How commercial card creates efficiency for purchasing processes

Commercial card, a program that is sometimes called purchasing, travel or fleet card, has become a hot product as companies realize how it can create efficiencies within their organization.

Commercial card has been around for a while, but businesses were leery of issuing employees credit cards that could lead to fraud and misuse, says Veenindra J. Singh, first vice president and treasury management consultant in the Corporate Services Division at California Bank & Trust.

Today, commercial card not only reduces internal costs when it comes to purchasing practices, but it also — unlike business credit cards — offers upfront controls on usage with a very robust reporting system that captures data, allows automated postings and so forth.

“There is more acceptance because companies have realized that the product has evolved,” Singh says. “It makes sense for a lot of companies to start looking at putting a program such as this in place.”

Smart Business spoke with Singh about how commercial card can benefit your organization.

How does commercial card create efficiency and reduce internal costs?

Typically 80 percent of business purchasing is below a certain dollar amount, and the remaining 20 percent is high-end purchases. However, the approval process for both is usually the same, whether you’re buying a box of pens or a $10,000 piece of software.

With commercial card, you set a benchmark, and then staff uses a card to make all purchases under that limit without layers of approval. Higher purchases go through the normal approval process, and staff still utilizes cards to avoid processes like invoicing, purchase orders, etc.

What about other benefits like upfront controls and robust reporting?

With upfront controls, a company can issue cards to different employees and each one can be restricted as far as usage. For example, if you’ve issued cards to a maintenance group, then those cards could have features turned on that allows those employees to make purchases only at related stores or companies. These restrictions are established by using merchant classifications codes.

In addition, the reporting is robust. Within 48 hours, a company will see the purchases. Commercial card has three levels of reporting; the level of detail you receive on a purchase depends on the merchant’s capability. With the higher levels, there is the ability to capture sales tax, general ledger codes, whether it’s a minority-owned vendor and exact specifications of the purchase.

There also are many reporting segments within the program, such as expense management where an administrator can create expense reports for each employee.

Does size or industry make a difference to how much a company benefits?

Size does matter. Larger companies have more purchasing needs and requirements. Smaller companies can use these cards, but most banks have a minimum, or an annual spend, and if a business is below that threshold the bank probably won’t offer a commercial card solution.

As far as industry goes, all industries can use the product, but there are more benefits to some, such as manufacturers, the travel industry and nonprofits.

What else is important to understand when getting these cards?

Commercial card, which has no interest rate because it is paid off in every billing period, does carry risk for banks. However, banks may be able to work with you to mitigate the risk, and therefore offer the cards, by decreasing the billing period, which can go all the way down to a daily settlement.

Banks only qualify the company, not the individuals who are issued cards. A bank will give the business a total limit, and then you can issue as many cards and assign whatever limits you wish as long as it’s underneath that umbrella.

There are different options for these cards. Some banks have a charge; others don’t. Most cards offer a rebate, but that rebate could either be in the form of points or dollars. Also, some banks require that you have a relationship with them. You can explore the programs from various banks to see which one will fit your organization best.

Insights Banking & Finance is brought to you by California Bank & Trust

How to decide which funding method is best for your business

Business owners face unique challenges and opportunities as they progress through the evolution of their business — and part of that process includes obtaining funding for expansion and growth.

“As you look forward to these opportunities, it’s important to remember that a bank wants to meet with you and understand what your needs are and determine the best method of funding,” says Jason Wells, business banking manager for Central Ohio at U.S. Bank. “Most bankers and relationship managers are looking at every strategy they can to make sure a business thrives.”

Smart Business spoke with Wells about the available funding methods and how to match those to your needs.

What funding methods are available to businesses?

There are generally two. A line of credit, which is for your short-term funding, is available to a business on an annual basis to provide structured working capital. And at some point throughout that year, the business expects to pay back the full amount of the line of credit that’s needed over that time period with interest. It usually takes accounts receivables and inventory to secure these loans.

For long-term capital needs like buying a building or real estate, major equipment purchases, capital improvements, etc., companies usually look at term loans. They are generally secured by inventory, machinery, equipment or real estate.

What are the main factors that determine which method is best for a business?

That’s primarily driven by your use or plans for the funding and the stage of the development that your business is currently in. For the most part, both factors work together.

How can companies best position themselves to get the funding they need?

