Tag Archives: SBA loan

Many lenders have had the unfortunate experience of negotiating loans with a borrower who was using false, exaggerated, or misleading information to obtain credit. Whether or not the ploy succeeded, the effects are often felt by legitimate borrowers, whose applications are scrutinized with even more suspicion due to the experience. While under normal circumstances there is a natural inclination toward trusting people, be prepared to confirm everything.

Unless actual loan losses have been incurred, many lenders may be hesitant to prosecute loan applicants found to have used false information to obtain their loan. But when they do, they may get assistance from the federal government, who insures depositors and regulates banks.

The FDIC (Federal Deposit Insurance Corporation) is not hesitant about using their resources that are available to investigate any attempt to defraud the government (via the bank) with false or misleading information.

These cases are prosecuted by a U.S. Attorney’s Office, who has unlimited resources to pursue such matters. Most federal prosecutors have nearly perfect conviction rates.

For those individuals who are flippant about the integrity of their business dealings, or who willingly try to obtain loans with inflated or misleading (a/k/a fraudulent) information, these actions can carry heavy penalties. It is a federal crime to submit false information in order to induce a federally regulated lender to provide business financing. If caught in such an attempt, one can be sure of criminal prosecution, and if convicted, may be punished with as many as twenty years of imprisonment and a fine of as much as $1,000,000.

Many lenders now require borrowers to certify in writing the accuracy and completeness of the application information they submit. These covenants acknowledge that the information is provided by the borrower in order to obtain loan approval.

Many lenders also have also begun verifying each borrower’s personal and business income tax returns with the Internal Revenue Service. There have been many instances of fictitious tax returns submitted to the lender by fraudulent loan applicants, resulting in significant loan losses. Lenders now confirm that the income tax returns submitted with loan applications are the same as those income tax returns submitted to the IRS to report income.

Think twice – you really don’t want the financing that bad, do you?

Starting a new business is one of the riskiest, yet exciting decisions you will make in your life. While over sixty percent of the new jobs in the United States are created by small businesses annually, a significant number of them are not sustained due to failure.

There are relatively low barriers to entry for starting up many businesses: adopt a name, maybe incorporate, get a business license and away you go. Dreams and schemes are cheap, but before you get too far down the road, you need to set your sights on reality.

While it can be simple to “start” a business, succeeding in business is another story. There are significant personal factors you should consider ahead of the decision to launch into business.

I am reminded of the dozens of business cards handed to me over the years that were in perfect form, good paper, nice design, and contained the designations “Founder, Chairman of the Board, President Chief Executive Officer.” These cards were given to me by freshly-minted entrepreneurs that didn’t have a business checking account yet.

Starting a business is serious work. If you have had trouble working for someone else, wait till you see how tough it is to motivate yourself some days.

There are many tough questions on which you should ponder: Why do I want really want to start a business? The path to small business success is littered with challenges every day. Are you just anxious to upgrade your job title, or do you really have the “fire in the belly” to make it work? Are you willing to endure past the mistakes, bad assumptions, unsympathetic customers, and unethical competitors?

While I would never discourage anyone from exploring the idea of starting their own business, I will try to ensure that the prospective business owners carefully weigh the gravity of how life changes when you adopt the title of “entrepreneur.”

There are more questions that need to be considered: Do I really have the skills and aptitude to earn a living in my own enterprise? How do I get started and what are the highest priorities to generate revenue? What will this enterprise really cost to grow to a sustainable level? Do I have sufficient resources to get to that point, and if not, can I get them anywhere else? These questions should be answered ahead of your decision to quit your old job.

When you’re the new business owner, the burden of making things happen falls on your shoulders. You take on multiple responsibilities usually without true expertise in many of them. And as challenging, you have to supervise others to perform work for you that you are not qualified to do, much less supervise.

Starting and owning a business is one of the most exhilarating and rewarding experiences you may ever have, but also one of the most tiring and challenging. The best advice is to weigh the costs, both on your fortune as well as your person, and make sure you know what you are signing up for before you pick up the pen.

Borrowers must try to imagine the worst case scenario in their business ahead and reflect on how the lender’s terms will impact the business. Sometimes there can be ways to give the lender adequate protection without the full- scale surrender that is often described in the loan agreement.

Business owners must consider these terms and seek to forge an agreement that provides sound options to ensure the business can avoid being disenfranchised by an insecure lender to the detriment of its other creditors, equity, and survival.

