Today's Guest

Ray Drew is a well-recognized Business Development Officer at Fund-Ex Solutions Group and Host of the #1 SBA Podcast: “The Art of SBA Lending.” Ray has established a successful career helping small business owners and investors secure the capital they need. Profitable businesses can take advantage of an SBA 7a loan to enhance their operations, acquire other businesses, or pursue competitive ventures. Fund-Ex Solutions Group is 1 of 14 SBA-licensed direct lenders. Ray explains the advantages of SBA loans, their wide range of applications, and the motives driving entrepreneurs to leverage this financial resource.

Resources Shared

• SBA Ray | Loans for Small Business Growth
• Ray Drew | LinkedIn
• Fund-Ex Solutions
• Art of SBA Podcast
• Thryv
  

Episode Transcript

(Please excuse grammatical errors due to transcription)

Gordon Henry:                 Hey, hey, this is Gordon Henry at Winning on Main Street and this week we're talking money, loans and grants for small businesses. Our guest is an expert on getting money and especially money from the SBA for your small business. His name is Ray Drew. Welcome, Ray.

Ray Drew:                          Thank you for having me.

Gordon Henry:                 Great to have you. So, Ray, we're going to do a quick bio and then we'll get into our discussion. Ray Drew is a managing SBA business development officer at a company called Fund-Ex Solutions Group. He's dedicated his career to helping small business owners navigate SBA borrowing. His job is to structure a customized loan solution that meets the needs of the business and guide the entrepreneur through the business. Prior to joining Fund-Ex, Ray spent six years helping a startup SBA 7(a) lender grow to one of the top SBA lenders in the country. Ray likes to say he eats sleeps and breathes SBA lending. What should you, our listeners, get out of this episode? If you're looking at build and grow a business, you may benefit from an SBA loan. Ray can help you answer the questions of if and how you should get an SBA loan. So, let's get into it. Ray, first maybe you could just tell us a little bit about your background and how you got here.

Ray Drew:                          Absolutely. Yeah, so I mean I fell into it right out of college. I graduated in 2011 and if I could take you back for a second, that was a pretty rough time in the economy, particularly for small businesses. And access to capital was rough. I mean, I worked for an SBA lender at the time I was 22, so I was getting my feet wet here and people would send in packages of their financials in the mail sometimes still at this point, and they'd be trying to buy a building for their business. They were renting, they're tired of renting, they want to buy the building. SBA loan is one of the financing options to do that.

                                               And I just kept seeing all these tax returns that were not profitable. So, I was telling a lot of people no, because you have to be profitable to qualify for these loans. So, in my other half of the job I was just cold calling real estate brokers trying to get a book of business built and that's how I fell into it. It's been 12 years now and I've been through now this whole economic cycle from that beginning to this tail end of it. So, it's been pretty interesting. And today I'm working for Fund-Ex Solutions as a business development officer, managing a team as well as doing my own production. And this is a much different time than back then, I can tell you that.

Gordon Henry:                 So, it seems like you're pretty passionate about SBA loans. Why should small business owners be excited about this area of lending?

Ray Drew:                          Well, I mean, just to give you an idea, the SBA 7(a) program, that's the SBA's flagship program. So, it's been around for decades. By the way, when people were talking about SBA loans 10 years ago, they weren't saying the nicest things about it sometimes. Too much paperwork, takes too long. The industry has gotten a lot better. The SBA has streamlined a lot and now people, they love it honestly. And I don't know if maybe PPP has anything to do with it because the SBA came in and really stepped up to get a lot of dollars out into the hands of small business owners during all those shutdowns.

                                               But the tune is completely different now and it's over 50,000 a year SBA loans, maybe it's 60,000 now, but it's about 25 billion dollars a year. So, that's all going to small business owners. Average loan is I think around 500,000 this fiscal year. And people are using this for all sorts of things, to buy a business, to start their business, to grow their business. And it's with terms that you just can't find anywhere in the market. So, there's some advantages to it.

Gordon Henry:                 Okay. So, what are the risks in taking out an SBA 7(a) loan for the entrepreneur?