As a foundation of your business plans, it’s good to develop a solid relationship with the bank. Begin by identifying a banker within the bank that you can work with — generally a business banker — and establish an open line of communication with him or her. You want to talk to that banker on a regular basis about your business needs and plans, so he or she has a strong understanding of your business.

A great way to continue building the relationship is establishing a business checking account or even a business credit card with your current bank. Regularly using and growing your business checking account and repaying a business credit card creates a solid profile for your deposit and repayment history with the bank. This can provide a good platform to launch off of when your business is ready to borrow money from the bank or to pursue some of the other lending opportunities that might be available.

What common issues prevent a business from getting funding from a lender?

The first and most common one is how a business demonstrates its need for funding and the ability to repay a loan. It’s critical to have sound financial preparation and provide the right information to a bank to demonstrate that. A business should always be clear that it generates enough cash flow to be able to pay its expenses, plus pay the loan back and at the end of the day generate a profit as well.

Another issue is a lack of or a shortfall in collateral, which is what the bank uses to offset the risk of lending to a business. The most important thing here is that you, as the business owner, really understand the value of your business, its assets and your personal assets because often the bank will ask you to pledge these to support a loan request.

However, even if your company faces some of these challenges, there are other options. The Small Business Administration (SBA) offers a lot of flexibility to banks with its loan guarantees, where the SBA isn’t directly loaning the funds but provides a guarantee to the bank that the government will repay a portion of the loan if the business owner should default. These loans can provide a business owner longer terms for payment and potentially even lower down payments when a company needs to purchase equipment and real estate.

Whichever funding method you end up taking, it all starts with that relationship with your banker who can steer you through the process.

Insights Banking & Finance is brought to you by U.S. Bank

How to protect your business from internal, external and data security fraud

Fraud is a crime that hides in the shadows. The adversaries often go to great lengths to cover their tracks, and businesses may not realize what they are up against, making it difficult for them to fight it and protect their assets.

“Ninety-nine percent of the time, clients either don’t realize it or don’t adequately address it,” says Michelle Thompson, vice president of fraud risk with FirstMerit’s Merchant Bankcard Division.

Most business fraud involves misuse of credit or debit cards through internal fraud, external fraud and data security fraud — and it may happen more often than you realize.

Smart Business spoke with Thompson and Susie Brindza, director of FirstMerit’s Merchant Bankcard Division, about the steps you can take now to help protect your business.

How does internal fraud typically occur?

One of the most common forms of internal fraud is embezzlement involving credit cards. A company employee processes a return for a purchase that was never made, and the money is credited to their personal credit card.

Business owners don’t want to become overly cynical and suspicious, but so many times when this type of fraud happens the embezzlement comes from a tenured employee who was trusted with the books, such as bookkeepers, accountants or other employees with opportunity and motive.

What can companies do about this?

To discourage internal fraud, it is important to have a second person review transactions. That second set of eyes tells people they are being monitored. Just by viewing the statements, you can see if there are returns being made with no offsetting purchases.

Also, another best practice is to password-protect all company bankcard accounts and closely monitor who has access.

What are common forms of external fraud, and how can businesses guard against it?

External fraud often strikes in the form of illegitimate orders or payments by parties who have illegally obtained someone else’s credit card information.

Different billing and shipping addresses could signify a fraudulent order. Typically, you want those addresses to be the same. It doesn’t always mean it’s a bad transaction — a customer could ship a gift to someone who lives out of state and bill it to his or her credit card and there is no problem. But you should look more closely if the bill-to and ship-to addresses don’t match.

A credit card authorization request only verifies the credit card number is legitimate and there are sufficient funds at that time to process the purchase. An authorization does not check names or addresses for matches, which is important for merchants to remember.

In addition, pay extra attention to shipping addresses. If you see addresses in New York, New Jersey and Florida, while there are plenty of legitimate businesses in those states, you should be cautious. These are some of the most common states criminals will utilize to transport items out of the country.

What’s important to keep in mind about data security fraud?

If you don’t take adequate steps to ensure your firewall and encryption software are effective, you run the risk of hackers stealing the 16-digit card numbers off your hard drive from that unsecure location.

Data thieves also can take advantage of system vulnerabilities during a transition such as when a card authorization is in progress between the merchant and bank. Be certain you have high security standards in place for protecting data and that you’re monitoring everyone to be sure they’re following the standards.

By taking the right preventive measures and being aware of fraud trends by talking to financial experts, you can minimize the risks to your business and limit the opportunities for criminals to steal your funds and information.

