Yes, there are ways in which to finance your hotel and motel project if you do no have a rich uncle, friend or other relative.

Many if not all banks have all cut back on hospitality financing over the past several years. This has been done for several reasons one being many of them are over exposed in this asset class. During the boom years before the recession an abundant of hotels were built and banks were clamoring for this business. In the same manner private investors diversify their investment portfolios and keep the asset classes balanced, banks diversify their loan portfolios as well.  When the banks have too many loans in one category, they stop lending in that specific category and pursue asset classes in which they have minimal loan exposure.  Also, since the recession hit many of these hotels are underperforming, in turn many of the bank’s hospitality loans are not performing as they had anticipated. The unfortunate result is even the well performing hotels are now lumped into an underperforming asset class.

As one door closes another opens. Seeing an opportunity private capital companies are filling the void for hospitality financing. Private capital companies should not be confused with hard money lenders. The private capital companies funding hotels and other hospitality entities are non-bank financial institutions that are able to raise capital for the specific purpose of lending to asset classes in which banks are shying away from. Many of these institutions are utilizing programs connected with the SBA and USDA, such as the 504 loans and 7A loans. These programs mitigate some of the risk to the lender and enhance the loans to the borrower. A win for all!

Royce Joseph Capital has numerous loan programs for the Hotel Industry. Some programs are for projects between $1M-$10M and others are for loans $10M-$250M.

Royce Joseph Capital LLC can assist with your hotel or motel funding. Please feel free to contact us at 973-257-2850 / 1-855-504-LOAN or info@RoyceJospehCapitalllc.com.

Royce Joseph Capital LLC………… Rebuilding The America Economy One Loan At A Time

Entrepreneurship is having a resurgence in America. There are many reasons for the resurgence with the recession being the catalyst. As the recession and lack of hiring continues into another year, many former corporate job holders are becoming a distinct group of people looking to start or buy a business.

There are two pronounced challenges facing business purchasers who have come from a corporate environment. The first is the small business culture is much different from the corporate culture. To start a small business owner’s job description is very broad. As the saying goes the owner is the “chief cook and bottle washer” in many instances they are the waiter, the porter and the cashier as well. I like to say a small business owner is at the front line of the economy, coming face to face with their clients everywhere they go.

The second challenge is the financing of a small business purchase. Even if the recession has had downward pressure on business prices, high quality and profitable businesses do not come cheap. Many business owners who have reached the age in which they thought they would be able to sell their companies, are not locating buyers who have the available cash and borrowing capabilities to buy the business outright. Many business owners are willing to finance the purchase but, usually the down payment requirements are substantial and the loan terms are short. This shortness in the loan terms straps the cash flow for the first years of the new ownership. The result, there is a stalemate in the business buying and selling environment.

The solution is what I like to name INCREMENTALISM.

This is the process in which a business is purchased over a set period of time. Incrementalism solves both problems that are created when a former corporate employee desires to be a business owner. First it solves many of the borrowing issues, what does that mean? For example if a manufacturing company is being purchased for $1,000,000 the initial cash outlay for the business by the borrower will be at a minimum 15%, or $150,000. The resulting loan is $850,000, with an 85% Loan to Value (LTV). Considering the fact most borrowers’ retirement accounts have been depleted due to the volatility of the stock market and their other investments or cash reserves have also shrunk, many times the cash infusion is not readily available. Purchasing the company over a three to five year period frequently solves the financing obstacle. If a buyer initially purchases one-half of the business for $500,000 it lowers the cash infusion to a minimum of $75,000, with a resulting loan of $425,000. The result is the loan is lower than a 50% LTV, something the financing institutions look favorably on. The balance of the business ownership transfer is structured to be completed over a set number of years. The selling business owner receives a cash outlay at the beginning of the transaction in which to prepare for their next stage of life. Purchasing a business in this manner gives the new purchaser time to obtain the subtle nuisances necessary to run a specific company, increase sales and revenue easing the pressures on the cash flow.

The challenge to this scenario at times can be conflicting agendas. There is the seller whose agenda is to move on. The buyer who’s excitement to take the business to the next level, with all of the new technology and business changes being put on the business owner’s every day. The solution in which I recommend is to bring in a consultant to manage the agendas for the betterment of all.