Ray Drew:                          There's two or three things that people don't like about it, and I tell people right up front, because it's not for everyone. The reason people do like it is because provides longer terms. I just got off a call with someone this morning and they have all these other debts that they've been using to grow their business and the terms are short, the rates are high. The SBA, I'm going to come in as an SBA lender and clean up their balance sheet, restructure it and bring their monthly payments from 135,000 a month down to 50,000 a month. This is a big business. So, I mean you chop it in half. So, those are the types of terms that you can get. People like that. People like that you can buy businesses in real estate with lower equity requirements. Conventional, you need to put a lot more cash into the deal. SBA it's lower if not, maybe sometimes nothing. But there's some downsides to it too.

                                               For a while, people didn't like the adjustable interest rate, which honestly, if you got an SBA loan two plus years ago, there was a span of time where there was 0% interest rates for many years. And if you got an adjustable rate SBA loan over the past two years, your rates probably doubled. So, that's not good. That's a problem with these loans being tied to Wall Street Journal prime and not all of them are adjustable, but most of them are, and most of them were.

                                               And those folks are having to deal with a higher payment now. Now today, people coming to get an SBA loan, they're requesting an adjustable rate loan, because they feel like we're towards the top and they want to be able to benefit from the slide down. But that's one thing and no one has a crystal ball. And I'm not going to get into where rates are going to go, because nobody knows. But the other thing is, and this goes back to risk, anyone who owns 20% or more of the business. So, if you own your business and a 20% ownership stake or more, you have to personally guarantee the loan and pledge all available collateral. So, these folks are all in.

Gordon Henry:                 Okay. And that's not the case on other types of loans. You don't have to pledge like your house.

Ray Drew:                          The personal guarantee part typically for a small business is a pretty standard requirement, but the pledging of the real estate is not a standard requirement elsewhere in the market. And the SBA's stance essentially is, look, we're going to give you a million dollars. Let's say whatever we're financing, we will take that as collateral, but often this is just growth capital or it could be buying goodwill, buying a business. And so there's not a lot of hard collateral. So, the SBA says, "Before we put the taxpayer dollars on the line, let's just make sure you as the business owner put all your collateral in and then once you put all your collateral in or the loan is fully secured, whichever comes first, then we'll stop. And if that means we're still unsecured as a lender by X amount of dollars, that's fine, the lender can still make that loan, but we have to be able to check that box that the business owners put all their collateral in."

                                               And essentially that's just real estate that has 25% or more equity in it. So, if you have a house or a rental property that you own that has that 25% or more equity, then that equity gets pledged towards the loan and that happens in the form of the SBA lender putting a lien on that property.

Gordon Henry:                 We heard during COVID PPP loans being forgiven, but that's not the case here. These loans are not forgiven.

Ray Drew:                          Yeah, that's an important distinction. Because for many years I was operating under the assumption that you had to pay me back and during PPP, that wasn't the case, but that was like an isolated thing. These loans you fully pay back. The only thing the SBA is doing right now to help is with regards to fee waivers. So, the nice thing about these loans is that the fees are what pays for the program. So, actually in most years, taxpayers don't pay anything. It's a zero subsidy program, but these fees on some of the smaller loans are getting waived and reduced. So, right now, and this is just starting October one of this fiscal year, and it's going to go through the end of this fiscal year. So, 12 months, there's going to be no SBA fee on loans up to a million, and the SBA fee from one to 2 million will be cut in half and 2 million and up, which goes up to 5 million. There's no changes. So, that's some pretty decent fee relief. That's like 26 grand on a million dollar loan, which it helps.

Gordon Henry:                 Yeah, I'd say so. So, tell us a little bit about your employer, Fund-Ex Solutions. Who are they and how exactly do you and Fund-Ex make money administering these loans?

Ray Drew:                          Yeah, yeah. So, it's a little bit unique. When you think go get an SBA loan, you probably think of go to your bank or your credit union, and there's about 1,500 of those who have made at least one SBA loan this past year. But there's also 14 non-bank lender licenses that are out there. And we operate under one of those 14 licenses, which means we're just directly regulated by the SBA and licensed to make SBA loans. So, it's the same as a bank. We lend money, you pay us back plus interest. And the only difference is we're a non-bank lender. We're owned by a larger non-bank institution and we operate as their SBA arm. Fund-Ex has about 42 ish employees all around the country and all of us just eat, sleep and breathe SBA loans from the top down. It's all we do.

