Getting cash to grow

Successful businesses thrive on opportunity. But often, the chance to land a lucrative contract, take a product or service to a larger market or expand existing facilities calls for investments in equipment, personnel, inventory and even real estate. Whatever the motivation, expansion takes financial resources that may be beyond a business’s on-hand resources. Banks offer commercial financing options to help owners turn business opportunities into success stories.

To reach their goals, it is key that businesspeople understand which lending options are available, and when to pursue them, says Deborah Bish, a business banker at Sky Bank.

Smart Business spoke with Bish about the commercial lending options available to business owners, and how businesspeople can use lending resources to achieve their growth objectives.

What motivates business owners to seek commercial loans?
Those who own existing businesses generally seek financing in order to take advantage of a new opportunity, such as entry to a new market; to fulfill large, new contracts; or to purchase real estate in order to expand or relocate a business. Businesspeople also turn to commercial loans to start new businesses.

What kind of commercial finance options do banks offer?
Banks offer lines of credit, commercial loans, term loans and loans that are backed by the Small Business Administration (SBA).

How do those options differ?
SBA loans are term loans backed by that federal government agency for between 50 and 85 percent. This means the backed percentage of the money lent by the bank is guaranteed by the SBA, and administered by the bank. Durations of SBA loans vary depending upon the purpose of the loan. Interest rates on SBA loans are based on the Wall Street Journal prime rate, plus a margin based on the size and type of loan as well as the borrower’s credit standing.

Commercial loans are short-term loans generally of three to five years that do not have fixed rates. Commercial loan interest rates are based on the Wall Street Journal prime rate plus a margin. Commercial loans and SBA loans generally provide capital for business startups as well as for equipment or other capital investment purchases.

Term loans are longer-life variable interest rate loans between generally 15 and 20 years. Rates are based on the Federal Home Loan Bank rate and are fixed for three years. So if that interest rate is 4 percent at the beginning of the loan, the rate would be 4 percent for three years and would change every three years thereafter. Term loans generally provide capital for equipment, long-term expansions or real estate purchases.

Lines of credit are interest-only loans designed to provide cash flow so a business can grow or obtain cash quickly for equipment or material needed, for example, to fulfill large or new contracts. Line of credit interest rates generally change as often as changes are initiated by Federal Reserve. Banks prefer that borrowers pay down lines of credit by 30 percent annually.

What collateral is used to secure loans and lines of credit?
Generally, business loans may be secured by the business’s assets, including equipment or contracts negotiated in advance of the loan application.

What documents to banks require of commercial loan applicants?
Lenders will ask applicants for a resume to evaluate the borrower’s experience in the business they want to finance. For example, if a person is seeking financing for a restaurant, the bank wants to know if the borrower has extensive restaurant experience.

Borrowers should also bring a business plan that details their business operation, target market, and profit and loss projections. Lenders also request a copy of the borrower’s personal income tax filings for the previous three years.

If a loan or line of credit is intended to fulfill contracts already negotiated, the lender will probably ask to review the three previous years’ business tax returns for the company representing the contracts.

Should commercial borrowers shop for loans?
They should shop for interest rates, terms and fees connected with loan processing, origination and other fees such as those connected with loans on real estate.

Also, borrowers should begin shopping for loans with the bank with which they’re already doing business and where they have an established relationship. Generally, that bank is going to offer the borrower a better deal, especially if the person seeking the loan has consistently made other payments on time and has good credit.

Deborah Bish is a business banker II at Sky Bank’s downtown Akron, Ohio office. Headquartered in Bowling Green, Ohio, Sky Bank serves communities in Ohio, Pennsylvania, Michigan, Indiana and West Virginia. Reach Bish at (330) 258-2354 or [email protected]. For more information,visit