The borrower cannot afford to unwittingly put the entire company at the total mercy of a lender. The lender is usually not the only creditor of business, and often not even providing a majority of the credit. The lender’s credit is important, but is usually secured, which provides at least two ways to get out of the deal.

Protect the business. Demand, argue, and hold out for changes in the terms that can compromise the continuation of the business at the whim of the lender. The lender can discuss these terms with you in good faith up front, or if they remain unreasonable, may be forced to plead before a bankruptcy court later. Convince the lender that you are much more reasonable and less expensive.

Sometimes you will be forced to sign off on terms that are ripe to be abused. The need for capital may require you to accept terms that are risky. Be diligent about observing these terms, and know that you can’t permit the lender to abuse your rights or investment with shoddy, haphazard enforcement of their terms.

Here’s a question for you: are there degrees of dishonesty?

If no one saw you miss a golf swing in the rough, and you didn’t add it to your score, is that dishonest?

If bad traffic made you late for work, should you lie and say you were on time, so to let your employer bear the cost of your missed time instead of you?

If you serve in the Legislature, and a certain political contribution from a trade association made it much simpler for you to agree with their reasoning, have you sold your vote?

Surely more readers would find less fault with the first rather than the last question. Cheating at golf, where the only stakes are the pride within the foursome doesn’t seem nearly as sinister as selling out one’s constituents for the lobbying efforts of some industry or special interest.

But we all know that all three examples are wrong, which takes us back to the opening question: are there degrees of dishonesty?

Last week my blog poses the question as to whether there could be too much profit, based on the premise that some profits are obtained less than honestly. In our polarized political discourse these days it seems as though the dissecting question of that argument comes down to this question: where are is the dividing line between freedom and responsibility?

Those holding freedom to the lowest denomination might insist on a purely “buyer beware” world. In other words, “if you will buy it, it’s your responsibility to know what it is.” So put a fresh coat of paint on a distressed vehicle with many hidden problems becomes your problem when you trust the person selling it to you however it’s represented otherwise.

Think about a blurrier situation where a fast food restaurant offers to double your French fry order for a very low price. Those extra fries may satisfy your guilty pleasure while doubling the profit to fast food joint. To me the freedom/responsibility question arises when they knowingly sell you products with artificial aroma at a seemingly cheap price that is known to be outside your best interests. While they soak up a few extra cents of profit, you are left with clogged arteries and heartburn.

Politicians have an even murkier reality when accepting campaign contributions from organizations with a vested interest in how they vote on certain legislation. The New York Times had an interesting article on Saturday describing how Jefferson County, Alabama is facing bankruptcy primarily due to interest rate swaps (a financial derivative) they purchased on bonds used to finance their infrastructure.

Their Congressman, Rep. Spencer Bacchus, Chairman of the House Financial Services Committee, is strongly opposed to any regulations of financial derivatives. Not only is that curious due to the effects of these unregulated financial trades on the finances of his home county, but as Chair of the committee that regulates the U.S. financial industry, he should know better than most how the abuses of derivatives contributed to the financial crisis in 2008.

Is his price too low? Should his intellectual curiosity be stronger than mere ideology, since he is leading the committee with responsibility of protecting the country from predator financiers?

And, should his responsibility to his constituents be better demonstrated with ensuring that investment bankers don’t pillage other Alabama cities or those around the nation?

Or should at least he avoid accepting political contributions from financial services companies who are affected by these regulations to demonstrate that his philosophy and work is not unduly influenced by such monetary gifts?

Back to the question of freedom/responsibility, how do you think Rep. Bacchus fares?

Yes, that is a serious question. And in my reasoning, yes is also the ultimate answer to the question.

Trust me when I assert that I am a committed free-market capitalist. I believe in the power of the profit motive to move mountains, revolutionize the world, and spread assorted good things to millions of people. Without it, we might be still be living as serfs in 18th century conditions under the knuckles of some knight.

Profits motivate ordinary individuals to unleash their imagination, energy, and industry to create opportunities, innovation, and relief. Profits solve problems, feed people, and change the planet. Without profits, the world would collapse on a moribund economy that couldn’t even feed us, resembling the failed communist societies that herded citizens into forced labor in collective, state-owned enterprises, rife with corruption, fraudulent output, and dispirited participants.

