Full transcript9 chapters · 7,834 words
00:00Why banks tell contractors to call back in six months
Dillon Caraway: We never want to say hey, like never call me again. It’s more so. Hey, your financials are here. You know, based on your current debt, you know your tax returns or your profit and loss saving, that I’ve evaluated. This is your debt service coverage ratio and here’s the free cash flow of your business.
Dillon Caraway: This is kind of where we would need to see it, you know, be, if you wanted to get approved. So why don’t we do this? Why don’t you kind of work on these few things? Let’s schedule a call in three to six months.
Dillon Caraway: It’s not, you know, my favorite conversation to have, but if we can’t do the deal right now, I still want to provide value and help paint the target on on how we can get there.
Narrator: Welcome to Profit and Grit with Tyler, where blue collar owners and insiders spill the real story behind their hustle, building businesses that thrive through sweat and smarts. We’ll dig into their journeys, from scaling chaos to growing the bottom line, with lessons and grit that pay off big.
Narrator: Here’s your host, the blue-collar CFO Tyler Martin.
Tyler Martin: I talk to HVAC, plumbing and electrical contractors who tell me the same thing over and over Tyler banks just don’t understand our business. The problem is when you need money to grow but lenders can’t see the real value in what you’ve built. That’s beyond frustrating.
Tyler Martin: Today we’re talking with someone who’s changing that narrative. Dylan Caraway isn’t just another banker. He’s a senior loan officer who specializes in understanding what makes service contractors tick, what makes them valuable and, most importantly, what makes them bankable. In this conversation, we’ll explore how Live Oak Bank has become the number one SBA lender by taking a completely different approach to banking the trades.
Tyler Martin: You’ll discover what banks really look at when evaluating your business, the surprising truth about 100% financing options and the three critical steps you need to take now to position your business for future growth capital. Whether you’re planning an exit, considering an acquisition or simply need capital to fund your next phase of growth, dylan brings practical insider knowledge that most contractors never get access to.
Tyler Martin: This is the financial conversation every trades business owner needs to hear. Hey, dylan, welcome to the Profit and Grit with Tyler podcast show. How are you doing today? Doing well, tyler. How about yourself? Good, I was a little shaky on that intro. I have another podcast.
Tyler Martin: It’s called Think Business with Tyler, and I’m so used to saying it now for like four years. I need to reframe my mind. So, hey, thanks for being here is the first thing that I’d like to say, and the second thing is I’d love to know what you do professionally and then maybe, if you have a tidbit personally, I’d love to learn a little bit about you personally.
Dillon Caraway: Awesome. So my official title is Senior Loan Officer of Service Contractors at Live Oak Bank and that kind of encompasses a lot of different things. I manage a lot of our external relationships with our industry partners, so I think manufacturers in the industry, distributors, success and coaching groups Also work directly with HVAC, plumbing, electrical and other home commercial service business owners on helping them grow and transition their business through financing.
Dillon Caraway: So everything from looking through their financials, structuring loan packages and seeing it go from start to finish.
Tyler Martin: That’s a lot. How about a little tidbit personally, anything you got.
Dillon Caraway: Personally, I really enjoy playing golf being outside, my wife and I. We live here in beautiful Wilmington, north Carolina, so on the southeastern part of the state. We’re right by the coast, so we like to spend time out in the water as much as we can, and we have a five-month old golden retriever puppy at the house right now.
Dillon Caraway: That keeps us pretty busy.
Tyler Martin: Wow, I thought you were going to say a five-month-old baby, and then you said golden retriever. I said, well, that is a baby, she’s our baby for now. That’s awesome, okay. So where I kind of want to set this up is you know, a lot of times I’ll hear many of our HVAC and plumbing type business owners they’ll say, hey, banks don’t really understand my business when I’m trying to grow.
Tyler Martin: I mean, that’s like one of the common things I hear. What’s your going through your presentation and learning about you? I realize you know you guys kind of differentiate yourselves. Can we talk about that a little bit, because that’s kind of one of the most common things that comes through me.
04:33How Live Oak picked industries instead of regions
Dillon Caraway: Yeah, yeah, and I’ll give a quick 30 seconds on Live Oak as well. But you know Live Oak. We were founded in 2008. We’re headquartered here in Wilmington, north Carolina, went public in 2015. And we’ve been the number one SBA 7A lender in terms of dollar volume year over year since 2017.
Dillon Caraway: And we’ve always taken a very unique approach to banking. If you think about traditional banks, they focus on a particular region in the country and lend to every industry, and we decided to take the exact opposite approach. So we lend nationwide and decided to focus on industry versus region.
