For an entrepreneur, a small business loan is often a lifesaver. Whether it’s to cover operating expenses, finance an expansion, or raise capital, business loans are one option taken by small business owners. In this episode, Tersh Blissett & Josh Crouch discuss the ins and outs of small business loans and financing with Brandon Bolen, Loan Officer at Live Oak Bank. Brandon talks about the nuts and bolts of financing loans for entrepreneurs, especially in the service industry, and we hear how important SBA loans are. Learn more about financing your business through SBA loans by tuning in.
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A Guide To Small Business Loans With Brandon Bolen
We have Brandon Bolen on. He’s with Live Oak Bank. You’ve probably heard his name, especially whenever we’re talking with Patrick, who does a lot with businesses selling and buying. His go-to man whenever you talk to him is Brandon because of the diligent hard work Brandon does for their clients. Anytime you talk about business acquisition, Brandon’s name gets brought up almost instantly. It’s wild whenever I’m talking to people and you say, “Brandon with Live Oak,” and they’re like, “I know who Brandon is.”
Anytime you start talking about a business acquisition in the service industry, everybody seems to know Brandon. This episode is for those people who don’t know Brandon and what they offer. It’s not whenever we’re talking business to business buying and selling. There are a few other times whenever you would reach out to somebody like Brandon. That’s what we’re going to talk about on this show. With that being said, welcome to the show, Brandon.
Thanks, Tersh. I’m happy to be here and looking forward to educating your readers on SBA loans and who Live Oak Bank is? I knew the hot topic is business acquisitions because that’s how a lot of people are looking to expand, getting value that way and meeting their growth goals. There can be a little bit more to banking and what we can provide financing for.
Tell us a little bit about Live Oak and then yourself too.
I’ve personally worked at Live Oak for a few years. I’ve been lending to home service companies for a few years. I normally say unique, but I’ll say we’re weird as a bank because most banks will essentially get a bunch of bank branches. They’ll set them up in a specific geographic area and lend to consumers, homeowners and businesses alike, but with no real expertise in any one product or any one industry. It’s an inch-deep mile wide type thing, which is fine. It’s worked.
When we were founded several years ago, we took the exact opposite of that, where we have never made a consumer loan or a residential mortgage. All we do is provide financing to small businesses in specific industries that we’ve researched heavily, mainly using the SBA 7(a) loan product. We’ve expanded into conventional offerings because a lot of our customers over the years have gotten bigger where an SBA loan was almost like a Goldilocks loan.
You can’t be too wealthy because once you become too wealthy, the SBA, which is a government-administer program says, “You can get conventional financing.” We have a bunch of teams set up where we focus on a specific industry. Our team here at the bank, all I, my teammates, Dylan and Jordan do is work with home service companies like your readers.
Even though we have one bank branch in Wilmington, North Carolina, we can lend in all 50 states because of our expertise or our specialization in your industry using a handful of products. Unlike most lenders or most banks where they’ll hop off a call and they’re talking to a dentist or a carwash or an auto repair shop, what I’m doing is talking to heating, air and plumbing companies.
Through the SBA program, most of what we’re doing is, I’d say in our industry specifically, it’s split right down the middle. Think Brandon Bolen heating and air is looking to buy Tersh’s HVAC. Tersh wants $1 million for his company. I probably don’t have $1 million in cash, but a bank will provide me financing to grow that way. That’s what we do. My company is looking to buy real estate because I’m bursting at the seams. My landlord’s a pain and I’d rather own my building and build equity that way. We can give you a commercial mortgage through the SBA loan program.
From a bank's perspective, the most important thing is going to be net profit because revenue isn't going to repay the loan. Click To Tweet
One other thing that I’d like to add is that whenever I reached out to you in 2020, it’s cool. At the time, it was also very helpful. Whenever we were talking to Elliot, it’s wild because I didn’t plan this. He comes in and does the numbers on the backend and then starts talking to Patrick and then now we’re talking to you, the lender. It was very cool when we talked before because I sent you my numbers and the data for the company that we were looking to purchase. You’re like, “This doesn’t make sense. Here’s why so and so on.”