Insights Banking & Finance is brought to you by FirstMerit Bank

How banking locally benefits the economy, your business and you

Your banker is here to help you … really. Local bankers who have a presence in your market work in close proximity to your business. They understand the local economy and markets, and work to understand you.

“Bank employees are hired to make a difference for your company, not to push products,” says Jeff Hastings, market president at U.S. Bank, Central Ohio. “They’re working to offer ideas that are beneficial to your life and your business.”

A banker can be a business owner’s trusted adviser, forging a close relationship in which advice can be shared on decisions that affect a business owner’s entire life through loan decisions and investment strategies.

“It’s much more than taking deposits,” he says.

Smart Business spoke with Hastings about the benefits of a strong relationship between business owners and bankers.

What should a local business look for when choosing a bank?

One of the most important things is whether the decision-makers are familiar with your local economy and your industry. You should also have quick and easy access to your representatives and the different lines of business they work on for the benefit of your company.

What are some common misconceptions businesses have about banks?

A common misconception is that banks only lend money when companies don’t need it. That’s far from true. Businesses need a strong relationship with their bank, which means facilitating open communication, giving bankers the information they need to address issues, good and bad, in a timely and proactive manner. It really is a bank’s intent to help companies grow in any way.

In some cases, bank loans are perceived as a commodity. But a good banker is more than that. He or she becomes a value-added adviser to the company if there’s solid communication.

What impact does banking have locally?

There may be no other state in the country where banking has a bigger influence on the local economy than Ohio. There are hundreds of community banks and multiple regional banks headquartered in, or that have major presence in, the state, and there’s not an industry they don’t impact.

A healthy banking industry has a dramatic impact on the city of Columbus. During the recession, when the banking industry had problems, there was a negative impact on the nonprofit and arts communities. Since the industry has regained its footing it’s been able to contribute more fully to the art and philanthropic communities.

How can a business benefit from a strong relationship with their local banker?

Working with an institution that’s located near a business means those bankers should have a handle on how the local market is affecting business owners — changes in the Commercial Activity Tax and unique workers’ compensation issues, for example. Bankers also should find ways to make introductions between business owners and service providers, or link suppliers with customers in new markets or industries.

Having access to a local banker generally speeds up decision-making when companies need new lending products or other services. The more local they are, the better handle they have on local companies’ needs.

Also, ‘Made in Ohio’ is an important designation. Whether its B2B or B2C, people in Ohio tend to be loyal to businesses run by people they know and like. It’s a common theme in this state to do business with local businesses, and the loyalty factor has a big impact.

How do businesses and banks work together to improve the local economy?

The banking industry has such a dramatic impact on the economy. It helps people start new businesses, fund new lines of equipment, and provide working capital management, allowing companies to hire new employees and introduce new products.

Central Ohio is a good example of how banks can have a positive affect on an area. For example, the region has had incredible housing growth for 15 years that would not have happened without the local banking community. It’s further evidence that banks within this community are working to do the right things that have a positive impact on the community where we live and work.

Insights Banking & Finance is brought to you by U.S. Bank

How a few simple controls can make the difference in fraud prevention

By and far, the most pervasive fraud risks to companies are cybercrime and internal fraud.

Cybercrime takes many forms — from large fraud operations such as credit card data breaches to malware attacks that collect private information from company computers, including system passwords. At the same time, a lack of internal controls for protecting company assets and reconciling accounts regularly can result in significant losses.

“The risk of corporate fraud, internal and external, places companies in a precarious position. They need to balance routine business flow and operations with preventing and detecting fraud (particularly online fraud exposure) that may result in operating losses,” says John Harrison, senior vice president at California Bank & Trust. “In many cases, a few simple controls can make the difference between a profitable year and a large financial loss.”

Smart Business spoke with Harrison about how companies can better protect themselves from fraud risks.

How has the increase in electronic payments changed the fraud prevention landscape?

Billions of people have benefited from instantaneous access to information from anywhere, at any time. But these advances have also aided criminals who use technology to steal identities, credit card numbers and cash. Gone are the days when people or companies were robbed in person. It’s more lucrative and easier for a cybercriminal to steal from the comfort of a laptop.

What business controls would you recommend to reduce the risk of fraud?