Dillon Caraway: So we started out in 08 making expansion loans to veterinarians, helping them buy their first, second, third practice, and we did that really well over the years. And then we started scratching our head and saying, man, there’s so many low credit risk industries in the US, why don’t we do some research, target a few industries, put a team together?
Dillon Caraway: Scratching our head and saying, man, there’s so many low credit risk industries in the US, why don’t we do some research, target a few industries, put a team together and go to market? So fast forward. Today we’re in 43 different industries, specialize in 43 roughly and have different sides of the bank.
Dillon Caraway: We have commercial finance, we have deposits, we have wealth management, all that cool stuff. So the bank has seen a lot of evolution. But I work specifically on what’s called our service contractor team. So think really, home commercial service base. You know it’s primarily HVAC, plumbing, electrical.
Dillon Caraway: We do see some garage doors, some roofing companies are starting to get pretty popular. So that’s really what we specialize in and our team was launched in 2019. And I don’t know if you’ve ever been to eastern North Carolina, but it gets really hot and humid here in the summer.
Dillon Caraway: And my colleague, brandon Bolin, he’s still with the bank, but he made an internal move in January of 24. He’s the one that actually launched our team and pitched it to the bank. He was walking his dog outside in the summer and it was like 95 degrees, you know, humidity through the roof.
Dillon Caraway: And he’s, like you know, if my AC went out right now, not only for me, but I would want it repaired for my dog, you know we couldn’t stay in there in the summer. So he’s, like you know, kind of deemed that as essential.
Dillon Caraway: You know you have to have heat and air and extreme climates. So he kind of went down a rabbit hole, wrote a white paper, pitched it to our leadership team and the rest is history.
Tyler Martin: Oh, that’s awesome. I love we’re talking a lot about dogs. It’s cool. Hey, no, that’s an interesting story. I do want to talk. Looking at the contractor review I believe it’s called it showed that you guys had like 50% increase in loan production last year.
Tyler Martin: What do you think’s driving that?
Dillon Caraway: I think really two things. One, a little slowdown in PE activity. As we know, over the past few years private equity has invested heavily into this industry. They were buying really any company that was doing north of right at or north of a million dollars in EBITDA and that focused on service, repair and add-on replacement work.
Dillon Caraway: I think that slowed down a little bit over the last year, year and a half, and you know not sure where that trend will continue, but I think that may play a role into it. But I think more so what played the role into our increase in production really in a rising rate environment, was education.
Dillon Caraway: A lot of what we do is try to educate the industry on what options are available for contractors when they want to grow or transition their business. So say, for example, I’m at a HVAC distributor meeting in the year 2020. I’m talking to a guy about succession planning and how to prepare to sell their business.
Dillon Caraway: They may not transact on that opportunity for one to 10 years. So as you continue to educate more folks, the phone will continue to ring more and that results in more deals close.
08:20The Air Pros bankruptcy and lending conservatively
Tyler Martin: Very cool and then just switching gears here. Current topic have you heard about this Air Pros bankruptcy? It’s kind of big news $250 million, I think, debt they had and they supposedly had like $25 million in EBITDA. Do you have any thoughts from a banking perspective?
Tyler Martin: Do you have any thoughts around that? Does it make you lose sleep at night when you first read something like that, or what are your thoughts around it?
Dillon Caraway: Yeah, I did read through that. Actually a little bit about that this morning, don’t want to comment too much on that. What I will say is we are very conservative at the bank with what we underwrite, to that the business produces enough cash flow or income to cover the debt payments associated with the business, as well as pay the owner a comfortable salary to support their lifestyle.
Dillon Caraway: And we are, you know, we do want to grow with our customers, but we also, you know, take a approach to managing exposure and making sure they’re not, you know, running before they need to be walking. So, you know, I think there’s a fine line managing, you know, risk and growth hand in hand.
Dillon Caraway: So hopefully that helped provide a little color.
Tyler Martin: That was a good answer. I mean, I get it. You know where you got to kind of toe the line here. I will tell you just my perspective and the research that I did and it’s limited, I’m obviously not on the inside but it seemed like they got really debt heavy and the cash flow just couldn’t sustain the debt.
Tyler Martin: I mean from what I could glean from it. So, for whatever that’s worth, I wrote a big old article on it. I got all excited about it. It was kind of interesting to me. But hey, I think these next questions really will help the people in the audience when they’re thinking about different things.