I was like, “That sucks, but I get it.” It makes perfect sense. It was one of those things where you could have said, “Here’s the money, but you’re going to fail.” You were a very open to book and helpful whenever it was like, “That company doesn’t make sense for you right now.” I was like, “Why not?” We dug a little deeper. You were like this, that and the other. These numbers don’t align. This doesn’t make sense and all that. I was like, “Okay, cool.” You saved me months and probably years of heartache and stress. Going back and talking to Patrick, he was like, “Yeah. You were trying to solve a problem of employees, but those employees weren’t the employees you wanted.”
I’m like, “You’re right. My ego got in the way and your emotion.” I guess that’s a good question for me to go into is how often do you see people like me reaching out to you and say that, “I want to purchase this company. He’s my competitor. I want to put them out of business at the same time I want to acquire all his people,” but then it’s purely emotional because that company doesn’t make sense. That company is not worth half of what they’re asking. Do you see that very often? If you do, does it ever get emotional? It’s like, “I want him out of business-type stuff.”
From my perspective, it’s common. When I have to get my air conditioning unit replaced, I have no idea what goes into the technical side of it beyond what the technician or the salesman tells me. That’s their level of expertise. I’m not expected to know that. When we’re a bank and working in your specific industry, you know how to run a company, get guys to show up every day and provide good customer service. Oftentimes, you don’t know what a bank is thinking about and looking at.
As a banker, it’s easy because we are in one of the positions where, unfortunately, you can tell a customer no, but a lot of times, it’s because they don’t know. They’ve never been on the banking side. They look at a company and say, “They have a thousand maintenance agreements. I know I can do this.” When I look at that company, I can appreciate the maintenance agreements, but what I look at is profitability.
If your seller across the street who’s doing $1 million in sales and wants $20 million for his company, Patrick will tell him that’s probably not based in reality. I’ll tell you if I gave you a loan, day one, you’re going to default on the loan, which is not in our interest like a bank, but it’s also not in your interest as a business owner. You have to guarantee personally. There’s going to be a lien on the business. I’m not a commission-based sales guy, so I’m not going to be slinging loans out the door that I don’t think are going to work.
I’ll tell you why because ultimately, what that does is it paints a target for you as the business owner who stepped out along the way and you reached out to the bank to see if something can be done. My job is now to provide you to target and say, “This is why we can’t do the deal.” Going forward, maybe you tell the business owner, “It’s not worth $20 million, but I’ll give you $200,000,” and he’s like, deal and we can do it or it’s maybe he can agree to it. What it does is provides you with a target. As you’re looking for new businesses to acquire, you know what’s within reason, the bank can do and ultimately, it leads to a deal getting done versus me saying, “We can’t do this,” and I don’t even tell you why. That doesn’t help anybody.
That was awesome whenever you and I spoke because I had acquired a business. Our books were goofy. It was not an ideal situation and rushed on my end too. It was one of those things where it was like, “This company’s coming up for sale. Hurry up this process.” I was trying to get this stuff done and you came back and were like, “It’s not a no forever. It’s not right now because you need to fix this, this and this. That company needs to fix this, this and this.” I was like, “All right, cool. Gut check,” but it’s a good thing because for me, I’m one of those people where I would rather hear the hurtful truth than a comforting lie.
While it’s not always pleasant and fun to hear that, but in the long run, it does make a massive difference. Turn right around a couple of months later and we had a pandemic happen. If that had happened while I was struggling to pay a note, it would have been bad for both of us. It wouldn’t have made sense for you. Not that we could tell the future, but hindsight’s 2020. It is one of those things that I’m super thankful that it didn’t go through.
At the same time, I learned a ton even in that short conversation that we had. It was one of those things where it didn’t cost me anything, but it could have cost me a lot if you were like a commission sales guy and you slung the note out. I was like, “Brandon, what do I do now?” You’re like, “I’ve got a problem see you later.”