Tried and true common-sense controls are a first step. Access to blank check stock must be monitored. Simple dual accounting controls, such as ensuring staff responsible for fulfilling customer orders are different than employees reconciling order invoice payments, reduces fraud opportunities. Whenever possible, reconcile accounts daily (easily available through online banking) but always at least monthly, and report discrepancies immediately.

Restrict online access on a need-to-use basis. Use dual authentication with online transactions such as online transfers and outgoing wire transfers. Always employ strong online passwords and change them regularly. Utilize secure entry tokens for all users who perform administration functions or process online payments.

Beware of customer emails requesting a change to wire destination instructions, as hackers can compromise email passwords through malware attacks and social engineering. If in doubt, call the customer to confirm any out of the ordinary payment requests or change to a payment destination.

What other steps can help prevent fraud? 

Some additional controls to employ include:

  • Using online services like Trusteer’s Rapport, a free program that helps detect and mitigate malware attacks and phishing attempts. 
  • Avoid downloading programs or files from unknown sources, which could include malicious code and fraudulent programs. 
  • Limit the use of flash drives, CDs or other portable media that can transport and install malicious code.
  • Talk to your bank about fraud prevention products and services, such as Positive Pay, which matches check issue information against checks presented to identify discrepancies or suspect checks. 
  • Keep security software, anti-virus programs and firewalls up to date.
  • Never conduct casual Web-surfing or social media site visits on computers used for business transactions and payments. You can dedicate specific computers for online business tasks only.

These controls are a matter of exercising prudent, common-sense information protection and accounting controls.

Is there anything else you’d like to discuss?
Fraudsters are always one step ahead, devising new, clever techniques to separate companies from their money. The old saying ‘if a deal sounds too good to be true, it probably is’ is still true. A business offer from an unknown person via email promising a large profit for a quick transaction is a huge red flag. Educated people fall prey to fraud all the time; due diligence, prudent internal controls and common sense are the keys to preventing losses.


Insights Banking & Finance is brought to you by California Bank & Trust

How letters of credit can ease the stress of doing business overseas

Companies that only do three or four international sales a month are often not aware of the various payment mechanisms that are available to them.

“They may not focus on the risks that come with international transactions and how banks can help mitigate those risks,” says Ken Rosenberg, senior vice president and group manager for the International Banking Division at Bridge Bank.

Smart Business spoke with Rosenberg about letters of credit and the value they can provide in protecting companies engaged in international commerce.

What is an example of the risk businesses face doing business overseas?

Businesses may not have in-depth knowledge of their counterpart’s business, history and credit standing or know the legal environment in which it operates. So there might be a risk of a customer being unable to pay or capital being locked up or frozen by a foreign government.

The worst-case scenario is your goods arrive in a foreign country and the buyer is either unable or unwilling to pay for them. The seller then owns goods that are sitting in a foreign country and has to either be able to resell them or bring them back.

How can a business protect itself?

A letter of credit provides value to both the buyer and the seller. It is a foreign bank substituting its credit quality for that of the buyer. The foreign bank issues the letter of credit and in doing so, promises to pay the supplier as long as the supplier delivers documents proving delivery of goods or services. Presumably, the letter of credit comes through the seller’s bank, but it could also be advised through a different bank. In most cases, the seller wants that letter of credit coming through someone it knows.

The letter of credit provides security for the seller by guaranteeing payment upon delivery of goods or services. For the buyer, the letter of credit means that a payment is only being made when verification has been received that the goods or services have been shipped or delivered.

The letter of credit can also address country risk. When the domestic bank confirms the obligation to pay on that letter of credit, you now are taking U.S. risk rather than foreign country risk.

What is involved in getting a letter of credit?

The issuance is going to be based on the credit available to the applicant or the buyer. It can range all the way from a client that has an unsecured line of credit with a sublimit for issuance of letters of credit to a situation where the client provides the cash in advance for the bank to hold. It just depends on the relationship between the bank and the customer.

There are typically minimums for issuing and negotiating letters of credit. If you are below a few thousand dollars, the cost of using a letter of credit becomes a significant part of the value of the transaction. Once you get above a few thousand dollars, the costs are very minimal.

Is a letter of credit the same as a contract?

The letter of credit is simply a method of making payment. There has to be a contract or purchase order negotiated between the buyer and the seller that calls for the letter of credit as the method of payment. It is a contractual obligation for the bank to pay upon presentation of documents, but it is not the contract between the buyer and seller.

