Loans are fuel for small businesses,
helping owners meet payroll expenses,
finance equipment, replenish inventory, purchase real estate or simply to provide working capital. These resources are
granted with careful consideration and risk
evaluation, but the creative lending programs banks offer today can provide new
opportunities for both existing business
owners and start-up businesses. Banks
often partner with loan programs offered
through the U.S. Small Business Administration (SBA), where guaranteed loan
programs help to offset weaknesses that
could affect the approval of a conventional
loan.
“Small business owners are risk takers,”
says Diane Bogniard, vice president, Small
Business Banking at Sky Bank in Canton.
She defines small as businesses with revenues of $5 million or less. Often these
companies rely on loan structures that
SBA loan programs offer, such as minimal
down payments and longer loan terms.
To qualify for any loan, business owners
must prepare financial documents and
approach their bankers with clear goals
and strategies to grow their businesses or
maintain profitability. Most of all, owners
must keep an open mind.
Smart Business talked to Bogniard
about securing a bank loan: What to prepare, what to consider and how to make
your business appealing to bankers.
What various loan structures are available
for business owners?
We try to get a feel for what a business
will need by asking them about their plans
for the future. Do they expect to expand
the company? Will they have equipment or
financing needs in the near future? What
working capital requirements are necessary to meet day-to-day needs? If a company is planning for growth, how will those
needs change? Based on this information
gathering, we can recommend one of several types of loans, including term loans,
real estate loans and lines of credit.
Term loans generally mature in five years
and are used to finance equipment and
vehicles. Lines of credit support working capital needs. For example, a business that
must wait 30 to 60 days for customers to
pay them. A business line of credit makes it
possible to meet payroll expenses and purchase inventory for new jobs. Every business should have a line of credit for emergency cash-flow needs. Finally, real estate
loans support building purchases, whether
new construction or an existing structure.
A client that has been leasing for years may
decide to invest in real estate. We generally
require 20 percent down or equity for these
loans if they are structured conventionally.
For those borrowers with a lesser down
payment, SBA loan programs open doors
to business owners who come to the table
with financial constraints.
When do banks support conventional loans
with SBA programs?
Anytime there is a collateral shortfall
resulting in a higher loan-to-value or for a
business that has been in existence for less
than three years. Often a borrower has sufficient cash to inject into their real estate
purchase but feels more comfortable with
a 10 percent down payment while holding
on to their remaining cash for future working capital needs. In this case, we would
partner with the SBA 504 loan program, a loan partnership where we lend up to 50
percent of the total project and the SBA
finances the remaining 40 percent. This
program allows the borrower to purchase
a building with as little as 10 percent down.
If an SBA loan goes into default, resulting
in liquidation of the business’s assets, the
bank receives guaranteed payment by the
SBA. These loans are common in the small
business world. Even existing businesses
with healthy cash flow may opt for these
loan structures as a way to hold on to their
working capital. Think about it: A 20 percent down payment on a $1.5 million building is a lot of working capital.
How should a business owner prepare for a
meeting with a bank lender?
We like to see two to three years of financial statements, and if an owner is purchasing equipment or real estate, we need
a purchase order or purchase agreement.
We also like to review interim financial
statements. For small businesses, this
means profit-and-loss statements and
records from the last five to six months. We
like to see that the owner has a record-keeping method and understands monthly
expenses and income. This sounds basic,
but because owners are often wrapped up
in day-to-day operations, they sometimes
put record keeping on the back burner.
Financials prove that your business is profitable, efficient and capable of growth.
Startup businesses should prepare a business plan and three to five years of financial projections. This can be a difficult
assignment for many entrepreneurs. I often
recommend that they take advantage of
free business resources, such as S.C.O.R.E.
and the Ohio Small Business Development
Center, both housed at the Kent State
University Stark Campus. Most state
schools provide similar resources, and are
affiliated with the U.S. Small Business
Association.
DIANE BOGNIARD is vice president, Small Business Banking at
Sky Bank’s Canton and Akron offices. She is based in Sky’s new
West Tuscarawas office. Reach her at (330) 498-5013 or
[email protected]. For more information, please visit
www.skyfi.com.