It is not because they do not want to lend you money it is because your business criterion does not match the criteria required by the bank to provide you with a loan. All if not most banks will gladly open business checking accounts and other bank accounts for a business but, when it comes to lending money that is another story. There is a process for a loan approval. Just like your business has a process and a client profile so do lending intuitions. Not everyone who walks into your office or store you can service the same is for banks.

Each bank has specific loan criteria and this criterion is based upon loan underwriting departments and sometimes the bank charter’s criteria for lending. Banks also have loan portfolios, and just like stock investment portfolios banks want to keep it balanced. Banks will be over exposed (meaning a disproportionate amount of dollars lent) in one business category and under exposed in another. When this happens a bank will begin to search out the business category in which they have minimal loan exposure to begin making loans in that specific category. Simultaneously the same bank will stop lending in the business category in which they are heavily exposed in. Your specific business at the time you are searching for a loan can be a business in which your bank has no desire to lend. This does not mean you cannot obtain a loan, just not at your first bank of choice.

Due to the amount of loan defaults and bank failures caused by the recession banks have become very conservative in their underwriting process. Simply stated, conservative loan underwriting means increasing the credit score criteria, debt to equity standards are tightened, debt service ratios are more stringent, collateral requirements are higher, and when purchasing a building down payments are upwards of 25%-30% and sometimes even higher. (An SBA 504 loan solves the down payment issue; this specific loan only requires a 10%-15% down payment)

The preparation for a loan can be very extensive. Just to obtain interest from a bank to accept a loan application could entail submitting extensive information. At the very least the banks will require past three years tax returns business and personal, a personal financial statement, and a use of funds description. I always remind my clients the loan process is temporary, one’s business growth and expansion is permanent. Loans are an unemotional decision for the bank which is contrary to how a small business owner feels about their own company.

The amount of work to obtain a loan can be extensive and most business owner’s do not have the time or acute knowledge to work through each banks’ criteria. The business owner is an expert in their field of endeavor. This is why many companies bring in professionals to help them through the process. A loan professional’s knowledge will include evaluating a company’s financials, knowing which banks is loaning in your specific industry just to name a few. In the end the process is much more efficient, organized and streamlined when a business owner brings in a loan professional to ease the loan process.

Commercial property mortgages traditionally mature every five years. Until the recent recession this has not been an obstacle for the lending industry because property values have risen steadily over the past decades.  Due to decreasing property values caused by the current recession lenders are facing a large dilemma. The dilemma simply stated is that many of the properties with maturing mortgages are “underwater”.

According to the Oakland, California based research firm, Foresight Analytics, 49% of the loans maturing in 2011 and 64% of those loans maturing in 2012 fall into the category of being underwater. They also value the amount of commercial loans with balances greater than the collateral coming due in the next few years to be near $770 billion.

The amount of commercial properties currently “underwater” needing to be financed is a very precarious dilemma for the national economy. If the properties are not refinanced and go into default, the rippling effect could be more damaging than the housing crisis.

Recognizing the potential for another economic calamity, Congress and the White House in September provided a solution in the Small Business Jobs and Credit Act of 2010. Within this legislation, the Small Business Administration will now allow their 504 loan program to be utilized for the refinancing of properties. The SBA 504 loan program has only been permitted to be used for the financing of properties and hard assets at the initial time of purchase. These loans have been particularly advantageous to the small business owners because they have provided them with the opportunity to purchase fixed assets with a lower down payment, below market interest rates and long term fixed rate mortgages. This same concept will now be applied to the commercial property refinance market place. (The traditional 504 loan program allows the business owner to purchase a property with only a 10% down payment. Two mortgages are then utilized to finance the balance. A  bank holds the first mortgage at a 50% LTV and a second mortgage for the balance of the loan is held by one of the SBA’s federally chartered Community Development Corporations.)

The complete details of the refinance program have not yet been established. However, they are scheduled to be released between February 15 and March 15. Preliminary information is slowly being released and the following example will provide some insight into how this program will work.

A property purchased five years ago for $1 million dollars may have a loan of $750,000. In today’s market that same property could very easily have a value of $750,000. A bank requiring a 25% equity position by the current owner will only allow for a loan of $562,500 or a 75% LTV. This would obligate the building owner to provide $187,500 to satisfy the lending institution’s loan to value requirement. The new SBA guidelines will allow the complete $750,000 to be refinanced utilizing lending assistance with the SBA’s federally chartered Community Development Corporations. The results of the above will allow the business owner to remain in their building and keep their company moving forward, preventing further unemployment and erosion of the economy.