Tyler Martin: One of the common different things as they relate to financing. One of the common things I’ll hear is home services, in particular sometimes commercial service providers. They’ll say, hey, I want to grow but I don’t really have any cash. What would be your thoughts from a financing standpoint?
10:17The 1.25 debt service coverage ratio explained
Dillon Caraway: Educate yourself on available loan products, the SBA. I think that’s one of their largest benefits to their loan program. And just to clarify, we are an SBA lender. I think that’s one of their largest benefits to their loan program. And just to clarify, we are an SBA lender.
Dillon Caraway: We’re a preferred lender with the SBA. So if you work with preferred lenders you actually work directly with the bank. You actually don’t work with the SBA to secure funding, but that’s just the loan product you get. But that loan product is very beneficial for existing business owners and folks looking to purchase their first business in terms of potential equity injection and down payment requirements.
Dillon Caraway: So for first-time buyers, sba is going to require 10% equity coming into the project and that can be made up of cash and or seller financing and there are certain rules if you are using seller financing for it to be applied towards that equity injection.
Dillon Caraway: But for existing business owners, you can potentially utilize the equity off your existing business balance sheet to go through their expansion program where you can potentially qualify for 100% financing on your next expansion project. Not to say that’s every deal. You know that happens.
Dillon Caraway: You know the cash flow coverage has to work, but essentially you’re utilizing existing equity off your business balance sheet versus, you know, putting cash into a new deal through their expansion program.
Tyler Martin: Yeah, could you dig in a little bit. I don’t want to get super technical, but when you say you know, off their balance sheet and equity just for kind of the people out there, is that like AR that you’re looking at AR less AP?
Tyler Martin: What are you kind of looking at in terms of when you say equity and off the balance sheet?
Dillon Caraway: Yeah, we look at a lot of different things on the balance sheet, but this would be specific to the actual like shareholders equity down towards the bottom of the balance sheet.
Tyler Martin: Okay, got it. And then when you say, like debt coverage and stuff, are there certain numbers that you’re looking for? I hear a common one is like 30, debt service coverage is 36. Is that kind of the common one for you guys, or do you look at different ratios?
Dillon Caraway: So our main cash flow coverage ratio is debt service coverage ratio and that is 1.25 times. So essentially that means that the business is going to produce $1.25 of pre-cash flow for every dollar of debt associated with the purchase of that business, which includes a salary paid back to the owners.
Dillon Caraway: So we want to make sure that we’re underwriting somewhat on a conservative basis and also making sure that we’re setting up the customer for success by giving them this loan, because if we give them this loan, it goes bad. Not only does it not work out for the customer, but it also doesn’t work out for the bank.
Dillon Caraway: So we want to create a win-win scenario. So we turn over a lot of rocks during our due diligence and underwriting process to make sure that we feel comfortable when we give this loan to that business owner, because those are real people, it’s a real transaction, so we want to make sure that we’re setting them up for success.
Tyler Martin: Very cool, dylan. What do you do when someone comes to you and you have to deny them Particularly? Someone says to you hey, I need some cash, I’m already an established business. And they come to you and their ratios don’t work or the equity isn’t there, is it just?
Tyler Martin: Hey, you’re rejected, is it? You try to point them in the right direction to get to where they need to be. What does that look like?
Dillon Caraway: Yeah, we always try to take a consultative approach. We never want to say, hey, never call me again. It’s more so. Hey, your financials are here, based on your current debt, your tax returns or your profit and loss statement that I’ve evaluated. This is your debt service coverage ratio and here’s the, you know, free cash flow of your business.
Dillon Caraway: This is kind of where we would need to see it, you know, be if you want it to get approved. So why don’t we do this? Why don’t you kind of work on these few things? Let’s schedule a call in three to six months.
Dillon Caraway: We’ll get updated financials and we’ll, you know, kind of revisit this exercise. So I actually, you know, do that quite frequently. It exercise. So I actually do that quite frequently. It’s not everybody gets approved. It’s not my favorite conversation to have, but if we can’t do the deal right now, I still want to provide value and help paint the target on how we can get there.
14:17Add-backs, messy books and cash jobs on a P&L
Tyler Martin: I’m curious as a fractional CFO, how many times do you have clients come to you and it’s just like records are a mess or things don’t really make sense? Is that a common thing or is that like kind of more of the exception?
Dillon Caraway: So it’s very uncommon that we get a deal and I have zero questions there’s always going to be stuff that we got to dig through, especially when owners in this industry are selling their business. They’re commonly referred to as ad backs, but there are a lot of personal expenses that are ran through the business that we have to account for and that can be added back to the bottom line net profitability.
