Bret Keisling’s guest is David Hincapie of the Small Business Administration, discussing SBA 7(a) & 504 loans, challenges to EO funding, and his EO A-ha Moment.
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Episode 125 Transcript
Bitsy McCann: 00:03 Welcome to The EO Podcast, where we amplify and celebrate all forms of employee ownership.
Bret Keisling: 00:12 Hello, my friends. Thanks for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. Today, you're going to hear the first half of my two-part conversation with David Hincapie who is with the Washington field office of the Small Business Administration. In this episode, David will share his EO "A-ha Moment," the experience that turned him into a passionate EO advocate. He'll also explain the SBA 7(a) and 504 loans that are available to employee owned companies. Finally, we'll chat about some of the challenges there have been with accessing SBA funding for employee owned companies.
Bret Keisling: 00:56 Next week, we'll air part two of the conversation, which I found very interesting, and that's how employee ownership, practitioners, advocates, and organizations can work with the SBA to create a whole lot of EO transactions. I hope you enjoy part one.
Bret Keisling: 01:16 There is a lot of talk in employee ownership about the SBA, what funding is available and frankly, how challenging it can be to get SBA funding. Well, I've got great news for all of us in employee ownership. We have a friend on the inside! I'm joined today by David Hincapie. David, thanks for coming on the podcast.
David Hincapie: 01:35 Happy to be here.
Bret Keisling: 01:37 Do me a favor and share your title on your job. What do you do?
David Hincapie: 01:41 I am an economic development specialist in the Washington metropolitan area district office of the SBA. That is one of 68 district offices throughout the country. We, our service area, covers the District of Columbia in Maryland, Montgomery and Prince George's counties and in Northern Virginia, Loudon, Fairfax, and Arlington County.
Bret Keisling: 02:04 So those are the counties that your district office handles, but you're unique among all the district offices, because your office is actually located in the same building as the national SBA headquarters.
David Hincapie: 02:16 Yes, we are. We're in one floor, our district office, we share it with the SBA Office of International Trade and the SBA headquarters is the floors above us for all the other program offices, Office of Women's Business Ownership, Veteran Business Development, capital access to loan programs, everything else is in that building.
Bret Keisling: 02:38 So, and as we'll cover a little bit later, as you have delved into employee ownership, you actually have a lot of resources in the building that some of the district offices would have to reach out.
David Hincapie: 02:48 Yes, it's an advantage. Sometimes when I have a question I can, well, pre-pandemic days, I could just go upstairs and go to the right people and get the question answered. Yeah, that's an advantage sometimes.
Bret Keisling: 03:00 David, we're going to talk about your EO "A-ha Moment," but first I do want to give a heads up to our listeners as we're recording this. It is Thursday, November 5th, 2:00 PM. We are in Washington, DC, a couple of blocks from the White House. For those of you listening well into the future it's election time still hasn't been decided yet I've been in DC all week, just frankly, celebrating democracy. But if you hear background noise sirens, first of all, we are in a city. Second of all could be something's going on in DC. So hopefully you'll ignore the background noise.
Bret Keisling: 03:35 With that. David, you have just a really cool story, how you become so passionate about employee ownership. And I know it ties to your starting of the job at the SBA. So, share your EO "A-ha Moment" please.
David Hincapie: 03:47 Well, I came to the SBA and to Washington DC from Southern California on August 2nd, 2018 and that was a Thursday. On Monday, August 6th was my first day at the SBA. And I got started and was doing all the usual in processing that you do with any kind of new job, you know, going to human resources and getting this briefing and that briefing and all that sort of stuff. The first week went by uneventfully. And on Monday of my second week in an internal newsletter that we receive, I saw a notice, a news item was flagged, about the NDAA, which is the National Defense Authorization Act, that was the one named after John McCain. Folded into that was something called the Main Street Employee Ownership Act. It was originally a standalone bill, but then it was folded into the NDAA.
David Hincapie: 04:45 And in it, it talked, the news article talked about the provisions for Main Street, for employee ownership. And I read up on it. And I had known what a cooperative was before I knew about employee owned companies and the employees were the shareholders. I didn't know the details of it, how it all worked, but this intrigued me and I, this was only my second week of work. I was not fully yet into my normal duties. You know, you got to get your computer, you got to get your phone, you've got -- there's all kinds of stuff that's got, has to go on. Plus, we were also in the last two months of the fiscal year, so wrapping up lots of projects. So here I am, I'm starting and they're doing their best to orient me and get me integrated into the team while at the same time doing all this other work. So I had a little bit of time off, not time off, but just time to myself, they said, go read this, go learn this, go watch this video. And, and part of that was I was reading up on Main Street, on employee ownership...
