I would think for the borrower, for the SBA buyer, the two key numbers that they need to think about as they approach the possibility of this product are the loan value. Obviously, that will determine price and it will determine what they're on the hook for. So loan value and then their own net wor.
Acquiring Minds
How to De-Risk the Personal Guarantee
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If it's a $5 million loan and I've got $50,000 to my name. That's a very different picture than I've got $5 million to my name and it's a $2 million loan. Whatever. So it's th. Would those be the two key numbers that kind of inform the rest of this calculation?
We're going to look at a lot of the numbers that the, the bank looks at as well. You know, the debt service coverage ratio is important for the banks. It's going to be important for us to understand how the business is doing as well.
So that's, that's the other component. But, but for the borrower, the, the loan value is very important. And then their net worth is also important to this.
The ratio of their net worth to what they owe certainly impacts how they're going to view the risk of these loans and the risk of having the personal guarantee on their head. So all of that's going to go into our underwriting for each of these insurance policies. Yeah.
And just at a holistic level. Not to like go back to this, but that's why real estate can be really important is because you've got some actual collateral to protect that loan if things go bad.
And why the new recent rules around the 7a and 504 program that if you can have a lot of real estate as part of your business acquisition, that is a way to help mitigate the downside protection on the loan and why it's such a kind of awesome new, new new program to, to take advantage of.
And if people want to learn more about those new loan limits, the 7A combining 7A with 504 for $10 million total. See our webinar with Heather Anderson, which we did last week, where she unpacks it all. Very, very helpful and valuable.
And just going back now to the numbers and we're going to walk through a couple examples. The other thing about the way those two numbers play the loan value and your net worth is also whether or not the premium makes sense to pay. So this isn't, this is a significant expense.
As we said, you know, $1,000 a month per million dollars of loan. So if you don't have a lot of net, of net worth to, I mean and over a number of years that premium starts adding up and it. Are you. The aggregate that you paid in premiums could could for some people I guess catch up with the, the, the very number, their very net worth that they're trying to protect. And so then it makes less and…
And so a couple things there so one, many insurance policies you have property insurance for your home or auto insurance. These premiums tend to go up over time in the annual underwriting. Our policy is going to go down over time in almost every case because it's a percentage of the loan that you're guaranteeing.
But with the annual policies, you're not required to keep this. If you're doing really well, you're four or five, the business is humming along, your cash flows are great, you're paying down the loan much more quickly than you expected, which happens in many of these cases. There's no need to continue paying for our policy.
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