and debt in particular:

1. We are most interested in your character and experience, so spend as much time on your resume as you do on your business plan.
2. Prepare a solid business plan with realistic financial projections based on verifiable benchmarks. For example, restaurants are a great business, but they don’t generate 40% margin, and when we see something like it, we quickly decline.
3. Related to #2 above, it is imperative that you present to us projected liquidity, not just profitability. New businesses burn through cash to hire and train new employees, put a deposit on a lease, and buy inventory. These are all important assets; we just want to be certain that there is enough cash to cover all these and any other important items that come up.
4. Equity contribution (or as some call it, “down payment”) is a necessary component of the capital structure of any startup. We typically want to see at least 25% in cash equity in startups we finance.

Our experienced team of SBA lenders is always available to talk through your project and help determine if an SBA loan is a good fit for your borrowing needs. Give us a call, shoot us an email, or schedule to meet in person. We will have plenty of time to pore over plans and resumes, but hearing you tell the story, hearing the excitement in your voice as well as your passion for your project is simply irreplaceable. We are here to help!

I am often asked (or, more accurately, I frequently volunteer my opinion without being asked) about the current state of the U.S. economy.  The facts are compelling:  The U.S. economy is on very strong footing and it is handily beating all of the major economies of the world.  Late 2023 and continuing through the beginning of this year we have experienced strong output growth, near full employment, and the taming of inflation. This latter part is still a work-in-progress, but the Fed is being cautious and not overpromising many rate cuts this year (will there be 2? 3?).  The big takeaway is this: we will be okay.  

But what does all of this mean to us here at Gulf Coast Small Business Lending, our referral partners, and our borrowers?  As our name implies, we provide SBA loans to small businesses, ranging from several hundred thousand to five million dollars, and sometimes even more.  Our borrowers are businesses you know and love: hotels, gyms, garages, restaurants, childcare centers, campgrounds, RV parks, and assisted living facilities just to name a few.   Most of our loan originations are SBA 7a loans that are used to purchase businesses and real estate; to fund growth; to start or refinance a business; or to buy out a partner.  We also provide conventional term loans to franchised operations and we operate nationwide as SBA Preferred Lenders.  This means that our viewpoint on matters such as the economy take on a national focus with a more narrow emphasis on entrepreneurs and small businesses.

In more good news, year to date Gulf Coast Small Business Lending has experienced a spike in business loan requests.  Our experienced team of SBA business development officers has been very busy over the last several months assisting borrowers with their SBA borrowing needs.  Overall, demand started to significantly pick up beginning in the fourth quarter of 2023 and has accelerated into 2024 with absolutely no sign of slowing.  We attribute the increase in SBA loan volume to several key factors:

1. The dark clouds have lifted: Entrepreneurs, an optimistic bunch to begin with, are back with a vengeance.  As fear of inflation eases from a year ago and the Fed scores some meaningful success with efforts to at lowering it further, business owners are no longer hesitating to borrow and put equity into their small businesses to fuel growth.
2. Sell-side pent up demand:  Business sellers have lost patience and are watching stable valuations.  Consequently, encouraged by the business broker community, they are returning and are putting their businesses up for sale.  We are seeing tremendous, and growing, activity in this space.
3. SBA rule changes:  The U.S. Small Business Administration (SBA) introduced several policy changes last year that make SBA 7a loans even more flexible and attractive for small business borrowers.  These changes include allowing partial sale of a business, for example, which has allowed more and more borrowers to consider an SBA loan for their borrowing needs.
4. Interest rates are projected to begin declining:  The vast majority of small business loans, certainly SBA 7a loans are booked at a floating rate, priced off Prime, adjusting quarterly.  Would-be-borrowers and credit departments alike are now factoring in flat to declining rates this year, and further reduction in subsequent years.  This obviously results in a more positive analysis and projected outcome than in a rising rate environment!  In other words, borrowing will become less costly going forward and that is obviously appealing to entrepreneurs.
5. Lenders are leaving the market:  Specific to our own worldview, we are seeing major lenders leaving or downsizing their small business and SBA lending.  In just one example, the non-banks are facing liquidity concerns, rising costs of capital, and increasing operating costs.  In many cases their models are not sustainable.  Smaller banks are also facing liquidity constraints, but even very large banks are (again) focusing on their core product lines as they prepare for a wave of office building loan maturities.  But lenders like Gulf Coast Small Business Lending are well positioned to pick up the additional business and we remain bullish about SBA lending.

Gulf Coast Small Business Lending is a unique lender in part because we benefit from the liquidity of a successful parent bank (even though we operate as an independent specialty finance company).  Small business lending is all we do; it’s our sole focus, it’s ourraison d’être, and we do it really well.  In fact, you can see what some of our borrowers have to say by visiting https://gulfcoastsba.com/testimonials/.  

We would love to hear from you as you prepare to finance your next great adventure in entrepreneurship.  Our experienced sales team loves nothing more than to work with entrepreneurs to help them realize their dreams of small business ownership.  We like to say that we are NOT ordinary lenders and that approach has never wavered.  We also like to say that good things are happening at Gulf Coast Small Business Lending which has been especially true in 2024 – stay tuned for more good news on the horizon – from Gulf Coast Small Business Lending and about the U.S. economy.  We’re bullish about SBA lending!  How can we be of help?