Bret Keisling: 05:50 David, let me just interrupt because it's classic management story, a new hire comes on. You don't really have the time to go deep in the processing because the SBA is crazy busy at the end of their fiscal year. So they just sent you off. They gave you the basics and said, go learn some stuff. And that's what you did!
David Hincapie: 06:10 Yeah, exactly. So in that, that was on a Monday. And there, I had finished watching the videos that I needed, training videos that you've got to watch and, and I needed a break from reading some of the policy manuals it's not, it's not the best prose in English. And so I was following up on this employee ownership stuff on that same day and I came across all of the organizations: you know, National Center for Employee Ownership, the NCBA National Cooperative Business Association, I came across The ESOP Association, the ESOP S Corporations of America, Cooperation Works!, -- everybody -- Project Equity. And I just started doing a deep dive on everything, reading everything, printed out a bunch of stuff, took it home with me that night. I was reading it.
David Hincapie: 06:58 Then the next day I come back, that's a Tuesday and I carry on with my job integrating into the team here and learning more about this because it is, after all, part of my job. it's small businesses and it involves lending and SBA programs. So they coincided in that way. I kept learning more. And on that day, my -- I call her my deputy boss-- she's a deputy district director. She asked me if I would be comfortable going to some of the SBA lenders in Germantown, which is a town in Montgomery County, north of DC. It's not far, but it feels far because it feels semi-rural when you, once you get outside of DC in there. And I said, sure, I'll, I'll go talk to the lenders. And we had to do a an annual visit, a final visit with them, and there was no one else available. So I went up there by that time, I had already read the NCEO report on lending to ESOPs and how the default rate is very low.
David Hincapie: 08:00 Now it comes with caveats because their sample set is very small and they say, they said, look, we can't say this is definitive, but we have a pretty good sample set and this is, these are the conclusions we're able to draw. And what jumped out at me was that the default rate on loans to ESOPs is so small based on that sample set, it's less than 1%. Well, anybody who's ever worked around commercial lending, or lending of any kind, a default rate of less than 1% is the kind of thing that makes lenders happy. So, as I mentioned a minute ago, coincidentally, they asked me to start going to visit some lenders. Okay. So I asked her, can I mention this by the way? And she asked me what it was. She didn't know --
Bret Keisling: 08:45 Employee ownership?
David Hincapie: 08:45 Employee ownership, right -- you know, and the Main Street Employee Ownership Act. And she said, wait a minute, what's that? And of course, this had just passed a week before, so no one knew no one, unless you were an advocate for it, you weren't paying attention. So even in the SBA, people didn't know about it unless they read the news bulletin. She said tell me about that. And so I told her about that. She said, oh wow, that's really interesting. Okay, all right. Well, okay, yeah, so obviously we don't have the policies in place for this, but yeah, you can, you can mention it that this is a new thing and it's going to be coming down down the pike, right.
David Hincapie: 09:20 So I go off and I talk to the lenders and I mentioned this to them, in addition to doing the normal visit that I was supposed to do. Oh, by the way this just passed and you might be interested in this because there are X number of small businesses in the state of Maryland and surely some of them are in your service area here, around Germantown, people who you service, maybe some of them are customers of yours and they might be looking to sell, right. The owner might be looking to retire. So there were these statistics, these that I got. So some of it I got from the NCEO, the National Center for Employee Ownership, some of it I got from Project Equity, some of it was from SBA research.
Bret Keisling: 09:59 And a lot of the data, just to let you know, emanates from Rutgers University...
David Hincapie: 10:02 Yes.
Bret Keisling: 10:02 And some of the other places where the organizations that you mentioned and NCEO does a lot of their research by themselves standalone.
David Hincapie: 10:09 Yeah.
Bret Keisling: 10:09 But a lot of us rely on the employee ownership curriculum that Rutgers has put together.
David Hincapie: 10:15 Right. Right. And I stumbled across some thing from San Diego as well.
Bret Keisling: 10:19 Yeah, the Beyster Institute.