There are online lenders that will send you the money in a few days, but then they’ll charge high-interest rates and you have to pay the loan back aggressively. People will come to us to have us refinance those loans because an SBA loan is going to give you a longer term, so you have a longer time to repay it and it’s easier on the business. When we reviewed the financials, we were like, “Net income is lower than where it needs to be.” The customer had never even thought about that. They thought, ”You’d go ask a bank for a loan and they give it to you based on collateral.”
Ultimately when you're buying a company, and it's priced out fairly, that company should be able to repay the debt. Click To TweetWe, as an SBA lender, are going to look at your cashflow. First and foremost, we want the business to be able to repay the loan. I told them all this and maybe 6 to 9 months later, he came back to me on the phone. He’s like, “I listened to what you had to say. I started focusing on profitability. I talked to my business coach.” We worked on it and, “Here are my financials.” The financials looked great and he was like, “Could you refinance the debt?” “If I’m a good student of yours or if I’ve listened to you, I probably shouldn’t even take out a loan. I should pay it off and not take out any debt.”
Even though we didn’t get a loan out of it, it was a proud moment for me to see somebody turn their business around like that. That’s one of the cool things about being in our position is getting to see a lot of financials for a lot of different businesses in the home services space. We’ve definitely been exposed to all types of businesses.
You get to see the financials of all kinds of service businesses. As you said earlier, when you’re first introducing Live Oak, you’re not looking at an ice cream shop or an HVAC company, maybe you’re looking at service companies. It’s very consistent. I would like to associate this with air conditioning units because most people that are reading are in the HVAC industry or plumbing and something. You come up to an HVAC system and it’s a Rheem or a Trane or a Carrier, they’re different brands, but you walk upon it and it’s like, “This is what it should be doing. This is what it shouldn’t be doing,” but you’re very familiar with the basics of how it should be operating.
I associate that with you. If we were working on an AC unit and then we went and worked on a windmill and then the other thing over here. It’s like, “Let me take a few minutes and figure out how to work on this microwave,” but it’s the same way with you. You’re working on those service business financials. This is sticking way out. We go to a compressor and it’s making this howling noise. You’re like, “That’s a sore thumb sticking out.” You have that very quick sense of, “This is way off base,” type stuff. With that being said, which is more important, top-line revenue or net profit?
From a bank’s perspective, the most important thing is going to be net profit because revenue is not going to repay the loan, but profitability will. If I’m a company that’s doing $1 million in sales and I’m netting $200,000 a year, that’s the cashflow that I can either reinvest in the business or use to pay down a loan. If I’m looking to buy my real estate, you’re going to qualify for a $1 million loan. We’re going to be willing to do that transaction.
Whereas if you’re a $2 million company in sales, from the outside looking in, that company is bigger, but you’re only netting $100,000, for whatever reason. You’re going to qualify for less from our standpoint because we’re looking at your net income. That’s what’s being used to repay the loan. We do look at trends. Trends are going to be important. We want to look at if sales are stable or increasing. Ultimately, the cashflow of the business, that net income is going to be what’s used to repay the loan.
From our perspective, a company with a higher net income is going to be better. It’s going to have an easier time repaying the loan, but there are so many variables I can go into business. You might be somebody who’s growing your company. You’re investing a lot in your marketing budget. You might be investing more in direct mailers and that’s hitting your net income now, but you’re ultimately going to have larger sales.
How do we communicate that to you? Whenever I was talking to you before about getting a loan, it was last minute. It was not something that I planned on three years trying to purchase a company. It was super like, “This fell on my lap. Can I make it the purchase type thing?” If I come to you with that and my net profit is not where it needs to be, but I’m spending a ton in marketing because I want to grow. I made some capital purchases. I purchased a backhoe like, “We needed to purchase this. We could have rented it. At the time, it seemed like the right thing to do. Now, it is not because I have it on the books now.”
Can some of those things be taken into consideration? If so, before I go and spend a bunch of money on marketing, purchase another truck or two, how do I prepare in case something like this falls in my lap? It hurts my cashflow and net profit, but it’s an investment basically if I took that cashflow, net profit and was investing it back into the business already.