Gordon Henry:                 Got it. What are some of the differences between buying existing business and starting a business from scratch from your perspective?

Ray Drew:                          And I listened to your last episode at the time we're recording this and it was about profitability and starting businesses and things like that. And with the starting of the businesses, the odds aren't in your favor, just statistically speaking. So, I finance a lot of business acquisitions and lately the last three years it's just been taking off. I think the idea is really getting out there. And then also, there's this wave of baby boomers retiring, I think it's like 10 or 11,000 a year, and a lot of them own businesses. And what we're seeing is that their children who are typically millennials, they have maybe minimal interest in taking over the family business. These are often blue collar manufacturing businesses, trades, things like that. So, these businesses are being sold into the open market. They're perfectly good, profitable businesses, and it's estimated that I think the number $7 trillion worth of these businesses has to sell this decade.

                                               So, what we're seeing right now is the largest transfer of wealth the country's ever seen. And people are sitting in corporate America or in different walks of life saying, I want to work for myself. I don't want to work for someone else anymore, and I want to start building my own wealth, my money. And if you buy an existing business, you cut through that startup phase and you acquire on established existing profitable business that's cash flowing right out of the gate, bypassing a lot of that risk from the startup and the SBA 7(a) loan is the primary way to do that.

Gordon Henry:                 So, just to be clear, a SBA 7(a) loan can be used to buy a business, but can it not be used to launch or start a business?

Ray Drew:                          There's a lot more access for business acquisitions. Business acquisitions is off the charts right now. Myself, it's 80% of what I'm doing on a daily basis. There's a lot of lenders doing it now. Startups, we look at from the lending side in two buckets. There's franchises that are established franchises like Orangetheory Fitness, Dunkin' Donuts, things like that. There's a lot of access for those types of startups. When you get into an independent startup, it's a lot tougher. It is possible for sure, but the pool of lenders that will entertain those types of loan requests is smaller and the requirements will be a little bit stricter.

Gordon Henry:                 Got it. Yep. Makes sense. What does it take to qualify for the SBA loan? If somebody is listening to this and thinking, okay, I'm interested. Just walk us through the process.

Ray Drew:                          So, you start with what the loan's going to be used for. So, let's say it's a business acquisition. The business acquisition, a lot of the underwriting's on the business itself that's being acquired. So, we are going to look at three years of tax returns from the seller as well as the current year to date financials and just make sure that the cashflow that's being generated by the business can support the debt. That's the crux of it all. It's called debt service coverage. Then on the buyer side, I look for three things. Good credit, you do need to have a track record of paying your bills on time. That's one. Two is cash or some sort of assets. I mean, you don't need to be rich or wealthy by any means to do this. I mean, I did a loan for someone last year who was a receptionist at the hair salon, put herself through beauty school, became a stylist, started managing the business and was a stylist and then bought the business.

                                               So, she worked her way up from receptionist to CEO essentially of a salon. So, you don't have to be rich, but you need to have your financial house in order. Some money to put into the deal, plus have a little bit of post-close cushion, a rainy day fund leftover, so that's cash. And then three is experience. And that's really the most important thing. You don't need experience in that particular industry all the time. You don't need business ownership experience, but you do need some sort of relevant management experience or transferable skills. So, for example, if you're in corporate America managing a team with five direct reports, that's helpful. You have managing skills, you have P&L maybe responsibilities or budgetary responsibilities. Those are all types of things that are going to translate over. But most of all, you got to be able to see yourself in the business that you're buying. This is not a passive investment. This is you as the operator of the business and it's all going to fall on you. So, you got to find something that really suits your skillset.

Gordon Henry:                 Got it. I assume if someone were a passive investor, let's say somebody who might be listening is thinking, hey, I'm interested in buying or one of those Orangetheory Fitness, you said, but I don't want to run the business. I want to hire somebody to run the business. You would be looking for the person who's running the business in the employee of this buyer to have the skills you mentioned. Right?

