The Small Business Administration’s (SBA) lending program is a major part of U.S. business growth, and these loans can often be substituted for traditional commercial loans with some benefits to the borrower.
“With SBA loans, a business owner can increase his or her cash flow and sometimes get approved for higher loan amounts than traditional commercial loans,” says Steven Valiquette, second vice president and commercial loan officer at First State Bank.
Smart Business spoke with Valiquette about how SBA lending works and what business owners need to know.
What are the advantages of SBA loans versus traditional commercial lending?
The SBA allows for longer amortizations than most typical bank financing, so business owners can utilize extended terms. For instance, real estate can be amortized over 25 years with SBA financing, but the bank may only offer 20 years with traditional bank financing. As another example, equipment can be amortized over seven to 10 years with SBA financing, while traditional bank financing may be limited to five years.
Another advantage to SBA loans is lower out-of-pocket expenses when compared to traditional commercial loans. The SBA also allows the borrower to roll fees into their loan balance, which isn’t normally the case.
Lower collateral requirements are another benefit. The SBA has higher loan-to-value ratios compared to traditional commercial loans.
What type of loans will the SBA finance?
The SBA can generally finance the same types of business loans that a bank can, with the major exception of non-owner occupied real estate. Term debt such as real estate or equipment purchases are typically financed with SBA 7(a) or 504 loans, and lines of credit can be financed with a SBA Express loan or SBA CapLines.
How can a borrower increase its chance of being approved for a SBA loan?
First, talk to several financial institutions. Find financial institutions in your market that make loans to businesses similar to yours and work with bankers who understand your industry. Other best practices are:
• Develop a good business plan. Be ready to explain why customers are going to want to do business with you and how your business is going to compete in your market.
• Take the time to understand the risks associated with your business and provide mitigating factors.
• Provide realistic projections with best case, worst case, most likely case and break-even scenarios. Having detailed projections can help mitigate some of the risk associated with the loan request.
• Develop alternative ways the loan can be repaid if business is slower than projected or, in worst-case scenario, fails.
• Maintain a good personal credit history. Many bankers feel if your personal credit isn’t handled properly, there’s a good chance your commercial loan payments will not be either.
What else do business owners need to consider?
Take your time and develop a well thought out business proposal. For many small businesses, the bank is not only looking at the financial statements or the business projections, but also the person or people behind the company.
Always provide the information your banker is asking for because any information he or she is requiring is a tool used to evaluate your request.
It’s also important to put focus on management’s experience. If management can demonstrate a strong knowledge of the industry and the ability to handle adversity, this may help ease some of the risk of the loan request.
Finally, try to anticipate your future financing needs. Commercial or SBA loans take some time to close, so you need to plan for it. Remember, it’s easier and less stressful to seek financing prior to the actual need.
Steven Valiquette is second vice president, commercial loan officer, at First State Bank. Reach him at (586) 445-1058 or firstname.lastname@example.org.
Website: For more about SBA loans, visit www.thefsb.com/sba.
Commercial banking today isn’t just about loans, it involves a partnership with a bank that helps build a business.
“Probably the most overused word in banking right now is relationship; everyone talks about it,” says Paul Duren, senior vice president at Bridge Bank. “Several data collection agencies even changed their terminology from ‘standard commercial loans’ to ‘relationship loans.’ But what exactly does that mean?”
Smart Business spoke with Duren about what relationship banking means and how it can translate into improved customer service as well as increased profits for your company.
What makes for a good banking relationship?
A good relationship involves a banker bringing value beyond providing access to capital. Businesses need a banker who understands their business — one who takes the time to learn about your vision so he or she can fully understand your goals. A proactive banker can anticipate your needs and bring information and services to help you grow or run your business.
In a good banking relationship, the banker acts as your advocate within the bank. However, much of the banking industry utilizes centralized credit processing and call centers, so there isn’t always the personal touch that a good banker will provide.
Can you provide an example of how this relationship works?
There was a drink manufacturer that saw a need to take its product from powder form to liquid for store shelves, and needed additional capital to do so. The banker saw the vision and understood the potential market for the product. That extra capital turned the company from a small manufacturer to a major player in the sports nutrition industry, and it started with an injection of capital from a loan made possible because a banker understood the vision.
Has banking changed since the recent recession?