You can receive additional information regarding commercial property refinancing by contacting Royce Joseph Capital at
973-257-2850 or via email at info@roycejosephcapitalllc.com.

In September of 2010 Congress passed and President Obama signed The Small Business Jobs Act of 2010.

Within this Bill were important changes to the SBA lending programs designed to enhance, encourage and be more inclusive of larger companies.

1. For the first time the SBA 504 loan program will permit refinancing of owner occupied commercial properties. Details of the refinancing parameters are scheduled to released by the end of 2010. The details will be posted on  www.504loanpros.com  once they are made available. This loan program will be available through the autumn of 2012
2. The 504 loan limits have been increased to $5.0 million for most companies and $5.5 million for manufacturing companies. This equates to a total loan of up to $11.25 million to $12.5 million.
3. 7A loan limits have been increased from $2.0 million to $5.0 million
4. Small businesses under the SBA lending guidelines now include companies with a net worth of $15.0 million and $5.0 million in average net income. This has increased significantly from previous guidelines

Restaurant: A young entrepreneur had been in the family’s restaurant business for years.  Like most entrepreneurs it was time to venture out and open his own restaurant. He purchased a building with his savings for $478,000 and began the renovations. As with many projects, the restaurant expansion started to cost more than the owner expected causing Mark to deplete his cash reserves. After numerous attempts to obtain a traditional bank loan and denied, the restaurant owner stumbled upon a 504 loan. The project was carefully analyzed and accepted into underwriting. The ultimate financing of the project looked like the following:

• Building Purchase $478,000
• Refinance: $872,000
• Construction: $1,400,000
• Equipment: $342,000
• Closing & Others: $52,000

Total Project
$3,144,000
X 85% =
$2,672,000

The owner’s original capital outlay of $478,000 was credited towards his 15% required capital infusion. As with all 504 loans, a traditional first position bank loan was located for 50% of the total project cost or $1,572,000. This loan was a five year adjustable with a 25 year amortization at a 6% interest rate. The 504 portion of the loan would be $1,094,000, with a fixed rate of 4.62% for 20 years.

Angel Investors, commonly referred to as Angels, are individuals or groups of individuals who have a desire and the financial ability to invest in start-ups or early stage companies. More often than not, an Angel Investor is a successful business person or previous entrepreneur who has a personal passion to see new businesses excel and grow. Angels are traditionally the first stage of financing once a person has exhausted their own money. They are the bridge between one’s personal money and the need for Venture Capital.

The term “Angel Investor” may conjure up ideas of persons who swoop down and shower a new company with money. This may conceptually be the idea; in actuality, the Angel Investor has a desire to receive a substantial return on his/her investment. They have chosen new companies to invest in and are acutely aware of the risks of losing their investment.

For an entrepreneur, looking for funds and ultimately accepting financing is the first stage in which they will have to answer to someone other than themselves. Frequently this can be a little challenging for a business owner who is not accustomed to answering to other people and sharing their dreams and ambitions. A clear understanding on how the Angel will participate in a company is very critical. Before an entrepreneur introduces themselves and their business project to an Angel, they will need to have a concept on how the Angel will participate in the venture if they desire to do so. Some Angels prefer to be involved, and if this is the situation, the Angel should bring an expertise the entrepreneur doesn’t have. Other Angel Investors prefer to only invest and leave the new venture to the entrepreneur and his/her expertise. If an Angel Investor has business acumen that is advantageous to the business, having them involved will increase the probability the new business will succeed and thrive.

Angels provide a vital part in the growth of a start-up. Angel Investors do like to say “Yes” to a funding request because that is what they are in business for. In today’s environment there are many more entrepreneurs than available funds and being prepared to present to an investor is more critical today than ever before. In today’s internet world, Angel Investors are easier to locate than in previous years. Being able to make a presentation to an Angel or Angel group more often than not will require an invitation. This is why the best Angels are located through networking and personal referrals.