Dillon Caraway: So having clean books is very essential. Is every profit and loss statement perfect? No, but most of them, especially for businesses that are doing one to 10 to 20 million bucks especially when you get over a few million bucks in revenue, you’re probably going to have a full-time bookkeeper.
Dillon Caraway: You’re probably gonna have a really good CPA, so that improves the accuracy of the financials. You know, if you’re a smaller company you’re probably out in the field yourself selling jobs, doing payroll, running the books, so it’s kind of hard to keep up with everything at once.
Dillon Caraway: So sometimes the books may not be as accurate as a $10 million company that’s got a CFO, a controller and a CPA. But for the most part I think folks try to do a good job with their financials and we can kind of talk through anything that might not look right on there.
Tyler Martin: Yeah, is there any common things that you’ll see on financials that just kind of don’t make sense, or could maybe be kind of let people see around the corner in terms of things they should be looking at, just to keep things clean?
Dillon Caraway: Yeah, never write cash jobs on a P&L at the bottom and add it to your profitability. That’s just something we cannot not account for. If you’re not going to report that and pay taxes on it, we can’t account for it.
Tyler Martin: So what if you put in a mattress cash, cash, jobs in a mattress Does that make it any?
Dillon Caraway: better. No, they can’t bring the mattress to the bank, unfortunately. So you know that’s really one that you know we don’t have really any flexibility on is trying to account for cash jobs as income. But you know if a seller of a business or an owner of a business is running, you know their personal vehicles or their cell phone or their insurance.
Dillon Caraway: That’s stuff you can typically verify with bank statements and find the exact line item in the P&L or the tax return. So those are items we can typically get comfortable with.
Tyler Martin: Very cool, that’s helpful, hey. So take me through a situation. Doing some research, you had a company, an HVAC acquisition where the buyer received 100% financing. How does something like that work?
16:54How a buyer got 100% financing on an HVAC acquisition
Tyler Martin: Because most people wouldn’t know that’s even a possibility.
Dillon Caraway: Yeah, certainly, and the SBA what we can lend on is up to $5 million in financing. We can actually go above and beyond that with conventional financing layered on top of SBA. But that was a scenario that we kind of touched on earlier where they were able to utilize equity off their existing balance sheet.
Dillon Caraway: To go through the SBA expansion program the business does have to be generating revenue for at least 12 months. They have to be buying a business in a similar industry. So if you’re heating and air, you probably want to go buy another heat and air company to qualify for that expansion program.
Dillon Caraway: Or heat and air buying plumbing, you could qualify for that expansion program. But essentially they add their existing business to the borrowing structure of the loan as a co-borrower and we’re able to utilize the equity off the existing balance sheet for the expansion program.
Dillon Caraway: So they’re able to receive up to a $5 million loan again with technically no money down. But they are utilizing that equity from their existing business. And we’ve seen folks where they want to go acquire another business. They create a new entity to purchase acquisition number two or business number two or they can merge it into their existing entity.
Dillon Caraway: We’ve seen both ways work, just a preference to that particular individual and how they would like to structure it. So if they are creating a new entity, we just add their existing entity and the new entity on the loan. If they’re merging it into their existing entity, we just take the existing entity on the loan.
Tyler Martin: Hey Dylan, how much do you look at the buyer’s background? Let’s say you know they’re buying an HVAC company and their whole life they’ve been an engineer, a software engineer or something Like. Are you guys kind of thinking about that or what you know?
Tyler Martin: How much do you get into that?
Dillon Caraway: That’s very, very important. I think we’ve seen a ton of interest in this industry from non-industry buyers. We want to make sure that, if they are not coming directly from the industry, that they have transferable or relatable skills to suit them while running a business in the trades.
Dillon Caraway: So to answer that question, resume, background is very important for us as well as licensing. State to state it’s going to be different. Some states may not have licensing requirements, some states may have stricter licensing requirements, but that also plays a role. Ideally, we want the individual that’s personally guaranteeing our debt to also be the license holder, not to say that we can’t get comfortable with other particular structures.
Dillon Caraway: Every deal is different, but the majority and we want that business owner or the personal guarantor on our debt to hold the license.
Tyler Martin: So a lot of times in this ETA community in particular, you’ll see people enter into, let’s say, for example, into the space, and they’re immediately thinking like a second in command, where they’re not going to be heavily involved, and maybe it might be someone already there, or they’re going to go out and find someone, an operator.