David Hincapie: 10:20 So, so here I am with all this to talk about to these first lenders that I went to in this small bank, a community bank. And I mentioned it to them and they got very interested. You know, their eyes got really wide -- when you talk to a lending officer about a 1% default rate to a certain category of customer, they suddenly want to know more! And I said, okay, so we don't have the policies in place. It's going to be a 7(a) loan. Now, a 7(a) loan is the major SBA loan program. That's the general business loan that the SBA does.
Bret Keisling: 10:56 And we'll talk more about that.
David Hincapie: 10:57 Yeah. So you might have good customers for this possibly, but you know, I'll keep you informed, right. Just letting you know, this is, this is going to be happening, you'll be hearing more about it.
David Hincapie: 11:07 So that was, that was my "A-ha Moment." It was just realizing that the SBA loan program, 7(a) loan program, could be used to find buyers for a lot of these businesses who will never find a buyer. And a lot of businesses that are doing 2 million or 3 million a year in revenue that might sell for between $5 and $10 million sale price, they're never going to find a buyer because they're not, they're not big enough for a strategic buyer to be interested in. And the strategic buyer is one that wants to buy them to remove them as a competitor. They're not big enough for, you know, some private equity firm to buy them because they just don't make enough money. They're not interested in that and they're not going to grow. They don't have the potential for growth. Nor do they have the potential to be bought and then stripped of assets and sold for a profit.
David Hincapie: 11:58 So they just don't find a buyer. And these small business owners who might have been at work for 20 years, 25 years running this business and growing it they have to liquidate and they don't make nearly as much as if they sell it as an operating business. And they may not even have a lot of assets to liquidate. So this solves a lot of problems, right? You sell it, you create a buyer by selling it to the employees, the employees get to keep their jobs. If the business has been around for 20 years and is reasonably profitable, obviously it's doing something worthwhile in that community. It's employing people and with the money, those people earn it from their salaries and their wages. They buy houses, they rent apartments. They shop at the local stores, et cetera.
Bret Keisling: 12:47 It adds, as my friend Jen Briggs said on a podcast a few weeks ago, it adds to the community health.
David Hincapie: 12:53 Yes.
Bret Keisling: 12:53 It makes the community stronger.
David Hincapie: 12:54 Yes, yes, it absolutely does. So that was my "A-ha Moment." It was just this serendipitous coincidence. I happened to start work the day the NDAA was actually signed in the law, or maybe the day right after, something like that. And a week later I hear about it and I hear about this new SBA in connection to it by way of the Main Street Employee Ownership Act.
Bret Keisling: 13:21 We're going to talk about the 7(a) program and get into it a little bit. And then the main thrust of the podcast is going to be what barriers there might be to SBA funding, both legitimate barriers, and also just a misunderstanding and what employee ownership can do to overcome those barriers, essentially create demand with the SBA. But what struck me in your "A-ha Moment," and I'm really glad you had it, David. You and I have had a couple of phone calls and had lunch before recording this and you are the real deal. You believe, as it's going to come out, you have drank of the EO Kool-Aid and you have pronounced it good.
David Hincapie: 13:59 Yeah.
Bret Keisling: 13:59 You went to the deputy director of the SBA who didn't really know what employee ownership was.
David Hincapie: 14:05 Oh, this was, this was actually different. This was I went to, so the SBA, the SBA Administrator is the top SBA person, that's the person in charge and then the Associate Administrators are in charge of the different program offices. So the program, the Office of Capital Access, Office of Disaster Assistance, Office of Field Operations, that's where we are -- the district office is also known as field offices, the 68 that are across the country. So at the beginning of the pandemic, I happened to go to a senior person in the Office of Disaster Assistance to ask about the disaster assistance loans, the by now, I think, well-known economic injury, disaster loans. And I...
Bret Keisling: 14:53 That has been very big this year.
David Hincapie: 14:54 That has been very big in the news, yeah. Unfortunately. And so I immediately realized this was going to go on longer than six weeks or eight weeks or ten weeks. I thought we're going to be in this pandemic for a year minimum. So these businesses, there's going to be shutdowns. There's going to be social distancing. And I -- here's the here's a curious thing. I already knew what social distancing was from having watched that movie "Contagion." [Laughter.] In that movie, they mentioned social distancing, and I thought, oh, we're going to have to do that. And that means I'm not going into any concerts, people aren't going to be hanging around, you know, at happy hour. They're going to discourage people from having backyard barbecues. So businesses are going to lose a lot of money. They're going to need the economic injury disaster loan, and by that -- and, you know, I was interested in the employee owned businesses. So I dug into the disaster assistance field manual, or SOP the manual that we have for the loans.