The most important piece of advice is being prepared. This preparation is not only in the business details but be also being prepared in appearance and demeanor. There is an art to presenting to an investor. One needs to be confident but not arrogant. Be respectful, but not intimidated. In the event an investor intimidates you, this is probably the wrong investor. You will want to have an investor in which you can have an open and honest dialogue. If an investor has an unapproachable demeanor this is probably the wrong investor. During the course of your business relationship odds are there is going to be some bad news. The entrepreneur wants to be able to easily approach the investor with detailed updates on the business progress whether it is positive or negative.

The most important piece of information necessary when approaching an Angel is a specific and detailed business plan inclusive of an exit strategy for the Angel. In simplistic terms, the business plan will detail the beginning (where your business is today), your road map to success and the end (exit strategy). This is no different than a map when you take a trip. A traveler knows where they are beginning, details the roads and highways to get to a predetermined location, and has an idea on the time required getting to the new location. For the Angel, a comprehensive understanding of the exit strategy is of the utmost importance and is all too frequently ignored.  The exit strategy is where the Angel will make their money.

Some of the information that should be in a business plan is the following:

• Anticipated expense requirement
• Anticipated invest requirements
• Ownership dilution if additional investment is required
• Management structure
• Required employees inclusive of costs to hire them
• Pro-Formas
• Details on your market place and  competition
• Details on how your product or service is to get to the market place
• Exit strategy

he never ending question on how to finance one’s business. In the most simplistic terms, all three are
different means in which to get money from a funding entity into your company for the purpose of moving your company forward. For centuries and continuing to this day, Debt, Equity, and Grants are the only three methods to finance businesses. Christopher Columbus, the most famous of all entrepreneurs, utilized all three methods to fund his initial expedition.

Determining which funding type is best suited for your needs can be a daunting task. It will require an extensive analysis of your business, which will need to include a comprehensive review of all aspects of one’s company inclusive of:

• Financial status
• Goals and objectives
• Legal structure of your company
• Is your company a start-up, a seasoned business or something in between?
• Are you in revenue?
• Do you have orders for your product or service or are you in a test marketing stage?
• Is your product or service new to the marketplace, and if so, will it be readily accepted in the marketplace?
• Is your product or service already in the marketplace and funds are needed to increase production?
• And most of all – Where is your company currently on the growth curve?

These are just a few of the numerous questions needing answers.

All three – Debt, Equity and Grants – come with different responsibilities and obligations which the company being funded will need to fulfill.

Debt: Most business owners have been exposed to this type of financing.  A company requires additional money to operate their business. This additional funding may be used for working capital, new equipment, a building, business expansion, receivable financing or numerous other needs. The cost for debt financing is interest payments, which is the amount of money in excess of the principal borrowed; the borrower will pay the lender for use of the money. We’ll go into the different types of debt financing in a future edition.

Equity: Capital taken into a company for the use of equity is, in essence, a business owner selling part of his/her company. How these transactions are structured will depend on many issues, one of which is where the company is on its maturity or growth curve. A seasoned company would have different options on where to locate money than a start-up company would. Companies in their infancy stages are typically financed from the owner’s savings or possibly friends or family. Once a company begins to gain some traction in their endeavors, that company would then begin to look for Angel Investors. Upon further success a company would approach Venture Capital Firms and, if they are very successful, they may have the privilege of going public and or be taken over by a larger firm. The cost of equity financing is an ownership interest in one’s company and the sharing of the profits. A critical element which is often forgotten when discussing an equity transaction is an exit strategy.

Grants: Predominantly grants are the bestowing of money from either the government, private or public foundations to a non-profit company. There are exceptions to this though. Privately held companies that are in businesses that serve the common good such as education, alternative energy and agriculture, at times do qualify for grant opportunities. The cost of grant money is the legal obligation to fulfill the requirements a company agreed to when applying for the grant.

There is not any one correct answer on the funding category that would be best for you and your company, though there are parameters to assist in making a well thought out decision.  Over the forthcoming months, we will be providing information with the intent of making the decision making process somewhat easier.

Capital is the fuel which makes businesses run, grow and expand.  During economic times such as the one we are currently experiencing, the minimal availability of this vital resource called “Capital” prevents companies from growing, expanding and/or taking advantage of the decreasing commercial real estate prices.