From the perspective of a backhoe, normally that’ll be depreciated. When we review the financials for business, we’ll add back depreciation because a lot of times, you’re not going to buy a backhoe every single year. We’ll add that back and that goes into the big ball of cash or net operating income that can be used to repay a loan. Normally that comes out via financials, but things like marketing or it’s not uncommon for us to have people where they were heating and air only. In the middle of the year, they invested upfront and a bunch of plumbing, equipment, inventory, staffing, and marketing for a new service line that hasn’t yet started getting the ball rolling. They had to hire a plumbing manager.
I can look at adding back those expenses because next year that business ideally is going to be generating revenue and profitable. When we review a loan, I’m the one reviewing the loan or my loan analysts or our underwriter. It’s not like a mortgage where you type in numbers and it spits out yes or no. We’re not black or white. There’s a lot of grays. As a business owner, it’s best to bring up anything that you can as it relates to the growth of your business or what you see.
We can add back non-recurring expenses. Maybe you had a consultant come in one year and you paid them $50,000. After that, you’re not using the consultant. That’s not a recurring expense. I’m going to add that back to cashflow. Because we are hands-on in our analysis of these loans, somebody can always spring up peculiarities in their business. Every single business is going to be different.
I can eyeball up a heating and air company and a plumbing company and say, “Your net income is at 80%. There’s some type of fraud going on.” Everybody’s different. It’s very helpful to bring stuff up. I can look at the financials and eyeball it, but there are a lot of stories that go into it. We might be able to do the loan, but we might not, but it still allows us to paint a better target to aim for.
A quick question. I have a couple of buddies of mine and we’ve talked about this before. Every time we talk about it, I’m over here with Mr. Google. I’m like, “What does this mean?” One of the things is EBITDA, what does it mean in layman’s terms? I Googled it and it was like, “Yeah. I get that.” Whenever I was talking to Patrick and Elliot, we were talking three times EBITDA, that stuff. People oftentimes are like, “It’s a buzzword. I understand that. I see it. I hear it, but I don’t have a clue what it is.”
Whenever I have to put it in layman’s terms, which is how I think about it, to be honest, I’m not thinking about it in a complex manner. When I came to the bank, they were teaching us about what is used to repay a loan. EBITDA, in my mind, is a big ball of cash. We look at it on an annual basis. It’s a big ball of cash that can be used to repay the proposed debt or any existing debt. What goes into that is essentially the cashflow after you’ve paid all your expenses throughout the year.
SBA loans are not collateral-based, which means if you're looking to get a million-dollar loan to buy another business, it does not have to have a million dollars in collateral. Click To TweetThere’s an amount of cash leftover that can be used to pay the debt and that’s what EBITDA is. That’s going to be a combination of net income. Normally, we’re adding back interest expense because if you’re looking to buy a business, normally you’re going to do buy the assets of that company and the debt of that business goes away. Any interests that they were paying us now going to be cash available to you to repay your loan.
Things like depreciation and amortization are accounting items. If you buy a backhoe one year and it is worth $100,000 and each year, you depreciate at $10,000, that’s a cash item. It seals your taxes, but it’s not cash out the door. That’s cash you can use to repay a loan. We combine that all together to come up with that EBITDA number, whatever it is on an annual basis. If your EBITDA is $200,000, you essentially have $200,000 that you can use to repay debt. We normally, as a bank, don’t look at it from a breakeven.
If your annual debt service is $100,000, we want to make sure your EBITDA is at least $125,000, so that you’re able to make your debt payment, but then you have $25,000. You have a cushion so that if next year is a little rougher and it goes down a little bit, you’re still going to be above breakeven. It gives you that cash left over to repay the loan. Everybody talks about multiples because a lot of times, when you go to buy a business, it’s going to be three times multiple.