David Hincapie: 15:59 And I saw in there that cooperatives only a certain kind of cooperatives were allowed to have them. And so I went upstairs to ask and say, is there any way this might change? Because there are a lot of, you know, this, these only certain kinds of cooperatives, agricultural cooperatives, are eligible for this, but there are lots of other cooperatives that are going to lose money. And the person I was speaking to didn't quite understand. I said, well, ACE Hardware is a purchasing cooperative. So the question came out well, what do you mean what's a cooperative? So then I spent 15 minutes giving a mini seminar on what a worker cooperative, a purchasing cooperative, a marketing cooperative, in addition to their agricultural cooperatives and farmer cooperatives that everybody's familiar with, or may not be familiar with, you know, Tillamook Land O' Lakes, Ocean Spray, Organic Valley they're my go-to for for milk.
Bret Keisling: 17:00 [Laughter.] Let's give them a shout out!
David Hincapie: 17:02 Yes, let's give them -- Organic Valley!
Bret Keisling: 17:06 Organic Valley.
David Hincapie: 17:06 Yeah. I like buying their grass milk.
Bret Keisling: 17:09 Excellent.
David Hincapie: 17:09 So I I explained there's all these co-operatives. And in addition to worker cooperatives, now they're usually smaller, but I said, but there's big ones. There's Equal Exchange. They've got 135 people. They do 70, I think over $70 million a year in business. And the person I'm talking to their eyes get wide. Really? That much? It's like a real business?
David Hincapie: 17:31 And now that, "it's a real business," that's something you hear a lot when people talk about cooperatives. They think cooperatives are just people selling you homemade soap or something at the local flea market, or they don't realize it's a big operation.
Bret Keisling: 17:47 And to be honest with you, hippies and communes, et cetera, et cetera. Yeah. Misperceptions!
David Hincapie: 17:54 There's a total, yeah, misperception about that. So, so this is cooperatives, not ESOPs, but I'm here explaining to someone about employee ownership in the form of cooperatives. And this person says, wow, I didn't know. Now they've been at the SBA since the nineties and they were heavily involved in the production of the SOP. And so the SBA doesn't know any, as an institution, the SBA knows little to nothing about cooperatives, because even until 2015, a worker cooperative was not eligible for an SBA general business loan, the previously mentioned 7(a) loan, because it wasn't categorized as a business concern. It was categorized -- or a business enterprise, a small business enterprise -- it was categorized as something else. We won't go into that history here, but that's a fact. And so that means the SBA doesn't know anything about cooperatives.
Bret Keisling: 18:51 And it almost sounds like because the agricultural cooperatives were written in 20 years ago, and we don't know why, but you could see where congressional members or staff members might be aware of the farmer's cooperative. So they did what lobbyists do or that sort of thing. They got agricultural cooperatives in, whereas it'd be much better from the EO perspective if the word agricultural had been exactly stripped out.
David Hincapie: 19:18 Exactly.
Bret Keisling: 19:18 Give me an overview of the 7(a) program, because ultimately I do want this episode to include what is available, right. But the, the vast majority of the episode you've hit on a note that I think is very important, and it is the challenge of employee ownership. And that is, there are too many people in government, state, local, federal, and in banking -- and we'll touch upon that -- who don't really know about employee ownership. And my perception very strongly is it's not the fault of people to know that which they've never been asked about. So for me, it's a demand, but before we get there, can you talk about the 7 (a) program? Talk about the size of the loans and just kind of very broadly what's available?
David Hincapie: 20:10 Well, the 7(a) program is the longstanding general business loan program that you can use that it's a maximum of 7 -- of $5 million, and you can use it for working capital, buying inventory. You can use it for land, for buildings, for improvements. There is another loan program called the 504 which is for fixed assets. Usually it's for property, but it can also be large capital assets.
Bret Keisling: 20:37 So if you're an existing business, including an employee owned business, perhaps you can get the 504 lending for the fixed assets.
David Hincapie: 20:45 Yeah. for the fixed assets.
Bret Keisling: 20:46 When we're talking about transactions, creating new employee ownership...
David Hincapie: 20:49 That's the 7(a).
Bret Keisling: 20:49 That's going to be under the 7(a).
