Professor Elam

Sunday August 4, 2013

The head line in today's Express News reads

Some Entrepreneurs Go Begging, Getting Business Loans a Struggle for Poor, Minorities

But the truth of the matter, in muy opinion,  is quite the opposite. Monica Prater sought a loan to buy a building and equipment for $170,000. She wanted to open her own hair salon. Three banks and a credit union passed on the loan. Then she got a loan via the Small Business Association thanks to Accion, a company specialzing inSBA 7a loans. Take a look at the photo of the building in the article, does that look like $170,000 worth of collateral to you?

While the article takes the tack of oh the poor cannot get credit, perhaps the three banks simply took the position that that last thing Monica needs is $170,000 in debt!  Think what her balance sheet looked like before the loan, money in the bank. Now what does it look like?  She has loan payments probably for the next 20+ years. The monthly payment on a 20 year note for $170,000 at 8% would be $1,412. That's quite a debt burden. What do would the rent be on a 600 sf small studio by comparison?

My experience is that SBA loans are all too often a way for someone with a sub prime property to unload it on a finanically unsophisticated borrower. The owner gets the money, the borrower, usually a no asset person, gets stuck with a staggering debt, and the taxpayers are on the hook for the difference in whatever happens. 

CPAs earn their keep by dispensing sound financial advice which keeps debts low and cash flow high.