Tyler Martin: How does that affect your thought? Or like, does that make you guys a little bit nervous?
Dillon Caraway: You have to warm up to it. What are your thoughts around that? That can also be difficult for us and it’s really the spirit of the SBA program as well. The SBA is there to finance owner-operators. It’s not for passive investments and we want to have the business owner that’s involved in the business day-to-day the one be signed off on our loan, If there.
Dillon Caraway: If there’s just a GM running the business has, you know, no skin in the game with our debt, they could care less if the loan goes bad or not. So we really want the individual that’s going to be managing the business in the day-to-day, interacting with the employees, to be, you know, our customer.
Dillon Caraway: Not to say that we expect them to go out there and install units or do repairs. You know we really want our owners to be working on the business, not actually in the business, but we do want them interacting with the employees, involved in the day-to-day and running that company.
Tyler Martin: Yeah, okay, great feedback there. So obviously, with the baby boomers right now, this makes for a lot of news around.
20:49Internal buyouts and prepping an exit one to five years out
Tyler Martin: There’s all these businesses out there and they want to sell. What does that mean in terms of succession planning? How does some of the succession planning include internal buyouts or employees, or maybe it might be a second commander, whoever but internal people from the company?
Tyler Martin: What does that look like in terms of financing through you guys?
Dillon Caraway: We love internal buyouts. It’s one of our favorite deals to do. We consider that there’s a lot less risk in an internal buyout than if you’re buying a company from a seller that you never met with employees you’ve never met. Internal buyouts is typically a GM or a key employee or a family member buying out the owner.
Dillon Caraway: Typically, those folks are pretty much running the business, already involved in management of the day-to-day operations. They’re familiar with the customers, the suppliers, vendors and the employees. So that’s one of our favorite deals to do. We get that done a lot through the SBA 7A program and that’s where we can potentially get comfortable with and flexible with structuring seller financing as part of their equity injection.
Dillon Caraway: We have the ability to get pretty creative on loan structuring for those specific types of deals Very cool.
Tyler Martin: And then I want to switch gears a little bit here. Well, actually one more on the exit side. What’s your thoughts around when owners should start planning for an exit and thinking about it? What should that preparation look like?
Dillon Caraway: I think it should be at least one to five years in advance. One, you want to make sure you have clean financials. Two, you want to make sure your business is bankable and attractive for a buyer to come in and buy it. We really focus a lot on, you know, work mix and customer concentration.
Dillon Caraway: So when we’re looking at deals, we like to know are you a service repair, add-on replacement heating and air or plumbing business, or do you focus on new construction and new installations with a lot of general contractors or a few general contractors? Again, we tend to focus on that service repair, add-on replacement or change-out market.
Dillon Caraway: And then also customer concentration. Do you have a lot of your revenue coming from one or two sources that could be seen as very risky to a bank or a buyer? So, learning these things in advance, in case you do fall in one of those categories, you can start to maybe build out your maintenance agreements.
Dillon Caraway: If your cost of goods sold and gross profit has been high and your gross profit has been low historically, you might want to revisit your pricing strategy and making sure that you’re pricing your jobs appropriately to target that 45% to 55% gross profit margin to maintain a healthy bottom line profit margin as well.
Dillon Caraway: So some of these changes may take time and that’s why it’s really important and I think also it can take time to identify a successor, whether that’s an internal employee, a family member. We’ve also worked a lot of succession plans where they sell to a neighboring company that they respect, that they know is a pillar in the community.
Dillon Caraway: So I think one to five years is definitely when they should start planning.
Tyler Martin: Yeah, and I would even, you know, just from a general standpoint of exit planning, I would even say at least like three to five years to your point. Because I know one thing that can make a big difference is if, let’s say, you can improve gross profit margin, it’s probably just doing it in one year is a little bit uncomfortable.
Tyler Martin: If you can kind of have some trending that shows you’ve been improving the business or you’re on an incline with some type of linear type growth. I know from a buyer standpoint that definitely makes buyers feel comfortable. I would imagine from a lender standpoint that probably also is kind of nice.
Tyler Martin: It makes for a better story.
Dillon Caraway: Yeah, I agree, hockey stick growth can make you scratch your head a little bit. You need to really understand how that growth was achieved. Is it sustainable? You need to really understand how that growth was achieved. Is it sustainable? Was it ethical? You know those are all questions that we ask when you see that type of growth.
Dillon Caraway: So you know trends are very important. If you business lost a bunch of revenue year over year, we kind of want to understand why.
