Funding Your Business: Is it possible in this economy?
Operating a company where customer service comes first; running a small manufacturing firm that supplies parts to a Fortune 500 multinational; or simply operating a small shop where the owner is the only employee—these are the dreams of countless people. For minorities especially, that dream ends when the prospect of financing enters the picture. Many African-Americans who wish to start or expand a business, for example, believe it will be difficult to get a loan either because too few banks are interested, or because the requirements are too stiff to meet. But in an environment of economic seesawing, financial institutions increasingly are opening their doors to entrepreneurs. While some may not exactly roll out the red carpet or lower lending standards, they certainly are looking to make loans, banking industry officials suggest.
Small business lending is hot
Small business lending is hot as a slew of start-ups, new franchise operations and the expansion of existing businesses boost loan demand. Some of that demand is being met by lenders looking to build market share, make good on Community Reinvestment Act commitments and balance loan portfolios. Much of this lending is backed by a U.S. Small Business Administration guarantee of up to 90 percent of certain loans, but other banks are looking to make loans independently of SBA support. Many want the borrowers’ businesses to expand, hoping this will trigger an increase in the business and personal services they offer each customer.
“The marketplace is actually very good,” explains James Ballentine, director of Community and Economic Development for the American Bankers Association, the country’s largest banking trade group. “For example, demand with the SBA programs has been running at an unprecedented level. Demand for small business loans has increased. There is capacity for it.” He adds, the “lending industry has faired well despite the slowdown in the economy, so there is capacity to do while there may be slightly stricter restrictions.” Ballentine estimates that the SBA is on pace to grant more than $12.5 billion in loans, up from last year’s $11.2 billion.
Competition from all fronts
This new financing capacity comes after a stop-start phenomenon, which saw the SBA launch a program to boost its loan activity after the second quarter of 2003 only to call a halt in January. After a short respite and a barrage of complaints, it resumed the program. Some say it was as if the SBA needed to catch its breath after receiving a heavy influx of loan requests.
Competition is coming from all fronts. Earlier this year, Valley National Bank of Wayne, N.J., announced it was in the midst of hiring a dozen business-development officers who will call on medium-sized and small businesses in the New York area. Southern New Jersey’s Commerce Bank, in Cherry Hill, which built its reputation serving small and minority businesses, is dipping its toes into New York City waters. More competition is a plus, suggests Ballentine. “There are some nontraditional small business financiers that have been created over the past few years and have been helpful in providing business capital to the sector. It’s a healthy competition.”
While smaller community banks have been major players in the small and minority business arena, major money-center banks also have made a commitment. Despite the recent merger of Bank of America and FleetBoston Financial Corp., capacity is expected to remain high. Bank of America proudly touts itself as the nation’s number one SBA lender. The company recently announced it had made more than 9,406 SBA loans for the fiscal year that ended in September 2003, more than double its performance in the previous fiscal year. In March, BOA Chairman and CEO Kenneth Lewis told members of the New York Bankers Association that his company would expand its commitment to Community Reinvestment Act activities and would especially bolster its commitment to small-business loans and development.
“Five years ago, we put forth a 10-year, nationwide goal for community development banking: $350 billion. It seemed like a stretch at the time, but today we’re way ahead of schedule. So instead of just coasting in, we decided, after we announced our merger plans with Fleet, it was time to set a new goal. This time, it’s 10 years, nationwide, $750 billion. We measure and report progress against this goal annually to all our communities beyond the standards set forth in the Community Reinvestment Act,” Lewis said. He noted that the bank announced last fall that it would provide $100 million in loans and investments to various organizations and projects in New York alone, “for the creation, preservation and renovation of affordable housing, as well as the construction of a new charter school in the region.”
More capacity = more opportunity
All this competition and added loan capacity means more opportunity for minority business owners, better interest rates for some entrepreneurs and more support services. The current prime rate, the interest rate banks charge their best corporate customers, is 4.5 percent. While many minority businesses do not get that interest rate, some may only have to pay as little as 2 to 4.5 points above the rate, explains Judy Hart, a senior vice president with Business Lenders, a Hartford-based nonbank financial services institution.