That EBITDA is what’s used to, one, repay any debt you take out to buy the business, or if you buy with cash, that’s going to be your return. That’s your distribution to yourself. As the business owner, you can either reinvest it in the business or distribute it to yourself. That’s essentially the free cashflow after expenses that you can do with it as you please.
A lot of times, businesses will trade, and Patrick’s got a better idea of the multiple, but they’ll trade-off of that multiple because that’s what’s used to repay a loan. From my perspective, when we’re giving an SBA loan, if you’re a heating and air company buying another heating and air company, we can provide you 100% financing. That multiple has to be within reason. It can’t be 100 times small spoke because if I give you a loan, that business is going to be able to repay the loan.
Whenever you are looking at a loan, say Company A wants to purchase Company B, the company that is being purchased, does their net income have to be able to cover the payment or does Company A’s net income have to be able to cover Company B’s payment?
The way we look at it is first Company A is the buyer. First, we’ll look at Company A. We want to make sure that Company A can repay its debts without any support. It provides a good foundation for growth. What we don’t want to do is provide financing for somebody to get out of a problem. We want to have a good base for the buyer. When we provide financing for Company B, we want Company B to be able to repay the loan.
We don’t want cashflow from Company A having to supplement the cashflow from Company B, the selling company to repay the loan because then you’re probably overpaying for it. That business can’t repay the debt. I have to take cashflow out of my company to repay it. That’s not what we want. The only time we want to incorporate that into our financial analysis as a bank is if you’re saying, “This guy has run this company into the ground, but there’s a ton of value here.”
There are 100,000 people on a client list or something like it that’s untapped.
He’s only been doing repair and service. Once I get in, within six months, I’ll do a bunch of replacements and make my money back quickly. We might be able to incorporate that, but ultimately when you’re buying a company and it’s priced out fairly, that company should be able to repay the debt. Essentially, if Company A is buying Company B, Company B needs to be able to repay the loan without any help from Company A.
That helps out a lot. A buddy of mine, Brian Johnson, he’s on a couple of boards with me locally here in Savannah, but he asked, “Does your bank go beyond EBITDA and factor in other discretionary add-backs?” Family members on the payroll who are not active in the business are a good example of that.
You guys are on a roll. Somebody might have a daughter they paid $20,000 to and she’s nineteen and goes to college. We’ll add that back to cashflow because as the new owner of a business, I’d hope you’re not going to continue to pay her $20,000. That’s going to be $20,000 that can go towards repaying the loan or reinvesting in the business. We do discretionary things like that. We do add back, RV payments, Country Club payments and stuff like that. We’ll add back to cashflow because ultimately that will be used to service any debt taken out to buy the company. It will be used to reinvest in the business. I’ll be honest, as a small business lender, you can see some crazy things being run through the business.
Is this common? If it is, what’s typically your response to it like when someone died, they have to sell the company? I hate to be morbid, but that’s typically what I think of whenever it’s an emergency sale of a business. Their books aren’t in order, but it’s not a bad business. Their books don’t make sense. Maybe their books have been adjusted so that they can take the advantage of tax incentives or rebates to the best of their abilities. How does that conversation happen? We show a $180,000 loss. In reality, we had a little nest egg that’s over here.
Similar to Brian’s question, that’s discretionary. From our perspective, we’ll have to see verification. You can’t say, “Yes. I spent $60,000 to Taco Bell in 2021,” and provide no verification of it because we want to verify. We want to make sure you, as the buyer, your investment is protected because it’s an investment. I’ve seen where their net income is 0.1%, but the business, if you add everything back, it’s 20% margin, but then you’re paying taxes on it. We don’t contend with you, but we have to verify all of that for our borrower to make sure it’s a good one to make.
Have you seen it where the buyer has that and the seller is solid?
I always think about that because it’s not something we see commonly. I think a lot of times, what happens is because people will get in growth mode. They have to show as much as they need to. If you go to your bank as a borrower and say, “I’ve been running my uncle’s car through the business.” We’re going to say, “That’s not a great thing to tell somebody.” I’ve never had it come up. From a business looking to acquire another company, it’s never the buyer. Normally, the buyer’s cashflow is strong and the seller’s company is where you have to verify those add-backs.