Ray Drew:                          Well, it's an interesting point you bring up because passive is a bad word in the SBA space. So, SBA won't finance or SBA won't allow us to finance anything where it's passive. So, there's always got to be some level of involvement and control to the person we're lending to. You can still have a GM in place, but at the end of the day, you're still in charge. You're involved, you have control over the finances, who's hired, who's fired. That's going to all have to fall on you. If you are more of someone who wants to be totally passive, maybe you want to consider investing in some of these transactions. If you are under a 20% owner, you don't have to be personally involved in the loan and you can do those types of investments like I do here and there on types of transactions, because these are good investments. People are buying these businesses for three to four times roughly the earnings. I mean, have you looked at the stock market lately? People are investing in companies based off multiples off revenue on companies that aren't even profitable.

Gordon Henry:                 Yeah. Okay. And what's the size of the SBA loan program overall? What's the total dollar amount and who's paying for the loans?

Ray Drew:                          The size of the loans per business, like the $5 million cap?

Gordon Henry:                 Yeah, and you had also talked, I guess in the beginning about the overall size of the program. How much money is available for loans?

Ray Drew:                          Oh yeah. So, it's funny because it's a government program, but the government doesn't lend the money. Just like with PPP. You go to your bank, the SBA is an insurance policy for the bank. So, if the loan gets defaulted, the SBA is going to cut the lender a check for 75% of the loss. We just kicked the can down the road on a government shut down 45 days at the time we're recording this. And so that would've had impact to the SBA, because we can't get SBA approvals when the government's shut down. So, of course this is all tied to Congress and spending. So, every year they appropriate a certain amount of dollars towards the program. We've run out here and there, but they always give us more. It's just maybe there's a gap of a couple days, and that hasn't happened in many years.

                                               And the reason it's not too much of a big deal is this is one of the few, first of all, few programs in Washington that's actually working and also has bipartisan support. It's rare that we'll run out of funds and that it won't get replenished. But that said, historically it's been about a 25 billion dollar a year program for the past handful of years. There was one year where it spiked. That was the year when SBA was giving away free money. But other than that, it's been pretty stable. And then I think it will probably be growing here because as the conventional markets continue to tighten, the SBA is there to fill in the gaps.

Gordon Henry:                 Yeah, I did want to ask you along those lines, what are some of the other ways you recommend small businesses access funds to build, to grow their business besides SBA loans?

Ray Drew:                          Well, the SBA loan, the whole point of it is, it's to provide access to capital. And historically was for businesses that couldn't get it elsewhere on reasonable terms. And back in the day, even before I was doing it, you'd have to provide that decline letter from your bank. They only wanted to do loans where you needed them. Now it's a little different. You don't need to do anything like that nowadays. You can just go get your SBA loan. But that said, in some cases, it is a stepping stone financing product depending on what you're trying to do. For example, if you're buying a building for your business, there's three really primary options when you go to your bank. There's the SBA 7(a), which is what we're been talking about. There's the SBA 504, which is a niche SBA program that's a little different, but it's for real estate specifically, and there's conventional.

                                               The big difference between the three of those is if you come to me to finance your building with the 7(a), I could do that. You probably don't need to put any money into it. I'll just use the equity you've built up in your business on your balance sheet and just say, all right, there's equity there. Most of these are then getting financed. These are mostly for growing businesses that really want to hang onto their capital and reinvest it into their business. So, we're going to preserve their capital with the 7(a). 504, you need 10% down typically. So, you're going to get a nice low fix interest rate on this one, but you're going to have to put in 10%. On conventional, you're putting in probably 20%, and then you're going to get a low fixed interest rate. So, it's like what's best for you?

                                               If you don't need to preserve your capital, you have this money, it's not doing anything here. Putting it into one of those other programs might be a better fit as well as maybe using the 7(a) to then refinance in 3, 5, 7 years and graduate into a conventional. That's on the real estate side. On a lot of other types of lending, because there's a lack of hard assets involved, like a business acquisition. SBA is the only game in town on these business acquisitions for one to 6 million ish dollars for enterprise value because aside from the seller financing it and buyer's cash, who else is going to finance a business acquisition for $3 million with no collateral?