Tyler Martin: If it, you know, gained a bunch of revenue and net profit doubled. We definitely need to understand why. And no cash added to the bottom of the P&L.
Dillon Caraway: Yeah, no handwritten cash line items on the bottom of the P&L. Fortunately I haven’t seen that too often.
Tyler Martin: That one would make my stomach turn a little bit Switching gears. So I want to talk about either technicians or managers that are working for a company and they’re like man, someday I want to be a business owner, Someday I want to have my own shop.
Tyler Martin: What does that look like in terms of how you guys could be involved?
Dillon Caraway: Yeah, I think, thinking like an owner. If the technician eventually wants to run a business one day, how do they plan to get there? What is their vision for the company if they took over? But things they can actually start to do day one is make sure that their personal financials are in line.
Dillon Caraway: So making sure that they’re managing their personal credit score, managing personal debt, you know, not going out and buying all these luxury sports cars and stuff. You know. Making sure that you know their financial, personal, financial household is in line, because if they can’t manage their personal financials, that probably won’t translate to managing their business financials any different.
Dillon Caraway: So that’s one thing we think about. If they’re not currently licensed, start to work towards meeting your prerequisites and trying to sit down and take the test to get that license, so that’s not a hurdle during the closing process with the lender. Try to manage liquidity.
Dillon Caraway: So try to save up some cash in the event that the bank does require that you put in some cash into the deal that you do have that set aside. So I think those are all things that folks could start to try to do if they want to eventually own a business one day.
Tyler Martin: Yeah, a lot of good stuff there, so I want to tie together now. I was talking about succession planning and the owner potentially selling to internal people, and then I talked about the individual that might want to start their own business. How does that conversation happen when the owner’s thinking about his internal people?
Tyler Martin: Do you know and you may not know this, but is that something that the owner approaches? Oftentimes the staff with the idea Is it? Staff says, hey, I’m going to leave if I don’t have a bigger picture. Do you know how sometimes this conversation and how that evolves?
Dillon Caraway: I think every business is different because relationships within a company are different. Sometimes, when we’re financing deals, the employees may know about the transaction. Oftentimes they don’t, but typically with those internal buyouts, there’s something that those guys or those folks have been talking about for years, saying, hey, I want to exit for five years, I’d like to give you the opportunity to buy me out, and it’s a conversation that goes on for multiple years.
Dillon Caraway: So I think it’s just if you have a good relationship with the seller or the owner of the business, then those conversations should be happening anyway.
Tyler Martin: Yeah, I just wonder sometimes if what kind of pokes the conversation is your key person decides they’re going to leave and then you start to have that dialogue. Hey, I was planning on transitioning at some point and you might be part of that.
Tyler Martin: I wonder if have more of a say in the day-to-day operations and overall growth strategy of the company.
Dillon Caraway: So I think getting key folks in the business involved and the upper management of the business will always be an added benefit.
28:09The $500K Live Oak Express loan for marketing and hiring
Tyler Martin: Okay, great. And then I wanted to circle back on this whole financing. I was reading one of the case studies and it talked about lending a half million dollars for marketing, hiring and training. That would allow that company obviously to grow and do some things that were very important to continuing to scale and grow the company.
Tyler Martin: What did that look like? What does something like that look like? Who’s a good candidate for that?
Dillon Caraway: Yeah, so one. You got to be a profitable business. You have to be in business for at least, you know, 12 months for us to look at an opportunity like that. But, like you said, we have a really good loan program for it’s called our Live Oak Express team here at the bank and really that’s anything 500K and below and that can be used for working capital, can be used for small acquisitions.
Dillon Caraway: I got a deal sent to closing today in that department for a partner buyout. Really we can do anything except for commercial real estate within that group and it’s a separate team within the bank that we have expedited credit decisioning and closing process.
Dillon Caraway: If you think of traditional SBA loans it’s probably a six-day week process from start to finish for a business acquisition and or real estate. But our LiveXpress team for those deals that are 500K and below, we have the ability to close within one to two weeks.
Dillon Caraway: But folks that want to invest in the organic growth of their business through marketing, advertising, maybe hiring, training, they can go and apply for this loan, get funding within two weeks and it’s an SBA 10-year loan, no prepay penalty, competitive interest rate based on today’s market, and it gives them that access to capital that they might not know was available.