If there’s going to be a weird question to ask you, it’s going to come from me. I appreciate that. Patrick says, “Brandon’s an incredible resource for those who are looking to acquire a service business,” and I agree 100%.
Thank you very much. The same can be said for Patrick. He does an excellent job of getting the deal done. When you hire a broker, somebody in Patrick’s position, you want to get the deal done and Patrick gets the deal done because he’s realistic, incredibly communicative and great at communicating with both buyer, seller and us. It helps get the deal across the line and allows sellers to exit the business and get valued for what they’ve spent years building.
Time flies whenever I’m having conversations with guys like you. Is there anything that I didn’t ask and if not, where do we learn more about you and connect?
I think the only one thing I’d add is for the readers, if it’s your first time thinking about getting an SBA loan, there are three big things we look at. The first thing is going to be business cashflow. Because the loan is government guaranteed, you’re not dealing with the SBA, though. You’re getting a loan from Live Oak. We’re looking at the cashflow of the business. Can it repay the debt? It’s not collateral-based, which means if you’re looking to get a $1 million loan to buy another business, it does not have to have $1 million in collateral to force through the loan. That’s not going to keep you from getting approved.
We’re also going to look at the resume. Obviously, you’re already the owner of a heating and air company, so that box is checked. Even though it’s a business loan, we do require a personal guarantee as an SBA loan. We do look at personal credit, that’s a big important thing. Those are the three things to consider when seeking an SBA lender to grow your business.
With the personal credit, what’s the personal credit score have to be?
It’ll vary by bank. Typically, we’re looking at 660 and above, but it’s not an automated process either. Sometimes it’s like with a business, there can be an explanation there as well.
I appreciate that. This is all great amazing stuff. Where can people connect with you and learn even more or go ahead and get the process started in purchasing?
I appreciate that. For my contact information, my email is Brandon.Bolen@LiveOak.bank. You can call my office line, which is 910-550-2858. You can also visit our website at LiveOakBank.com. We have a page where you can contact either myself or our loan analyst to get the process started. Even if it’s an idea that you have or you want to get your business pre-qualified to acquire another company or buy real estate but you don’t yet have a target mind, we’re happy to have that conversation. I don’t charge by the hour or at all for that type of conversation. I’m happy to speak 24/7 with somebody and appreciate the opportunity to be on this show and to get to talk with you, Tersh.
I appreciate it 100%. I’m glad you mentioned that at the end. I completely forgot to ask. We can reach out to you and say, “I’d like to get pre-qualified.” Can you say how much can I get or would we need to come to you and say, “I’m looking at getting a $200,000 loan for purchasing a company? Am I pre-qualified?”
When you’re looking to acquire another business, I can essentially look at your current business and let you know if it provides a good foundation for growth. It’s hard to say, “You qualify for X amount” since the loan will be based on the business you’re buying, but if you’re looking to buy real estate, we have a customer who’s got two properties. He’s got one that’s worth $1.5 million and one that’s worth $3.5 million. He wants to know, does he qualify for both or the $1.5 million? I can look at his business and say, “You qualify for the $3.5 million building as well as the $1.5 million,” or you qualify for X amount. We can do that for real estate.
I appreciate Brian and Patrick and what they’ve brought to the table as well. Brian, he’s a great local broker here doing amazing things. Patrick, everybody in the HVAC industry, knows Patrick. He’s doing amazing things with his videos and everything else. Thank you again, Brandon, for coming to the show. I’m honored to be connected with you and the group over at Live Oak. I look forward to the day whenever we get to the write Live Oak a check.
Absolutely, Tersh. I appreciate it.
Everybody, have a wonderful day. Don’t hesitate to reach out and connect with me on social media @TershBlissett. Until we talk again next time, have a wonderful week and stay safe out there.
Important Links:
- Live Oak Bank
- Brandon.Bolen@LiveOak.bank
- @TershBlissett – Instagram