David Hincapie: 20:50 Yes.
David Hincapie: 20:52 So under the 7(a), it's up to $5 million. It's a 75% guarantee. So the SBA, these are SBA guaranteed loans, which means the SBA doesn't do the direct loan. The SBA guarantees the loan when a lender does the loan, and that's usually a bank or credit union, an SBA Preferred Lending Partner is what we call them a PLP. And they do the 7(a) loan. We give them a guarantee of 75%, as long as all the underwriting and other standards are met.
Bret Keisling: 21:21 You guarantee it 75% of the 5 million.
David Hincapie: 21:24 Of the 5 million.
Bret Keisling: 21:25 On loans that you know have, because you said it earlier, a default rate of less than 1%.
David Hincapie: 21:31 Of less than 1%.
Bret Keisling: 21:31 So they are very safe.
David Hincapie: 21:32 So they are very safe.
Bret Keisling: 21:32 You guys are guaranteeing 75%. The banks not really at risk, generally only 1% on the remaining 25.
David Hincapie: 21:39 Right, right.
Bret Keisling: 21:39 Great, great safety for the bank.
David Hincapie: 21:41 It is. It is. And so, so the term of it is 10 years, which is very unusual for this sort of business loan. You know, if you get some sort of working capital loan from a bank, it's going to be two years maybe. So this is up to 10 years. It doesn't have to be 10 years, but it could be up to 10 years. So you're all, anyone who gets one of these loans is going to be negotiating all this with their lender, right. The term of it and the interest rate, There's a cap on that as well. And so that's the SBA business loan. It's a guaranteed loan. The guarantee is meant to be an incentive for small -- for banks, for lenders to lend to businesses that might have difficulty getting access to financial capital. You know, having the guarantee could be an incentive for them to do it if they're marginal, right.
Bret Keisling: 22:30 Let me ask this. As my regular listeners know, I spent seven years as an ESOP trustee lost track of the transactions, the number, you know, I think it was about a hundred transactions, but all of them, just about, required financing. Very few were owner financed. If we set aside the SBA part for just a moment, ironic on an SBA episode, but all the negotiating, the interest rates, that sort of thing with the banks is going to happen anyway.
David Hincapie: 23:00 Yes.
Bret Keisling: 23:00 In other words, you're not saying to the casual listener, hey, you got all this additional process. There is documentation, perhaps there are, there are some rules that must apply, but they're all handled between the bank or the PLP as folks call them and the SBA.
David Hincapie: 23:18 Yes.
Bret Keisling: 23:18 So if I'm borrowing the money, I'm going to be put through a lot of hoops if someone's going to loan me millions, this isn't more drastic than that?
David Hincapie: 23:28 No, it's the same amount of work. If you're going to sell a company, even if it's a very small company that's going to sell, let's say it's going to sell for $5 million. There's going to be a lot of work and administrative work involved in this, right? You're going to negotiate the selling price with whoever the buyer, your lawyer's going to look at their proposal. Their lawyer is going to look at your proposal. You're going to have inspections. You're going to have valuations. There's all this work to be done. It's going to be done anyway.
Bret Keisling: 23:55 I just want to reemphasize as an ESOP trustee, that's all the work we are doing anyway. I'm just putting the hammer on top of what you said of -- valuations, trustee doesn't do it without a valuation advisor. Everything comes into play, right?
David Hincapie: 24:09 And you have to have a valuation for an SBA loan anyway. It's required. It's in our SOP. So all we're...
Bret Keisling: 24:16 For those who've listened to me and I've come up to kind of do this as an aside, the trustee, isn't going to share the valuation with the SBA. It would require the company to have their own valuation to share with the SBA, but the trustee isn't going to release the valuation report to anybody, because trustees don't do that.
Bret Keisling: 24:33 Now back to David.
David Hincapie: 24:34 Yeah. So all this work happens and see the work between the lender and the SBA. That connection really is about one thing. It's about that guarantee. That's what it's about. That's what essentially it boils down to. The lender, wants to reduce their risk, just like any lender does. That's what they care about. They want to make money making the loan. Fine. But they want to reduce their risk. If they can reduce their risk by attaching whatever assets, you know, as security for the loan. Great. If they can reduce their risk doing some other thing great. And if they can reduce their risk, furthermore, by getting a government agency to partially guarantee the loan, they're going to do that too. And that involves merely meeting our standards, SBA standards for the underwriting, for getting a valuation, for doing certain things, submitted to us, and we're going to review it. And we're going to say, okay, check, check, check, check. You got your guarantee. And that's what it is. It adds a little bit of time to the whole transaction, but you're, we're talking about adding a month or a month and a half to a transaction that's going to -- sale of a business is going to take, could take you 12 months anyway. So if you plan ahead, if you, if you, if you plan ahead for whatever you're doing, it's really not a big problem.