It definitely has. There’s been growth in lending, but there’s also been a shift to more small and medium business sector loans coming from small and medium-sized banks. According to the Small Business Administration, big banks controlled 31 percent of the small business loan market in 2005, and that grew to 39 percent in 2009. That trend has reversed and small banks are gaining more share of that market. A Federal Reserve Bank of Boston study showed that smaller institutions continued to lend to small businesses at a stable rate during the recession, whereas big banks cut back.
Small to medium-sized banks are more invested in the community and more invested in the small business owner. For that reason, they are more likely to provide financing. Bigger banks focus on large companies in order to move their numbers. A smaller bank can get the same percentage growth through smaller loans. In one of its papers, the Federal Reserve Bank of Boston talks about how community banks are better at the soft skills — understanding the vision of the business owner, how he or she operates. Small banks take the time to listen.
What are the benefits of a good banking relationship beyond access to capital?
When people talk about relationships, they focus on the loan. What gets neglected is the deposit, or treasury management, side of the relationship.
During the downturn, businesses were looking for ways to get more out of their existing systems. Banks can help them do that with data feeds and other ways that save significant time and money. A good relationship banker also reviews the customer’s systems.
An experienced relationship banker has a toolbox filled with solutions to help his or her clients. This business is still about people, and banks need to be in touch with their customers and the community.
Paul Duren is senior vice president at Bridge Bank. Reach him at (408) 556-8688 or email@example.com.
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It’s a good time to refinance a commercial real estate loan or purchase a property.
“The market has become more competitive. The big retraction of lender funds in 2008 and 2009 that resulted from increased reserve requirements and unfavorable market conditions has flipped. More banks, insurance companies and other financing sources are back in the mix and looking to lend as the economy continues to improve,” says Kimberly Rysyk, a senior vice president in the Real Estate Lending Division at Bridge Bank.
Smart Business spoke with Rysyk about the state of the lending market and opportunities that are available.
How is the current commercial real estate lending market?
It’s favorable for borrowers, as lending sources increase and interest rates remain low. Many banks have re-entered the market as their financial positions have increased along with the economy. The increase in sources has created competition, resulting in a decrease in spreads. This has translated into a drop in rates. The bottom line is that there are more lenders looking for the same deals.
What about lending for new projects?
Finding lending sources for new projects remains difficult but improved through the latter half of 2012. Cash equity of 25 to 35 percent is standard and projects with higher risk may approach 50 percent. Certain housing markets warrant new construction as demand for new housing and rents increase. Lenders are interested in those builders and developers who have been able to sustain themselves through the recession and have cash to invest. There is financing out there for speculative construction as well, provided the cash equity is sufficient and the buyer is financially strong.
For owner-occupied businesses it can make sense to find property that’s not necessarily in a top location, but in a place where they can have a brand new building suited to their specific needs that works based on debt coverage, cost of the project and cost of the land.
Is it a good time to invest in such properties?
Historically low interest rates and real estate prices still depressed from the Great Recession have created some opportunity. There has also been a slow but steady improvement in the labor market and a leveling of vacancies and rents, which are positive signs for the economy. This is a good time to invest in commercial properties if you know your market.
In San Francisco, for example, payroll tax incentives for businesses that relocate are making some areas attractive that previously were considered B-rated. This has led to big companies, such as Twitter, Zynga and Salesforce.com, to relocate to areas that were not considered desirable but are now looking up. Other companies or investors can take advantage of the depressed values here, refurbish or rebuild, and greatly affect the end value of the project. There are lenders out there who can recognize the end value and will lend on the resultant cash flow, rather than the current depressed value.
What should you consider when choosing a bank?
Strength and longevity are key. Has the bank been in the commercial real estate business through the downturn? Were they able to navigate changes in the market? An experienced banker will look at your past and future projections, uncover the pros and cons, and help you determine the best solution for your needs, whether it be building new, renovating an existing building or refinancing your current debt.
What concerns do you have for the future?
A significant swing in interest rates is concerning. Properties that were refinanced at extremely low rates may have difficulty finding refinancing sources at maturity. This concern would be heightened if the facility were not amortized or if property values do not rise sufficiently. The European financial crisis, for example, has had an effect on companies that do business on a global scale. This type of uncertainty affects the stock market, which has a strong bearing on the continued strength of the economy. Finally, federal regulators are considering increasing the reserve requirement for real estate loans. A significant increase could chase many lenders out of the market once again.