Gordon Henry:                 Right. Are there any catches that we haven't talked about that people should know about? I mean, they come to Fund-Ex, they meet Ray Drew, they fill out the forms, they've got a legitimate request. They're looking to buy, let's say a franchise or something like that. They have a good track record of managing people maybe. What haven't we said that they should know about?

Ray Drew:                          Okay. Yeah. So, there's actually a lot of really important points. People every day I talk to folks, they always ask me about the process and the timeline. It's literally all we care about is am I approved and when can we close? That's what it comes down to most of the time. And with the SBA process, it's not that simple. So, there are landmines. If it's a business acquisition, I like to say the deal's going to die at least once before it closes. And these are two 60 day to 90 day types of timeframes. When you go to buy a business on real estate, maybe you can do a 60-day type of close. It's a little more simple, but you still need due diligence like environmental and appraisal.

                                               So, these things take time and there's a lot that can happen. So, my blanket advice is just to work with someone who's an expert. There's a 100, 150 lenders that I would deem experts. They are going to work every day to do SBA loans. That's only the top 10%. The other bottom 90 that you, I said 1,500, the other bottom 90% are doing onesies and twosies. If you only do 10 or these a year or less, you just don't have it figured out quite yet. And personally, I wouldn't want to go be someone's guinea pig while they try to go figure out SBA lending.

Gordon Henry:                 Okay, good advice there. Ray, we're going to take a very quick break, 30 seconds, don't go anywhere. We'll be back with more from Ray Drew.

Thryv:                                  This episode of winning on Main Street is brought to you by Thryv. The small business management platform that you and your customers will love no matter where you are. Thryv helps you run your business, keep organized, and get paid faster all from one login and dashboard. Thryv makes it easy for customers to find you online, instantly interact and stay engaged. And with free unlimited support 24/7, there really is no comparison. Go to thryv.com/pod for a quick demo to see everything Thryv can do.

Gordon Henry:                 And we're back with Ray Drew hearing all about SBA loans, fascinating topic really that many people I think don't know about. So, it's really useful for people who may be thinking about growing or buying a business to learn about the opportunities with SBA 7(a) loans that we've been discussing. So, Ray, we always hear about small business failures, 50% the first couple of years, 75% or more in five years. Does the SBA loan program in some way aim to reduce the failure rate?

Ray Drew:                          I don't think it aims to reduce the failure rate. I think it exists to provide access to capital as well as it's a job creation program at its heart. So, the SBA's actual goals are to do those things. And then beyond that, they're really focused on the smaller dollar loans and minority loans, better loans and things like that. So, that's what their focus is. Now, the banks and lenders, they're interested in making money and getting paid back and servicing their clients. So, that said, the SBA default rates are public information. In the 7(a) portfolio it's been under 2% for about a decade, 1.2%. It's very small numbers. Back during the '08 crash timeframe that spiked to double digits, I think like 10% or something like that. But you can track that. So, the number one reason businesses close is because they run out of money. So, having access to capital probably does help businesses be more successful.

Gordon Henry:                 Who would you say is your typical borrower? Can you create a sort of profile? Are they young, old, a lot of previous experience running a business coming from corporate America, ready to run, do their own thing? Who are your clients?

Ray Drew:                          Yeah. Well, there's a few different profiles, but one, my favorite profile, which we do a lot of is a manager of a business buying the business. So, sellers, obviously owners, they've been around for 20 years building their business. They have to retire at some point, and oftentimes they have an employee in their business who is their number two, been there since day one or been there 10 years, whatever. And I've done so many of these. I've done them for daycares, I've done them for fabrication companies, you name it.

                                               And the big problem with the person who's in that position, the GM or whatever, they've been a W2 employee and they might not have 200, $300,000 laying around to put into it. So, we have ways to structure that. That's actually pretty cool. And because of the SBA's recent changes, it makes it even more possible. This year they implemented sweeping changes to the program that no one's ever seen before in decades. And it's been crazy. But one of the big benefits to come out of it is essentially that the seller can provide your down payment for you. Now, buying a business with no money down sounds like a scam.