Exporters must be very careful about their ability to perform against the letter of credit. When they get a letter of credit issued in their favor, they really need to be certain that they can deliver the documents that it calls for including the invoice, bill of lading, insurance certificate and others that may be required by the buyer. Some of these documents may have to be obtained by a third party depending on shipping arrangements or other factors. Their bank’s trade finance specialists can guide them through the process and advise them on best practices.

Insights Banking & Finance is brought to you by Bridge Bank

How to consider what you’ll leave behind with a family-owned business

When you run a family business, you must make sure you’re considering the legacy you’ll leave behind for your children. That’s something Betty Uribe, Ed.D., Executive Vice President at California Bank & Trust, has firsthand experience with. She inherited a South American transportation business from her father, which she ran for several years from California with the help of various relatives.

“When my father passed away, I was left running the business — that’s why I am personally so passionate about this — it was completely overwhelming to me to have to learn the business,” Uribe says.

It took Uribe time to figure out what was working and what wasn’t, and she doesn’t want others to face the challenges she did.

Smart Business spoke with Uribe about understanding the banking needs of family-owned businesses, including looking beyond the immediate to the legacy you’re leaving your children.


In your experience, how do the banking needs of family-owned businesses differ from other businesses?

Technically, the business needs are the same for all businesses. However, the information channels aren’t always as clear in a family business. Unlike a regular business, family business ownership consists of: family owners, family-owner-employees, family employees and family members.

These bring different dynamics to the table. Take a recent example of a husband and wife manufacturing business, where he’s the CEO and she runs quality assurance. Normally the quality assurance people wouldn’t have access to the business books, but in this instance the wife can access HR records and banking information, and is a signer on the accounts. The structure of family business presents both challenge and opportunity not experienced in more traditional business structure.

But the biggest difference with family business is how you approach the business. In a family business there are four key areas that the owners must focus on: 1) the business, 2) the household, 3) the children and 4) the legacy. The fourth area is one many family business owners fall short on. They consider the business a legacy for their children but don’t do enough to prepare the next generation.

California Bank & Trust recently hosted six focus groups with its business clients, including many family business owners. It was surprising how few had thought about preparing their family for when they retire or if something were to happen to them.

This is something that’s really critical because they’ve worked so hard for many years to finally have a successful business. You don’t want to lose that by not having a generational transfer strategy in place.


What should family business owners be considering for long-term planning?

There are questions you can start to ask yourself, such as:

  • Where do you see the business in 10 years? What do you see for the business long term? 
  • Who do you envision would own the business at this time? Does your spouse see it the same way? 
  • What’s the contingency plan if you or another key family member has to take leave? What would happen to your business if you suddenly became ill? 
  • What are your children’s greatest personal and professional strengths? Are they going to be the ones that take over?

It’s also important to remember there are resources available to help you answer these types of questions, and understand how to let go of control at the right time. You don’t have to know and do everything yourself.

That’s why it helps to align yourself with a banker who really understands your industry and the dynamics of a family business. He or she can provide you with the right type of business acumen and services to support your growth and plan for the future.

At California Bank & Trust’s last family business conference, several of the family business owners who attended said things like: ‘I wish I would have done this before I gave so much information and access to my son.’ ‘I wish I had stood my ground.’ ‘Just because he is my son doesn’t mean that he has the experience to be able to take on this position or to be able to be in this particular area.’

Only by having the right family business strategy in place can you ensure the family legacy remains long after you’re gone.

No business is too small to be immune to cyberattacks

When massive breaches of cybersecurity like the Heartbleed Bug or the Target Corp. hack make headlines, it often sends us straight to our computers to check our accounts and change passwords.

But on a day-to-day basis, too many small businesses aren’t taking the proper steps to protect themselves from cyberthreats both large and small.

“No company is too small too get attacked,” says Kurt Kappa, senior vice president and market leader for Westfield Bank. “Historically, companies have devoted the most resources to preparing for big cybersecurity threats, often leaving themselves vulnerable to the smaller ones.”

The perpetrators of such breaches are known as “fraudsters,” and they’re usually one or two individuals — often located outside of the U.S. — who troll the Internet testing for vulnerabilities in online accounts.

Corporations and government agencies face an uphill battle trying to anticipate and prepare for fraudsters’ next moves. In fact, the federal government has allotted more than $13 billion annually to cybersecurity initiatives through 2015.