A cost effective means for companies to finance fixed assets is with a Small Business Administration (SBA) 504 loan. Fixed assets are categorized into several different groups including: the purchase of an existing building or business condominium, the construction of a new building, the purchase of equipment or machinery and in some situations leasehold improvements. An SBA 504 loan is only available for small businesses that are of the speculative nature.  Professional practices such as doctors, lawyers and accountants are all considered small businesses. Real estate investment companies or not-for-profits do not fit the SBA criteria.

Buildings which arepurchased or constructed must be owner-occupied in order to be financed with an SBA 504 loan . The borrower, though, does not have to occupy the entire building. Based upon whether the building is an existing building or new construction, the borrower needs only to occupy 51% -60% of the building. The balance of the building is available to lease to defray the carrying cost. Under an SBA 504 loan a borrower can borrow sufficient funds to renovate a building in order to accommodate their specific needs.

The SBA 504 loan is underwritten by a Certified Development Company commonly referred to as a CDC. The term CDC is used for many different types of entities authorized to enhance communities. In this instance a CDC is afederally chartered, privately held not-for-profit financial institution whose bank charter permits them to underwrite and fund the SBA loans.

The CDC does not substitute the use of traditional banks for these loans; the CDC actually enhances the traditional banking institutions. The most effective way to explain how an SBA 504 loan works is to utilize a loan example:  A client requires $1,000,000 to purchase and renovate an existing building to accommodate their needs. The client’s responsibility is a 10% down payment; the balance of the money necessary to complete the transaction is financed in the following manner. A bank (and it can be the client’s bank if they so desire) holds a first position 50% mortgage on the property. In this example the loan would be $500,000.00; the CDC would then have a second position loan of $400,000.00. The two loans equaling the 90% financing allowed by an SBA 504 loan. The CDC’s loan interest rate is fixed for twenty years and is very cost effective for the client in today’s historically low interest rate environment. Considering the CDC’s do not have any retail operations which include checking accounts, savings accounts etc., they are not in competition with a client’s existing bank. In the event a client uses their existing bank for the first position mortgage, a borrower’s banking relationship will remain unchanged.

For the same reasons a company would hire an architect to assist them through the design and variance process of a new building, the borrowing company  can  utilize a firm that are specialists in obtaining SBA 504 loans for businesses. The professional assistance will ease the burden of the loan process on a business owner, allowing them to focus on running their company.

The SBA loan which is utilized to fulfill a company’s financing needs other than  fixed assets;  such as working capital, inventory or other business expenses is the SBA 7A. Both the SBA 504 and the SBA 7A can be used separately or in conjunction with each other depending on the client’s needs. According to statistics released at the end of the first quarter of 2010, SBA lending has more than doubled compared to the same time frame from last year.

A loan package will consist of the financial history on a company, such as the past three years personal and business tax returns, personal financial statements, balance sheet, profit and loss statement, and a detailed use of funds. A use of funds statement can be as simple as a contract of sale to purchase a building or piece of equipment, or in the event a company is constructing a new building it would be a detailed construction cost estimate. Considering one of the main objectives of the CDC’s is to stimulate economic growth, two years business projections are also required. The business projections are taken into consideration during the loan underwriting process in analyzing whether or not a business can cover the debt service.

Upon receiving and reviewing all of the submitted documents, the CDC utilizing their in house underwriting staff will underwrite the loan. A completely underwritten and organized loan package will then be submitted to a bank for their approval for the first position mortgage.  As long as the flow of information from the borrower to the CDC is timely, the entire loan process takes approximately 60 days.

Purchase Order Financing is a funding tool utilized by a company to leverage an order or orders it has received so that the company can obtain the necessary funds to fulfill the orders. Some professionals have referred to this type of financing as transactional funding.

To obtain any loan today a company needs to have some type of collateral, and in many instances the purchase order is the only collateral that company may have.  To secure purchase order financing, the lending firm will need to be confident that the purchaser of the goods has the ability to fulfill payment within the terms established.

This type of financing is appropriate for many businesses ranging from startup businesses with sales orders coming in but are without the required capital to fulfill the orders, as well as larger more established businesses with unusually large orders for a new customer. Wholesalers, drop shippers and resellers frequently avail themselves of this option. Purchase Order Financing provides the capital needed so supplies can be bought, products produced and finished goods shipped in a timely manner and without concern of funds running low to complete the task. Purchase Order Financing provides the opportunity for a company to avoid turning down a large order for lack of access to capital.