David Lansaw helps orchestrate the financing deals bank officials write off as too risky to handle by themselves.
As a manger of business finance for the Greater Cleveland Growth Association, business owners routinely call upon him to help line up the government loans needed for building and expansion.
When it comes to securing the money to keep up with the physical needs of a growing company, Lansaw says there is no standard formula that breeds success. Much of it depends upon the industry, a company’s balance sheet and how much money business owners need to meet their goals.
The journey’s beginning, however, is always the same.
“The first step for a company, before they start looking for financing, is to identify what their project costs are, how much they need and what they are going to use it for,” he says. “Most companies know by the time they get to us what the capacities of their current facilities are and whether it can be expanded to meet their needs or not. In general, companies only want to move if they have to.”
The rest is a matter of shopping around for the most attractive deal that will take the least toll on your company’s finances. Here are a few common funding methods to consider when setting out to borrow money for your business expansion needs:
Government loans
The U.S. Small Business Administration 504 and Ohio Regional 166 loans are for business owners who want to expand but cannot handle the financial burden of traditional borrowing. Usually in these cases, there is some problem, such as cash flow or a risky industry, that keeps banks from handling the loan by themselves.
“Oftentimes, the deals we get involved in are deals where there is some element of risk that the bank is not comfortable with and they want to spread the risk around a little bit,” Lansaw explains. “Maybe the company hasn’t been profitable or maybe there is a seasonal issue or maybe the company is in a risky industry like restaurants or hospitality.”
SBA 504 loans require business owners to put in 10 percent equity instead of the 15 or 20 percent banks generally require. The business owner’s bank pitches in 50 percent and the SBA handles the remaining 40 percent. Ohio 166 loans are similar, but are offered only to manufacturing companies.
The benefit of both types of loan is the ability of business owners to stretch out loan repayment over a longer period of time with a fixed interest rate and a lower down payment. There are small one-time fees, but many find the financial flexibility well worth it.
Some cities also offer low-interest loans to business owners in exchange for their local investment. For example, the city of Cleveland offers a host of programs for business owners who want to contribute to the redevelopment of certain portions of the city.
But remember that government programs take time. Lansaw says the Growth Association generally needs 30 to 60 days to do its share of the work on federal or state loan programs. Meanwhile, loans through city-sponsored programs can take up to four months to approve since they require a city council vote.
Lansaw says that ideally, business owners should start trying to set up financing six to 12 months prior to a project. That always starts with a visit to a bank.
Traditional bank loans
The advantages of dealing only with a bank are the speed and general anonymity with which business loans are awarded. Government loans are financed with public money, so loans are a matter of public record, a prospect that may not sit well with business owners who want to keep news of their borrowing under wraps.
But the bigger advantage of dealing directly with a bank is that loan requests are processed promptly.
“What we try to do is give them a turnaround of 24 hours or less on their request,” says Lisa Rucker, a vice president at National City Bank. “If it’s real estate, that would be upon the condition that it appraises correctly and there are no environmental problems.”
What do you need before you sit down with your banker and talk numbers? Rucker suggests bringing your personal financial statement and tax returns from the past two years, as well as business tax returns for the past two years and revenue projections.
When a loan request tops $750,000, Rucker says people normally have their tax accountant draft an audited statement that categorizes assets, expenses and liabilities.
However, if your bank does not want to cover a loan by itself, your banker should be able to point you in the direction of one of several different government programs available to help snare the financing. Many banks focus on attracting small business borrowers and have a comprehensive knowledge of government programs.
“Banks theoretically should know or have a good idea that there is a savings plan out there available through another government agency, whether it be the SBA or the city of Cleveland,” says Larry Kenny, assistant vice president of Small Business Services for KeyBank. “It’s always good to start with your banker.”
Nontraditional lending
Nontraditional lending has taken a bad rap, mostly from unscrupulous residential lenders, but is a proven success in the commercial arena where business owners can find more flexibility when it comes time to juggle cash flow. Unlike banks, which generally approve or veto loan applications based on one set of criteria, nontraditional lending firms routinely shop a business’s loan needs around to more than two dozen business lenders, which decide to either invest in a company or pass on it.
“It’s very creative. It is, in a lot of cases, very risky (to the lender),” says Kirsten M. Grahovac, vice president of Cleveland-based CE Financial Inc. “There are a lot of people putting a lot of faith into a company.”
Although some business owners may be initially wary of nontraditional lenders, Grahovac says the programs are not just for those with credit problems. In some situations, business owners can find investors who are more willing to customize loan deals to meet a company’s individual needs.
“More than anything, people should know there are other options. It doesn’t ever hurt to call somebody and explore as many opportunities as they can,” she says. “Especially for a company trying to expand. They should know all of their options before they make a move.”
Paying up front
Paying expansion costs up front is great, but something that few companies can do. However, National City’s Rucker says there may be certain tax benefits to financing at least part of your expansion costs. She advises business owners with enough cash to pay up front to check with their accountant before plunking down the money.
“You and your tax accountant discuss how you want to purchase this building, whether you want to purchase it in the corporate name, whether you want to purchase it individually or whether you want to set up a limited liability company,” says Rucker.
“We tell (business owners) to tell us how they want to set up the entity.”
Jim Vickers ([email protected]) is an associate editor at SBN