Kimberly Rysyk is senior vice president, Real Estate Lending Division, at Bridge Bank. Reach her at (408) 556-8392 or firstname.lastname@example.org.
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The role that private equity firms play in our economy through business growth and job creation is fundamental. However, the general public — and many astute business owners — mistakenly think of private equity firms as if they were Gordon Gekko, character from the movie, “Wall Street,” taking over businesses, eliminating jobs and trying to make money by shutting down companies and selling assets.
“I’ve often been astounded by the disconnect between the actual performance of private equity-backed businesses and the general public’s perception of what private equity is all about,” says Scott McRill, CPA, director in transaction advisory services at SS&G’s Cleveland, Ohio, office.
As a result, the private equity industry has recognized the need to be more open and vocal about what they are, what they do and the positives they bring to the economy, he says.
Smart Business spoke with McRill about the misperception of private equity’s role and how companies can benefit from this type of capital.
How has the private equity market evolved into what it is today?
In the 1970s, many business owners who started companies with family money in the post-WWII era had limited choices if they wanted to grow their business. They could take the company public through the public equity markets, infuse more family money or sell the business outright to a larger company. Private equity capital became a viable alternative, giving business owners another option. If you compare the job growth of companies owned by private equity to the overall economy over the past 10 to 15 years, it’s pretty astronomical. From 1995 to 2009, private capital-owned companies produced job growth at a rate of 81.5 percent compared to only 11.7 percent for all other businesses. Similarly, in the same period, private capital-backed companies produced sales growth of 132.8 percent compared to 28 percent for all other businesses, a surprising statistic to many.
How have lending policies driven more businesses toward private capital investment?
The lending environment always goes in cycles, and the involvement of private equity as a rule hasn’t gone away. However, the ratio of how much funding comes directly from private equity firms in the form of equity versus from banks and lenders in the form of debt has changed.
In the mid-2000s, there was a lot of economic growth and private equity investment, but the amount of money private equity firms were required to put into deals was less as a percentage of the total capital required to get a deal done than it is today. For example, 80 or even 90 percent might have come from lenders in the form of debt and the remaining 10 or 20 percent in the form of equity capital.
After the credit markets froze in 2008, private equity continued to invest in businesses but became more cautious and were required to put more of their own money into deals. In 2009 and 2010, it was not uncommon to see 50 to 75 percent of the capital coming from private equity firms, and lenders only providing 25 to 50 percent.
The lending environment has loosened some in the past couple of years, but it’s still relatively difficult, which can be partly attributed to the uncertainty regarding tax laws, interest rates, etc. Deals in the past 12 months might have a leverage model that is, for example, one-third equity, two-thirds debt.
Where does the negative perception of private equity come from?
There are always risks from private equity, and news stories are often negative about a private equity-backed business shutting plants down or a company that went bankrupt. Of course that happens, but the raw statistics show in many more cases private equity helps grow businesses, make them more profitable and create more jobs over the long term.
Other negative connotations can be attributed to the misperception that private equity is a secretive ‘club,’ which is highlighted by the nature of the word ‘private.’ Private equity firms receive a management fee for their expertise, but make the majority of their money by growing companies, producing more profits within those companies, and typically selling that company to another investor and sometimes taking the company public. Many have assumed bad things are going on behind the scenes at private equity firms, but private equity firms normally want the company to expand and become more profitable.
How are private equity firms responding to the negative bias, along with pressure for more disclosure?
The private equity industry has realized that the negative perception has to be dealt with, and industry professionals are trying to open up a widespread dialog about the industry and the positive things it has done for the economy. At the same time, they recognize there is going to have to be more, rather than less, disclosure and transparency about the industry. By the nature of the ‘private’ equity investments, the specific details of individual deals are private and confidential and probably won’t ever be disclosed widely by the industry. However, the inner workings of private equity firms — how they operate, the management fees they charge and, most importantly, the story about the economic growth engine they provide for small businesses — could become more widely available, especially with the political pressure for disclosure.
Many very entrepreneurial and talented business owners or operators are really good at what they do. They are really good at making widgets, selling certain services and serving their customers. But, the private equity world is foreign to many of them; it’s not something that they’ve ever really needed to tap into, so all they’ve heard is the negative soundbites. A faction of very talented business owners still need to be better educated about the good things the private equity industry does to expand companies and create more jobs.
Scott McRill, CPA, is a director in Transaction Advisory Services at SS&G’s Cleveland, Ohio, office. Reach him at (440) 248-8787 or SMcRill@SSandG.com.