Smart Business spoke with Kappa about how to protect your business, your money and your customers from cyberattacks.

What are some examples of things a small business can do to protect itself?

Set up a computer for banking and nothing else. Don’t use that computer for emails, downloads or any other functions. When your banking is contained on one computer, it’s a lot harder for cybercriminals to access it. Never use a public computer to do online banking and don’t conduct any financial transactions on a laptop over a public Wi-Fi network.

Create a secure, unique password for your bank account and change it every three months. It should be different from any other account, like email or social media. The strongest passwords include a combination of uppercase and lowercase letters, as well as numbers and symbols. Check your bank accounts every day, but don’t store your login information anywhere that someone else could access it, such as your smartphone.

What protections can companies expect to get from their banking institutions?

Many banks offer online security products to help protect your accounts. For instance, there’s a product called Trusteer Rapport that essentially creates a bubble around your banking activities. If it detects a virus, it automatically removes it from your computer. It encrypts your keystrokes so fraudsters can’t recover your login information. And it verifies that you’ve connected to your bank’s website instead of a fake website created by fraudsters.

Another thing to consider is signing up for email or text message alerts with your bank that will notify you when each withdrawal or deposit is complete, or when unusual activity is detected.

Ultimately, there has to be a balance between setting up security to protect the customer without making it too cumbersome to get into their accounts to access their money and efficiently run their business. Banks are aiming for a mix of reliable security products to protect you and your accounts while being user friendly enough to access your money.

Is it possible to insure my company against cyberthreats?

Your insurance agent may offer an insurance rider or policy to protect you against cyber liability. It’s fairly inexpensive and most people don’t know it’s available. With banking and commerce going more and more online, it’s something everyone should have.

How can I be sure that I’m protected against future threats?

You can have all the security in the world in place today, but fraudsters are so sophisticated that they’re always coming up with other ways to get into accounts. Prepare for the worst. Do you know your risk? How quickly can you respond if there’s an issue? How quickly can you identify that something has been breached? How prepared is your team to fix a problem? Take precautions to protect yourself but also understand the risk if someone does breach your accounts. You can’t guarantee no one will, but how do you protect yourself if they do? ●

Insights Banking & Finance is brought to you by Westfield Bank

How your business can benefit from a government-backed SBA loan

Raymond Monahan, senior vice president, group manager SBA Lending, Bridge Bank

Raymond Monahan, senior vice president, group manager SBA Lending, Bridge Bank

Small Business Administration (SBA) loans are particularly popular in challenging economic times, when traditional lenders are less willing to provide funding. Program changes, including increasing the maximum loan size from $2 million to $5 million, are attracting more businesses. In the fiscal year ending Sept. 30, 2012, the SBA approved 39,442 loans for a total of $15.25 billion, and in the first nine months of fiscal year 2013 the SBA has approved 39,063 loans for $16.25 billion.

“In down times, the SBA programs become more important and fill a vital need for small businesses,” says Raymond Monahan, senior vice president and group manager of SBA Lending at Bridge Bank.

Smart Business spoke with Monahan about the types of SBA loans that are available and recent changes to the program.

What types of SBA loans are available?

The 7(a) is most commonly used; 75 percent of the loan is guaranteed by the government and money can be used for working capital, inventory, equipment, debt repayment (in certain instances) or real estate.

The 504 loan program is less well known. It’s more structured and is generally for real estate acquisitions. A borrower typically provides 10 percent down; a real estate mortgage pays 50 percent of the project cost; and the SBA guarantees a debenture for the remaining 40 percent through a Certified Development Company (CDC).

What are the benefits to SBA loans versus traditional loans?

The most obvious advantage is that there is a guarantee backing the loan. It’s also easier to qualify. Some businesses that are new, don’t have a certain profit level or don’t have the necessary down payment for traditional financing can get an SBA loan. Generally, you may need only a 10 percent down payment, whereas a bank will want 25 to 30 percent down if you’re buying real estate.

Another nice aspect is a longer amortization period. Most commercial real estate loans have a 25-year amortization period, but a 10-year maturity rate. That means you need to refinance at some point. With an SBA program, the loan is fully amortized over 25 years and you never have to worry about refinancing. Non-real estate loans can be financed for up to 10 years.
Although SBA loans aren’t subsidized by the government, the guarantee may be able to get you a better rate.

Are there disadvantages as well?