Dillon Caraway: I see a lot of contractors that will take out short-term high interest debt where they have like a daily or a weekly payment that is on a 20 or 30% interest rate on a two-year term. That can really cripple the business’s cashflow. So knowing your options to go and explore the SBA program, I think will be very beneficial for folks that listen to this podcast.
Dillon Caraway: So yeah, the SBA program is great for the organic growth of your business.
Tyler Martin: So, before someone makes their first call to you, what should they have in order? What should they have ready?
Dillon Caraway: Yeah, I think you know managing, knowing your numbers, making sure that their personal credit’s clean, making sure that they’re not delinquent on any payments on their personal credit. I see this kind of you know I wouldn’t say common, but we do see it every now and then where they said, yeah, my credit score is 800 and I’ll go and pull their personal credit and it will be like 650 and there’ll be like an outstanding $20 balance to you know a cable company where they didn’t return the box.
Dillon Caraway: Oddly enough, I just switched cable companies last week and turned in my box yesterday so I kept my receipt in case I run into this. But just trying to have a good pulse on where your business financials are, where your personal financials are, managing debt appropriately on both ends, I think is very important.
Tyler Martin: It’s funny I just canceled my cable, like within the last three weeks, and, as you were saying, I’m like, oh man, I hope I saved the receipt. It feels good, it does, it does. I went over to Starlink I don’t want to make this a big conversation but I was having such problems with well, I don’t want to say names, but I was having such problems with my know what I wanted to try this other one and I tried Starlink.
Tyler Martin: I don’t mind giving a plug and it’s been so stable, so, but hopefully I don’t get bad credit. I think I think I’ll, I think I’ll be okay, I think I. I went down there personally, so hopefully, uh, just one other thing I want to talk about.
Tyler Martin: What are cause? I hear this a lot what are big misconceptions that people often have about SBA loans?
Dillon Caraway: You know we hear a lot about the difficulty of obtaining financing through the SBA. Or you know they heard that their buddy applied for one and it took six to nine months to get an SBA loan and they had to jump through hoops and not to say that.
32:11SBA myths, collateral and the value of maintenance agreements
Dillon Caraway: You know you press a button and get funded. That’s definitely not the way the program works through banks. But my recommendation would be, if you are looking to obtain an SBA loan, whether it’s Live Oak or any other bank make sure that they have a preferred lender status.
Dillon Caraway: I would also check to see how much SBA volume that the bank does annually, because you could go to your local bank and they could be an SBA lender. But if they do one SBA loan a year, then they might not know the ins and outs of the programs as well as somebody that focuses on it 24-7.
Dillon Caraway: But I hear difficulty of obtaining financing, so going through that process can be burdensome. Again, working with that preferred lender will help make that transaction a lot smoother. They think that their business will not be approved for financing based on the collateral that they have.
Dillon Caraway: The good thing about the SBA program and you know how we look at these deals is based on cash flow coverage and not tangible collateral. I think that we both know in the trades businesses you know use heating and air, for example there’s not a lot of tangible collateral.
Dillon Caraway: In like a $2 million heat and air business there’s some vehicles, some equipment, but all of the values really in the employees, the cashflow, the work mix, the maintenance agreements, the name on the side of the truck, the website, customer lists so we understand all that.
Dillon Caraway: So working with the bank that understands your business and industry, I think will also help set you up for success when going to get an SBA loan. Yeah.
Tyler Martin: I hear a lot of different things too. When you mentioned maintenance agreements, how do you guys feel about those? Are they a big? Someone has a thousand maintenance agreements. Is that something where, like yeah, I got this annuity, that’s great. Or is it like, ah, they’re kind of just customer appreciation type things, which I’ve heard people kind of view them that way.
Tyler Martin: What’s your thoughts?
Dillon Caraway: So I don’t place like a specific numerical value on one maintenance agreement but we like to think if a business has a lot of maintenance agreements, you know they’re constantly touching the homeowner, so they’re in the home probably twice a year. No-transcript maintenance agreements keeps you top of mind with the homeowner and creates that stickiness.
Tyler Martin: Yeah, very cool. So, before I ask my last question, is there anything I didn’t ask you or anything you’d like to talk about? My last one’s going to be I’d love for you to and you’ve kind of already done this, but I want to recap on it.
Tyler Martin: It’s going to be around three specific action items that we could recommend to listeners to help them position their business for future financing. So before I get into that, though, is there anything that you want to add or anything? Maybe I didn’t ask you?
Dillon Caraway: I think we covered a lot. We talked about dogs for the first five minutes and then talked about cable companies at the end, but no, this has been a great conversation and I think we covered a lot, from the SBA program to what banks look for, how to position your business for growth, what options are available to grow and transition your business.