                                               So, you can do it, but the banks have to be able to approve it. So, we are going to use it fairly selectively. That's one scenario where we will absolutely use it. My colleague just posted on LinkedIn about one that just got approved yesterday or just closed yesterday. Business owners buying the business 10% down from seller, 90% financing by SBA. They're the best ones to take it over. We love doing those. That's one side of the client profile. The other side is folks that are exiting corporate America, they're 25 to 45, they're usually male, although we would love to see more women entrepreneurs buy these businesses, but I'm just giving you the profile. And they have been in middle management. They could have been at a consulting firm. They might've been coming from private equity, maybe investment banking or you name it, but they want to get off the merry-go-round and go buy their own business and build something meaningful for their family. And so they're looking at these business acquisitions as a way to do that. And I talk to those people every day.

Gordon Henry:                 Interesting. Really interesting space you're in. What's next for you, Ray? I love to know, on a personal level, when we talk to a expert in the field where they're headed, what's your next steps as a person who knows so much about this?

Ray Drew:                          Well, I am to the point now where a lot of my passion is in, I just feel so lucky to be able to get to do this. I mean, it really has been the best job ever. I've been working from home since before working from home was cool. You get to earn upside. It's a commission-based role. You get also the comfort of being a W2 employee and all like that. But most importantly, you get to help these businesses every day and every day is different. One day I'm looking at a landscaping business, trying to consolidate debt. The next day I'm looking for someone looking to acquire their competitor and double their business. And it's all fascinating, and it's like I have the knowledge that they need to make this happen. And putting in the 10,000 hours, you get to a certain point where it's like, okay, I have these superpowers. I want to go help people.

                                               But beyond that, again, I never thought I'd be doing this, but I feel really lucky to be doing it. And so now my passion is helping other people get into this type of role. So, I have a team of three other business development officers, one starting in a couple weeks here, and then one brought in from another department to create a junior business development officer. So, I'm teaching him the playbook on how to go and do this. And I have a podcast also for my industry. So, your listeners probably will think it's boring, but in my industry, it's the number one podcast. It's just a really niche industry. And I give away all my secrets on that podcast. I interview other big names in our industry on that podcast, and that's the stuff I just love doing today.

Gordon Henry:                 Okay, that's awesome. Well, my last question very relevant to your comment is, number one, what's the name of your podcast? And number two, how should people listening who want to talk to you about maybe buying a business, taking out an SBA 7(a) loan? How should they connect with you?

Ray Drew:                          Yeah, sure. So, I would say if you really want to go check out content, if you type in SBA Ray on YouTube, you'll see some really good content specifically for the small business owner who is trying to put the pieces together. But to get in touch with me, you can email me at rdrew@fundexsolutions.com.

Gordon Henry:                 Okay. And the podcast is called SBA Ray too?

Ray Drew:                          So, two podcasts. My main one I've been doing for four years for the SBA lenders is the Art of SBA Lending. And then I created a second podcast about a year ago. I did 12 episodes, and then I had a baby, and then I got busy. When you have YouTube and two podcasts and your day job and managing, it's like something's got to give. So, I put that one on ice for a little bit, but it's called Story Loans. And if you go check out some of those first episodes, I think it's some of the coolest content, because I'm interviewing small business owners who've been through the SBA process to acquire business. And that's exactly where my customers come to me day one in that. Those folks I interviewed are where they want to be. So, hearing it from them firsthand is always fun.

Gordon Henry:                 Oh, fantastic. Well, I want to thank you for coming on the show, Ray. This has been a great discussion and I think really great use, as you said, to entrepreneurs who may be or future entrepreneurs who are thinking about maybe buying or growing a business. So, thanks so much for joining us.

Ray Drew:                          I had a blast. Thanks.

Gordon Henry:                 And I want to thank our producer, Tim Alleman and coordinators Diette Barnett, Daniel Huddleston. And if you enjoyed this podcast, please tell your colleagues, friends and family to subscribe and please leave us a five star review. We really appreciate, it helps us in the rankings. Small business runs better on Thryv. Get a free demo at thryv.com/pod and check out our new free product, Command Center at Thryv.com. Until next time, make it a great week.

Listener Reviews