With 7(a) loans, there is a prepayment penalty in the first three years if the maturity is more than 15 years. Because 504 loans are financed through bond sales, they have longer prepayment penalties on those.

The SBA also may require additional collateral. You might put 10 percent down, but the SBA could want a house or other collateral to further secure the credit.
Finally, there also are fees. The 7(a) program has a guarantee fee of 1.7 to 2.8 percent of the total loan amount — the percentage goes up as the loan size grows. With a 504 loan, there’s a fee of about 3 percent of the CDC portion — the 40 percent financed through the SBA plus any fees charged by the first mortgage lender.

What recent changes have been made?

In addition to increasing the maximum loan amount from $2 million to $5 million, the definition of a small business has expanded. Instead of having different standards based on industry, the new alternate threshold is that the net worth of a company cannot exceed $15 million and profits over the last two years cannot exceed an average of $5 million. They have also loosened restrictions on line of credit programs.

There are two further changes being considered — simplifying the affiliation rules and eliminating personal liquidity tests.

The SBA has many cumbersome rules about what constitutes affiliate companies, and they’re attempting to simplify that so you have to own a majority of the business in order for it to be considered an affiliate. Someone might own 40 percent of a business with an SBA loan and not be able to qualify to get a loan for another business.

As for liquidity, the SBA has rules that you can’t have more than a certain amount of liquidity to be eligible for a loan. They’re looking to get rid of that test and just focus on whether it is a small business.

The changes are about helping more businesses that might need financing, which is the goal of the SBA.

Raymond Monahan is a senior vice president and group manager SBA Lending at Bridge Bank. Reach him at (408) 556-8384 or [email protected]

Social media: Follow Bridge Bank on Twitter @BridgeBank.

Insights Banking & Finance is brought to you by Bridge Bank

How to expand your business through an SBA loan

Santiago “Chico” Perez, SBA Sales Manager, California Bank & Trust

Santiago “Chico” Perez, SBA Sales Manager, California Bank & Trust

You need operating cash to grow your business, but securing a traditional commercial loan isn’t always easy for small and midsize business owners. Fortunately, Small Business Administration (SBA) loans are a worthwhile financing option. An SBA loan typically offers longer terms, more competitive interest rates and, best of all, bankers can be more lenient 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 through an SBA loan.

When should business owners consider an SBA loan, and how do these loans differ?

New ventures traditionally have a hard time securing working capital, but you may get $100,000 to $5 million through a SBA loan, as long as you’ve run a similar enterprise and propose a viable business strategy. You also can use SBA funding to purchase another company or procure equipment or inventory to fulfill a new contract.

Generally, SBA loans can offer more favorable terms. For example, you only need 10 percent down to purchase real estate, and you can roll fees into the loan balance. SBA loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments. 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 need less cash flow to service the debt. Owners also can use funds to buy raw materials, finished goods or equipment 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:

  • Projections. Bankers consider future sales and historical data when evaluating loan applications. Ensure your projections are realistic and correlate with current financials and forecasts. For example, earnings won’t automatically double with a larger facility or new equipment. Instead, explain how the equipment lowers operating costs or how you’ll use the extra space to add a new production line. Substantiate claims with copies of customer agreements and contracts.
  • Resumes. Tout your management team’s industry experience and track record.
  • Ownership. Owners with more than a 20 percent stake 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 are in an escrow account.
  • Collateral. The need for collateral hinges on the loan purpose and program so review underwriting criteria at, and state both in your proposal.
  • Tax returns. Owners must supply three years of tax returns, financial statements and balance sheets to qualify.

Does the SBA offer other support to small business owners?

The SBA provides myriad tools and support to help 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 experts.

The SBA also provides mentorships, free counseling and business plan expertise through the national nonprofit SCORE.

What else can owners do to successfully navigate the lending process?

Loan approval hinges on an accurate, thorough proposal, so take your time and seek expert advice. Bankers want to hear the story behind your numbers; be ready to explain how you overcame adversity and how you’ll use the SBA loan to take your business to the next level. Help your banker understand your customers by including links to your company’s website, LinkedIn page or Facebook page in your proposal. Finally, you can accelerate the process by selecting an approved Preferred Lender who can approve loans without submitting the entire package to the SBA.

Santiago “Chico” Perez is an SBA sales manager at California Bank & Trust. Reach him at [email protected]

Website: California Bank & Trust is an SBA Preferred Lender. Learn more at

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