But profits also introduce or exacerbate a very negative quality in mankind as well – greed. Greed ranges from the failure to be content with one’s rightful profit all the way to a psychosis that drives people to take enormous, self-defeating risks in pursuit of more profit, regardless of past overachievements. Greed can inspire people to do bad things to get more profit (note I did not say “earn more profit”).

Greed is everything from the mythical butcher placing his thumb on the meat scale, to the restaurateur selling chicken as beef, to Bernie Madoff running a Ponzi scheme with your retirement funds. Greed is dishonest and deludes people into bending or banishing any moral code.

Think about an industry that does not want to be responsible for some of the hazardous effects that the chemicals it produces might have, and decides that it’s cheaper to donate money to influence politicians than repair the problem. The politicians have their own profit motive – they want to stay elected. So they will attack the regulators on behalf of the industry and industry gets a lot of what it wants.

Polluted ground water? Increased cancer rates? Contaminated dirt? All are just collateral damage in the name of profits, jobs, and “good business.”

That scenario is greed at its worst, because the industry’s greed infects others using the common currency. The politician profits by selling their advocacy to the highest bidder, regardless of what is right, but who is contributing.

What happened to increasing profits by building a better mouse trap? By developing more productivity to deliver the same output? Or by creating strategic advances and new technologies that benefit someone? Why does today’s economy seem to achieve prolific profit growth only at the expense of one group of people by another (layoffs of workers by management), misrepresentation of value (triple rated CDOs built from subprime mortgages), or consolidation of one company by another (often with misrepresentation and at expense of someone)?

Too often profits seem to be driven by formulaic fraud. Go no further that the banking industry, and think of your credit card agreement. Ever read it? If you could really understand it (and I can’t), you probably would never have entered it. And that is the point – one party’s profit comes by suckering another party into a deal that will cost much more than the apparent sticker price, which is buried in a long legal document that might trip many attorneys.

In my mind, profits are owed to honest parties exchanging an honest value to another. Anything less produces too much profit.

Over this past weekend the federal budget drama ended with an hour to spare ahead of a threatened shutdown. Congress passed a continuing resolution to keep funding operations after a deal was cut to reduce the remaining 2011 budget by $38 billion, while taking several social issues off the table demanded by conservatives.

The story was covered like a natural disaster with hourly updates and frequent progress reports. Realistically, it was only the prelude to a larger fight looming over the 2012 budget and the necessity of raising the federal debt ceiling in the weeks ahead. Now comes the frightening part.

There is an old saying that in war, the first casualty is the truth. Remember that line as the rhetoric turns up around both the 2012 budget and the debt ceiling.

I will stipulate the following points:

a. Our federal debt is too high, and should be lowered dramatically over time.

b. Our federal spending is too high, and should responsibly be cut back to a sustainable level that meet the needs of a consensus of Americans about the society they want to live in.

c. Entitlement programs such as Medicare, Medicaid, and Social Security are hallmarks of one of the world’s most progressive societies, but frankly, need to be reworked in light of unsustainable commitments that will make them unbearable to future generations.

But prepare for the budget fight ahead to be one of ideology rather than numbers. Two points mark my interpretation of the conservative’s fight to lower federal spending:

1. The continued eighty-year old fight to eliminate social security, and the medical benefit entitlements that followed (Medicare Medicaid), which provide a safety net of health care and retirement income to the elderly and poor; and
2. Continuing choking off the federal government through more tax cuts for higher income Americans, and enlarging the wealth gap to worse proportions.

It is as simple as this: the code words smaller government really means we don’t want to contribute a dime toward the common welfare of our countrymen.

Other social disputes always loom in the background, especially abortion rights and federal funding for private schools. These and others will be added to the fight as dozens of amendments to cloud the debate, and feign compromise at the notion of dropping the most ridiculous of them, as the battle continues.

And all the way, listen for frightful stories about the damage done by the federal deficit and debt, about the loss of jobs, loss of competiveness, loss of the American dream….. all so that one more hedge fund manager might lower his tax bill enough to afford a second yacht.

Very telling though is to examine where the debt came from. The fact is that more federal debt was piled up (as a percentage of debt and as actual dollars) under the Reagan and Bush II administrations than all the others. You won’t hear about that in this debate.

The campaign slogan of the McCain-Palin run for presidency keeps echoing in my head…country first. Whatever happened to that notion?