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You need operating cash to grow your business, but securing a traditional commercial loan hasn’t been easy, especially for small business owners. Bank loans to businesses grew 10 percent in 2011; however, commercial lending has not returned to pre-recession levels, largely because companies that experienced a decline in sales or profitability can’t meet today’s strict underwriting standards.
Fortunately, Small Business Administration (SBA) loans are a worthwhile financing option for small to mid-sized companies. An SBA loan typically offers longer terms and more competitive interest rates than other commercial loans and, best of all, bankers can be more lenient when considering your request because the government guarantees up to 75 percent of the loan amount.
“An SBA loan is a sensible option for businesses that experienced a decline in sales and profits during the recession,” says Santiago “Chico” Perez, SBA sales manager for California Bank & Trust. “Bankers can consider your financial projections, along with historical data, when evaluating your loan application.”
Smart Business spoke with Perez about the growth opportunities for small to mid-sized business through an SBA loan.
When should small business owners consider an SBA loan?
New ventures traditionally have a hard time securing working capital, but you may get $100,000 to $5 million through a government-backed SBA loan, as long as you’ve run a similar enterprise in the past and propose a viable business strategy. You can also use SBA funding to expand by purchasing another company or using the proceeds to procure equipment or inventory to fulfill a new contract. Businesses that use an SBA loan to pay off or restructure an existing mortgage or other business debt can free up cash for other investments, such as hiring or purchasing supplies.
How do SBA loans differ from traditional commercial loans?
Generally speaking, SBA loans can offer more favorable terms than traditional commercial loans. For example, you only need 10 percent down to purchase real estate and you don’t need to come up with a lot of cash because the SBA lets you roll the fees into the loan balance. SBA loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments; consequently, companies often qualify for higher loan amounts because they can amortize the purchase of buildings over 25 years or equipment over the remaining economic life, and therefore need less cash flow to service the debt. In addition, owners can use the funds to buy raw materials, as well as finished goods or equipment, which gives manufacturers the flexibility to expand into new markets.
How does the SBA’s underwriting criteria differ from traditional commercial loans?
Bankers will review standard requirements such as financial statements and credit reports, but some criteria differ from traditional commercial loans.
*Projections. Bankers can consider future sales as well as historical data when evaluating your loan application, but be sure your projections are realistic and correlate with your current financials and forecasts. For example, earnings won’t automatically double if you purchase a larger facility or new equipment. Instead, explain how the equipment will boost the bottom line by lowering operating costs or how you’ll use the extra space to increase revenue by adding a new production line. Finally, substantiate your claims by furnishing copies of customer agreements and contracts.
* Resumes. Tout your management team’s industry experience and track record, particularly if you plan to start a new business.
* Ownership. Owners with more than a 20 percent stake in the business must submit signed personal financial statements and tax returns.
* Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds have been deposited into an escrow account.
* Collateral. The need for collateral hinges on the loan purpose and program, so be sure to review the underwriting criteria at SBA.gov and specifically state the need and purpose for the funds in your proposal.
* Tax returns. Owners must supply three years of tax returns, financial statements and balance sheets instead of two to qualify for an SBA loan.
Does the SBA offer other support to small business owners?
The SBA provides myriad tools and support to help business owners create a loan proposal and navigate the underwriting process. Small Business Development Centers offer free assistance with financial, marketing, production and feasibility studies, and many centers engage local CPAs, retired executives and consultants to advise small business owners.
The SBA also provides mentorships, free counseling and business plan expertise through a nonprofit organization called SCORE, which helps business owners across the country with various aspects of their business.
What else can owners do to successfully navigate the SBA lending process?
Loan approval hinges on an accurate, thorough proposal, so it behooves you to take your time and seek expert advice because you only get one chance to make a great impression. Bankers want to hear the story behind your numbers, so be ready to explain how you overcame adversity during the recession and how you’ll use an SBA loan to take your business to the next level. Help your banker understand your customers and add value to your proposal by including links to your company’s website, LinkedIn page or Facebook page in your loan proposal. Finally, it may be possible to accelerate the process by selecting an approved Preferred Lender’s Program lender because they have the authority to approve your loan without submitting the entire package to the SBA.
Santiago “Chico” Perez is the SBA sales manager for California Bank & Trust. Reach him at email@example.com.
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