Bret Keisling: 25:53 When someone would call me for an ESOP transaction. And as the trustee, this is, they've done the feasibility study. They're pretty sure they're going to go ahead. There's no guarantee that we'll close, but they're ready to assemble the team. On the quick side, we're looking at three months. As a trustee that generally was my comfort level of how quick I'd be willing to do this per DoL guidelines. Sometimes a little bit quicker. We would see without even the SBA involvement that financing, you know, if you've come to me as a trustee, wanting to close in 60 to 90 days, and you haven't even begun your bank financing process, that's going to be a challenge. So when you talk about the year end financing, you should actually be working on, at least in your mind, talking to your current lenders, that kind of thing, back at the feasibility study.
David Hincapie: 26:42 Oh yes.
Bret Keisling: 26:44 There are two points that I want to chat with you a little bit. One of the challenges with ESOP financing and I am certainly more versed with ESOPs than co-ops and collectives, but is that personal guarantee. And the selling shareholders like, hey, I'm selling my shares. Why do I have to personally guarantee it? That's to be negotiated. Sometimes you can negotiate out of that. Maybe does the SBA require the selling shareholder to guarantee, I guess the 25%?
David Hincapie: 27:12 So normally you're not going to require whoever is selling whatever to guarantee the loan, why they're selling it, what you're requiring is the person who's buying, right? The entity that is purchasing with borrowed money to guarantee the loan.
Bret Keisling: 27:25 In ESOP world. The problem is the buyer as the trust doesn't have collateral, doesn't have, it's a brand new entity, right? So me as the trustee, you, first of all, Bret, personally, isn't signing for anything. But even as the trustee, I don't have the assets in a new transaction to guarantee it.
David Hincapie: 27:41 Right. So this is what has slowed down the adoption or what makes it slow for these loans to happen in an ESOP sale, right? When you're going to, when the selling shareholder is going to sell to the, to the trust. Is just that, well, you, there is no personal guarantee. You can have it because there's no person there's a trust. So who is going to guarantee this thing. That is precisely what has slowed things down. So in a sense, there is a conflict between what was spelled out in the legislation and the way we have done 7(a) loans since 7(a) loans began. Because 7(a) loans were usually loans taken out by a person or persons, and they would provide the personal guarantee. But now it's not a person it's a trust and they -- right, you know, about the internal loan between the firm and the thing.
David Hincapie: 28:41 So how does all that fit in with the way the 7(a) program works in the SBA? That's what slows things down. That's why, to my knowledge, there have only been three 7(a) loans made for employee ownership since this legislation passed.
Bret Keisling: 29:04 In the two years that you've been with the SBA...
David Hincapie: 29:06 Yes.
Bret Keisling: 29:06 And you looked for the loans...
David Hincapie: 29:07 Yes.
Bret Keisling: 29:07 And you could only find three.
David Hincapie: 29:10 Yes.
Bret Keisling: 29:10 Share, by contrast, the number of loans in your district office in the last year, or compare it. How many loans is the SBA doing?
David Hincapie: 29:20 So in our district office alone just last year, we got some numbers recently actually where they were all compiled because it's, we're just started, the fiscal year. We did 262 7(a) loans for roughly a $107 million, a little bit more than 107 million, 800 thousand dollars. In our district alone.
Bret Keisling: 29:42 One of 69...
David Hincapie: 29:43 One of 68 districts...
Bret Keisling: 29:44 One of 68 districts.
David Hincapie: 29:45 Yes. Right. So some districts do a lot more than others. You know the, I suspect, the Nebraska district office is going to do a lot less than the Los Angeles district office, right? The district office for all of Nebraska, I suspect, does a lot less than the one for just LA district. But you can see that there's a large number of loans. To my knowledge -- and when I say to my knowledge, this is, this means something specific. It's because loans to employee owned entities, right -- to cooperatives and to ESOPs -- are so brand new that we don't even have that information captured, set aside. I cannot go into the database and search for all the loans made to employee owned firms. What I have to do is go talk to people in the loan processing centers and say, does anyone remember doing anything for -- with an ESOP, right? I have to call people.