Dillon Caraway: So this has been a great conversation.
Tyler Martin: Very cool. So, to close, can you give me like three actionable items and this can be things you’ve already mentioned, because you definitely have given those just three actionable items that listeners can take and apply to position their business for financing in the future.
Dillon Caraway: Yeah, Know your business financials. Don’t be scared of the profit and loss statement or your tax return. That’s something you probably need to visit very frequently to see how the business is performing. Learn about your cost of goods sold, your gross profit, your net profit margin, because you could run a $20 million company, but if it’s losing money on the bottom line every year, then what is that really worth?
Dillon Caraway: So, know your financials, I think, is number one. Number two maintain a good personal financial standing. If you have a lot of excessive personal debt or you have delinquent payments or a low credit score, it can be very hard for a bank to work with you.
Dillon Caraway: So making sure that you have your personal financials in order is very important. And then, three, don’t be afraid to ask questions. Reach out and ask questions. You don’t know what you don’t know. So if you have an idea in your mind of I would love to go buy this building, but I just don’t even know where to start, that could hold you back from future growth.
Dillon Caraway: So don’t be afraid to call text, email. Just pick up the phone and reach out and figure out what options you may have at your disposal to help grow or transition your business Good stuff.
Tyler Martin: And then on that note about your personal finances, pretty much everybody’s given a personal guarantee. Is that a fair statement?
Dillon Caraway: Any individual that has over 20% ownership in a entity and borrowing entity on an SBA loan is required to pledge personal guarantee. Now say, for example, they have 15% ownership. They may not be required by the SBA to pledge personal guarantee, but say they’re running the day-to-day operations and the other owners are kind of checked out.
Dillon Caraway: We would require them to pledge personal guarantee. So think, if they have over 20% ownership, it’s an automatic rule by the SBA. But the banks also have discretion on if they want personal guarantees or not and, like us, I always say every deal is different.
Dillon Caraway: So I don’t want to say one thing but yeah, that 20% rule is pretty important.
Tyler Martin: Got it okay, so I’ll put this in the show notes at profitandgritcom. Your cell phone. If anybody wants to reach out to Dylan, your cell phone is 252-671-2427. This is 252-671-2427. If you wanna shoot him an email, once again, this will be in the show notes.
Tyler Martin: So if you don’t get this, don’t worry about it. Dylan Caraway at LiveOak Bank. Dylan with two L’s Caraway at LiveOak Bank. So feel free to reach out to him if you think he might be able to help you. Dylan, you’re amazing. You got so much information and knowledge that you just shared.
Tyler Martin: I can’t wait to kind of break this down and share it with the audience in the live version. Awesome, tyler. I appreciate it, man. It’s been a lot of fun. Thanks, man. I really appreciate it. Take care, take care, have a good one.
Tyler Martin: Wow, what a cool episode. I really appreciate how Dylan breaks down the banking world in such a practical way for trades business owners. What stands out to me most is how much your personal financial habits directly impact your business financing options. It’s really all connected.
Tyler Martin: The reality is, knowing your numbers isn’t just about tracking revenue. It’s about understanding what makes your business valuable and bankable, whether it’s building equity on your balance sheet, maintaining debt service coverage ratios or recognizing the true value of your maintenance agreements. These financial fundamentals can literally determine your business’s future.
Tyler Martin: I’m passionate about this because I’ve seen too many great contractors with solid technical skills struggle because they never got the financial education they needed. Your numbers tell a story. Make sure it’s one that opens doors rather than closes them. If you found value in today’s episode, please take a moment to leave us a review.
Tyler Martin: Your feedback helps other trades business owners find this information when they need it most. And if you’re feeling stuck with growth challenges, cash flow issues or you’re trying to position your business for a future transaction, I’m here to help. Book an intro meeting with me at ProfitAndGritcom and let’s get your numbers working for you instead of against you.
Tyler Martin: Thanks so much for joining us on Profiting Grit, where we help home service, commercial and trade businesses build the financial foundation for sustainable success.
Related Episodes
- Become Your Own Private Equity in HVAC and Plumbing – Dillon Caraway
- The Shift That Took This HVAC Company From $5M to $11M – Darren Yarbrough
- The Weekly Numbers That Fix Cash Flow – Ellen Rohr
- The Big Five Numbers Every Trades Owner Should Track – Mark Paup
Tyler Martin works with owners on the numbers behind these stories: Profit & Grit CFOs.
