Interview with Sam Underwood CPA of Underwood, Dills and Associates of Waynesville, North Carolina.
Patrick: Hi Sam. Are you still on the Board of Directors of BB&T?
Sam: Yes I still am.
Patrick: How long have you been on the board with them?
Sam: It’s been six to eight years now.
Patrick: I knew that BB&T operates with separate regions that function like independent branches. Is that right?
Sam: It’s called an advisory board of directors, it’s not as powerful or have the decision making powers as, say, the directors of Haywood Savings and Loan. The old board used to sit down and review loan applications and said yea or nay on loans. Our function is to be a relationship in the community and introduce the management of local BB&T to potential clients.
Patrick: How have lending practices for small businesses changed?
Sam: They’re terrible, Patrick. I was watching CNBC this morning and Ken Langone, who started Home Depot, was on there and said that in today’s environment, if we came forward to the banks with our proposal like we did when we started Home Depot, we would have not gotten the financing to start. He was lamenting the fact, and we’ve heard this said before– but it’s even more true today– that banks only lend to people who do not need the money. If you’re looking for cash to do a startup business, and you don’t have your own cash to put in, or can guarantee it that way, the second best option, then, is to obtain an equity line based on any type of real estate that you have. A lot of banks, of course, are not equity lenders; they don’t want to be in a position to have to foreclose on people’s real estate.
Patrick: What percentage of the loans would you say are financed with home equity?
Sam: I would probably say 50 to 60 percent of them.
Patrick: And the rest is just by cash that is pledged as collateral?
Sam: They have a credit history; they have an income stream.
Patrick: Apart from the startup business?
Sam: Yes. But, if you don’t have a history, then it’s very hard to get startup money. On the other hand, if you have a history and can say, for instance “over the last five years, I’ve made this much money and now we would like to expand or would like to add” and if you show a cash flow that shows that you have the ability to meet debt requirements, then you can possibly get a loan.
Patrick: Has Sarbanes-Oxley or some of the other regulations impacted this?
Sam: Extremely. Of course the recent downturn in the economy and the recent banking crisis has made it harder for a startup business to get a loan.
Patrick: And the regulations have made it worse? I know, for instance Dodd-Frank has made it harder to get mortgages.
Sam: Yes.
Patrick: I was reading in the Smokey Mountain News that one of the elements of Sarbanes-Oxley was that it actually tended to cut out “employee ownership” of small businesses for the most part.
Sam: Yes. Now, several years ago you went to the bank to get a mortgage and they looked at what the property may be worth and how much you were asking and they were equity lenders and so they thought “we can loan on this.” They were not paying as much attention to your ability to pay back the loan.
Patrick: Because there was already equity built-in.
Sam: Right. So they loaned you money, then so many people defaulted and they ended up with the real estate on the books and had to sell it at a greatly discounted price.
Patrick: So, if you were starting up a small business and you were not working with an income stream, how would you recommend that they go about getting the financing?
Sam: Well, if they want to start a small business and they don’t have sufficient capital to begin with then they’re probably going to be unable to get a loan.
Patrick: From anybody.
Sam: Right. From anybody. It’s a sad state of affairs, but if the loan isn’t backed by cash, real estate or by stocks and bonds, then it is almost impossible.
Patrick: Is it because there is greater risk now that the business might not survive a year or two out?
Sam: Exactly. Everybody’s got a “great idea.” They need to put another coffee shop here on the corner, just like the dozen or so other ones down the street.
Patrick: Bless their hearts. Back when I was auditing, I was talking to this fellow from out of town who said he had an idea to put a hamburger restaurant that would serve the best homemade hamburgers in town. Of course there were already fifty places you could get a hamburger in Waynesville already. And he stayed open about a year.
Sam: Everyone ends up going to a coffee shop for a few hours in the morning, when they are at their most busy, so they assume that’s the way it is all day. They don’t go back later on in the afternoon and see that it’s dead and how much money do you make off of selling a cup of coffee or a danish?
Patrick: It used to be the old joke that people would start up a restaurant, build up a huge volume by selling dinners at a loss and then sell the business to some unsuspecting tourist for a massive profit, because they only looked at the sales figures and not the overall profitability.
Sam: Yep. That’s how they sell motels in Maggie Valley. They sell them in June or July to some retiree tourist, they don’t sell them in January or March.
Patrick: I appreciate it. Thanks for spending the time talking with me.