Bret Keisling: 30:43 And when you share this, the response, often at the district offices, what's an ESOP?
David Hincapie: 30:50 Yes.
Bret Keisling: 30:50 Employee ownership -- and this again is EO's problem of education and it's breaking through all kinds of clutter.
David Hincapie: 31:01 Yeah.
Bret Keisling: 31:01 But you're, and by the way, you may end up being able to do, and you already have a lot of education internally in the SBA because you got the passion, but this is the two-sided coin or the never-ending circle that I was referring to. Employee ownership complains, that there aren't SBA resources, or they're not tailored for SBA, but SBA doesn't have the knowledge and we're not creating that demand.
David Hincapie: 31:28 Right.
Bret Keisling: 31:28 So that is the challenge that I'm just repeating that. So we've got three loans. You presumably there were a couple of them that applied and didn't go through?
David Hincapie: 31:39 Yeah. It could be, I don't know.
Bret Keisling: 31:41 But the fact of the matter is you were only able to track down three.
David Hincapie: 31:44 Right. And I heard about them from the outside. I didn't, I didn't even learn about them internally. So w the first one I heard about from Menke and Associates... Menke?
Bret Keisling: 31:56 Yeah, Menke.
David Hincapie: 31:56 Menke, right? So Phillip DeDominicis sends me an email in... It was last year -- man, it's amazing, these last eight months of the pandemic. So it was a year ago. It was in November of last year. He says, hey, we did the first 7(a) or someone did the first 7(a) loan transaction. And it was for a small engineering consulting firm in Louisiana. So it wasn't even my district.
Bret Keisling: 32:20 Right.
David Hincapie: 32:20 But I didn't know about it. Internally, someone from the outside said, David, by the way, this happened. And then I, I heard about another one through a news, a press release because I did a Google -- I have a Google news alert to send me whenever something like this comes up in the news. I heard about that one. Then I went and tracked down details in our database. And then R.L. Condra from the National Cooperative Bank said told me, oh, we did one with a cooperative, a worker cooperative, 7(a) loan. Got it through, you know, it was like birthing a baby. [Laughter.] Like it was like birthing an elephant baby, you know, but they got it done.
David Hincapie: 33:00 So now I am certain, I know for certain three have been done: two ESOP one co-op. But that's it. I don't actually have a way to go find out if any more had been done, because we don't even capture the information separately. That's new that's that was in the legislation. It was mentioned that we have to begin tracking this, but you know, we don't have the system in place yet to do it, so.
Bret Keisling: 33:23 One other point that I'd like to go back to is I've always had it in my mind that among other challenges, SBA, the 7(a) loans, were capped at 5 million. So that the transactions were capped at 5 million.
David Hincapie: 33:37 Yeah.
Bret Keisling: 33:37 I had that half wrong. The loans are 5 million, but it could be an $8 million, $10 million transaction where the SBA financing is up to 5 million.
David Hincapie: 33:51 Yeah. You can have a firm that's going to sell for $10 million and if the lender is an SBA lender and they want to do a 7(a) they want to have even more, you know, guarantee. As I said, a lender will take as many guarantees as it can get as much security as it can get on a loan. So they'll do 5 of the $10 million purchase as an SBA 7(a) loan. And they will get a 75% guarantee on that from the SBA. And then the other 5 million, they'll just finance it with one of their other non-SBA loan products, whatever it is, they'll finance it without that guarantee. So there's a way to, to match them or to join the two financing methods together.
Bret Keisling: 34:34 So, what I think is important for EO to remember is that and again, there are still limitations SBA loans will never be the end all be all where they don't apply, but there are ways that we can apply them that we haven't tried. So I think that's very important to understand,
Bret Keisling: 34:52 Please join us next week for Episode 126, when I'll conclude my conversation with David Hincapie. If you're an EO practitioner, advocate, or organization, you're going to want to listen in for some great ideas on how we can all build a pipeline of EO transactions.
Bret Keisling: 35:08 As we're releasing this episode, the United States is approaching 10 million coronavirus cases and almost a quarter of a million deaths. We're going through a lot together right now and that is how we'll get through it, together. In the meantime, please wear a mask. This is Bret Keisling, thank you so much for listening.
Bitsy McCann: 35:34 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.
Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.
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