New Article: Small Business Loans
Article written for www.annarborbusinessmagazine.com
“If you would know the value of money, go and try to borrow some.” – Benjamin Franklin
Whether you’re a start-up looking to get your business off the ground, or you’re a going concern looking to expand, the move can be difficult to make without an infusion of capital. This capital infusion can come in many forms (angel investors, venture capital, lines of credit, government grants, etc.). But for small businesses in the Ann Arbor area, banks loans are the most common.
Small businesses seeking loans have a number of available options. The Small Business Administration (SBA), for example, has two programs that are of particular interest to small businesses.
SBA 7(a) Loans
The SBA 7(a) loan is designed to support start-up and existing small businesses as they seek to obtain financing when they might not otherwise be eligible for business loans. The loan name is derived from section 7(a) of the Small Business Act, authorizing the SBA to provide loans to small U.S. businesses. Banks that participate in SBA 7(a) loans agree to structure loans according to the SBA’s requirements. In return, the SBA guarantees a portion of loans made and administered by the banks.
Financing for businesses can be guaranteed by the SBA for a number of general business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvements, and debt refinancing. Loan maturity varies, from up to 10 years for working capital and up to 25 years for fixed assets.
SBA 504 Loans
The SBA 504 Loan Program provides small businesses with long-term, fixed-rate financing used to acquire assets for expansion or modernization. SBA 504 loans are offered through Certified Development Companies (CDCs), which include most commercial banks in the Ann Arbor area.
To get a sense for the current loan activity for Ann Arbor area small businesses, we spoke with three bankers who specialize in commercial lending for small businesses.
Bill Broucek is Chairman and CEO of Ann Arbor State Bank. Broucek has extensive leadership experience in Ann Arbor area banking. Broucek started the banking division of Ann Arbor Trust Co. in 1974. He later started the Bank of Ann Arbor, where he managed the bank as it grew into a $400,000,000 institution with five office locations and 100 employees. Then in 2008, Broucek and Peter Schork founded Ann Arbor State Bank
Mike Cope is Comerica’s Senior Vice President in charge of Business Banking in Michigan. His department focuses on companies with revenues between $2 million to $20 million. He has been with Comerica since 1985. As part of the senior management team at Comerica, Mike is a member of its Michigan Management Council and Michigan Leadership Team
Charlie Crone is Bank of Ann Arbor’s First Vice President & Commercial Banking Manager. Crone joined Bank of Ann Arbor after serving as Senior Vice President and Ann Arbor President for Comerica Bank. Crone has over 30 years of experience in the areas of commercial banking, credit administration, wealth management, and private banking.
What are you currently seeing in small business loan activity, and how does it compare to 2011?
In general, demand for small business loans remains relatively low. Banks have the funds available for loans, and the economy is showing signs of improvement. But businesses, in general, are not necessarily ready to take on the risk of a new venture.
A significant contributor to this problem is the policies coming from Washington. Increased rules and regulations and a failure to provide clarity on economic policy creates uncertainty in the market. The U.S. Senate, for example, hasn’t passed a budget in three years. How can we expect the private sector determine plans for the future when potential future policy is up in the air?
We have seen some increase in loan request activity in the past few months. This loan activity is across the board: SBA loans, USDA loans, lines of credit, etc. As we continue in 2012, the challenge we face in the Ann Arbor areas is not the availability of money; the challenge is getting entrepreneurs willing to take the risk with viable business ideas.
We continue to see measured, methodical, and somewhat slow improvement across the board in terms of loan demand. We, like many others, have utilized programs like the SBA 7 (a) or 504 programs to help offset lower real estate values. We’re certainly up from 2011 in terms of new business. But the difficult question is “What’s the new normal?” I don’t know. Compared to pre-2008, it’s difficult to know what to expect.
Broadly speaking, our customers are doing very well. They’ve learned a lot over the last decade. If you’re still around, you’ve been able to figure out how to do some things to get through that last downturn. Companies have really paid a lot of attention to expenses and to being more efficient and effective. So their break-evens are much lower in many cases.
When volume kicked back in over the last of couple of years, they began making good profits again. Still, companies are being pretty cautious. I think most are doing only what they need to do to get by from a capital expenditure standpoint until there is more economic certainty.
As I look at this year compared to last year, the economy has improved a little bit. While there is not a lot of loan demand created as a result of organic growth, anecdotally we have seen more customers who are borrowing because sales are picking up, which is, of course, a good sign. But it still feels fragile.
Commercial real estate prices are still quite depressed, creating opportunities for buyers. We’ve seen quite a few buyers take advantage of the reduced prices. In addition, the banking industry continues to heal, putting many banks competing in Washtenaw County in strong capital positions. In the past three or four months, banks that had problems and had moved away from the market have now come back into the market more aggressively.
And because loan demand is still somewhat lackluster, banks are all the more liquid. Because of this liquidity and the low interest rate environment, pricing is probably a little better than it was a year ago for the borrower.
We continue to use programs like the SBA which has been very helpful, especially when it comes to depressed commercial real estate prices. The SBA 504 program has been quite useful to banks and borrowers to help out there. We’ve done some 7A but not as much as the 504.
Most of the opportunities we see are for refinancing. These are opportunities where a bank replaces a competitor. When we look at our own customers or opportunities with companies that are not yet our customers, not many of those opportunities are created because the company needs to borrow for a bigger building or a new equipment line because they’re growing. There is more of that activity than there was a year ago, but in a stronger economic time you’d see much more.
What advice would you give to a small business considering a loan?
Have a well thought-out plan for the business. The plan should lay out how you expect to generate the cash flow to pay the loan. Most entrepreneurs and business executives understand this. Sometimes we have an applicant who applies for a loan by describing the costs of a building or project and identifying the desired loan amount. Banks want to see the plan; it demonstrates that the applicant has a strategy for generating the necessary cash flow for the investment.
Work with a Banker that truly understands business lending. Ask yourself if the loan you are considering fits with your overall business model. Show that you’ve thought it through in terms of cash flow forecasting and plan/budget forecasting. That’s not always an easy task. But if you haven’t thought through the cash side of it, nothing else is really going to matter. The common theme I have noticed with businesses that successfully navigated the downturn were those who really understood its costs.
First of all, make sure you have an open and collaborative relationship with your banker. It’s a great time to talk to your banker if you have a need or you think you have a need coming up. Get with them and collaborate with them as early as possible. Make them part of your decision process. For the smaller businesses, I think the community banks are just an absolutely phenomenal choice. They are very relationship-oriented.
Second, try to come in with a well-organized business plan. And if possible, come in with three to five years of historic financial information, tax returns, projections, correct financial statements, etc. Make sure you have thought deeply about willingness to personally guarantee the loan because more often or not, that will be asked of you. This means providing personal financial information, so talk that over with other advisors and have that thought out before you approach the bank.
Summing It Up
Money is available for sound business ideas that make economic sense. If 50 people walked in today with qualified loans requests, for example, we could accommodate all 50. And we have a promise to any loan applicant to provide an answer to the application within 5 business days of receiving all relevant loan application documents. The money and the will to lend it are there.
The credit environment is really quite good for someone who has a good business model and some history. We hear murmurs from the Fed that it’s going to last for the next two or three years, but you never really know. Right now, though, the interest rates are incredibly low. So it’s really a great time to lock in some very low rates.
It’s really a good environment for borrowers. It’s certainly a better environment than it was a year ago. Rates are low and banks have plenty of money to lend. It’s a great time to work with banks.
If you run a small business, then you know the value of money. And if you need a loan, Broucek, Cope and Crone say now is a good time to borrow some.
by David Baker and Margaret Baker