Earl Walker, executive director of the Manhattan-based Regional Alliance for Small Contractors, believes the competition and added loan capacity is healthy because it helps business owners who might not have been able to expand or meet new inventory demands. “Some banks are taking people who have been turned down for small reasons,” he explains. “Maybe one bank has shown it has problems dealing with $50,000. Maybe the company had too many receivables. The point is they will let you in the door if the company meets all the other criteria.” Walker suggests that interest rates can vary, with some business owners obtaining financing that may require them to pay as much as 4 to 5, or even 7.5 points higher.
Getting through the doors
In the past, some minority businesses might not have had an opportunity to present their business plan to a willing lender. Today, those who are entertained by a serious lender must still meet the same creditworthiness criteria as in the past. “Old-fashioned standards still work. The package [loan package] has to be together. The business owners must have a business plan that makes sense,” Walker says.
Some small and minority business owners need an usher to get through the doors of willing lenders. Steven Dennison, owner of Dennison Electrical, a certified union contractor in Jamaica, N.Y., was able to obtain a $50,000 loan from Fleet Bank through the Regional Alliance. After obtaining a line of credit from that bank, two other banks lined up to provide additional financing. Dennison launched his business with $35,000 of his personal savings. The business grew rapidly and Dennison needed the additional funds to accommodate the expansion.
Heretofore, minority contractors were hard-pressed to obtain financing, partly because construction and construction-related companies were deemed unstable because of uncertainty in the industry. Now, however, with several major construction projects on the drawing boards, lenders are more willing to listen to contractors with a proven track record. Contractors who have bids in on such projects as the Lower Manhattan Development Corp.’s rebuilding campaign, the Metropolitan Transit Authority’s Second Avenue subway and the Jets’ new stadium may have an inside track. “Five years ago, banks were not lending in this marketplace for construction and construction-related businesses. That has changed,” explains Sioan Bethel, director of business development for the Regional Alliance for Small Contractors. He cautions, however, that underwriting criteria still apply.
The involvement of nonbanks
Nonbanks also have helped to add loan capacity to the arena. For example, Business Lenders, a Hartford, Conn., lender that has become a preferred nonbank SBA lender, takes on business proposals that some of the larger institutions would not entertain. “Everybody is carving out a niche,” explains Judy Hart, a company senior vice president. The larger players are going after the million-dollar loan. Some of them shun the small loan, franchises and start-ups.” And that’s where Business Lenders comes in. “Banks don’t like gas stations, hotels, restaurants, or single-use properties. A lot of banks don’t like start-ups,” Hart says. “So we offer companies opportunities they may not have otherwise.”
She adds that Business Lenders and other nonbank lenders are able to grant loans with longer terms than the conventional banks offer. For example, a minority business owner may be able to obtain a loan with a 25-year life. Hart estimates Business Lenders will provide more than $35 million in loans this year. While she could not say how much of that will go to companies in the New York metropolitan area, she stated that the recipients would include operators of United Parcel Service, Quiznos’ Sub and Cottman Transmission franchises. Loan amounts can range from an average $350,000 to under $2 million, depending upon the type of business and its financial stability, she says.
“So many people think the most difficult thing is getting a loan,” says Ballentine of the American Bankers Association. “The hardest work comes in putting together the necessary material to even be in the position to request a loan. We’re seeing an increasing number of very capable people who have worked for large corporations and have experience managing people and managing budgets [becoming entrepreneurs]. We want to make sure the business has an opportunity to succeed.”
What Lenders Want to See
Financial services experts say money is available from banks, nonbank institutions and venture capitalists interested in investing in growing businesses. These institutions want to see proven success, a track record of growth and a potential for profit. Lenders and investors also want to know whether key managers are capable as well as about the growth potential of the business’s industry sector.
Business Lenders, a Hartford, Conn., nonbank lender with offices in New York City, suggests that business owners should have three main strengths: personal, business and asset. Personal strengths include experience, skills and commitment. Does the business owner have experience managing, or have extensive experience in the designated business sector? Does the business owner have a particular skill? What is the business owner’s commitment? Does the business generate enough cash flow? Are assets sufficient collateral for the loan being requested?
The U.S. Small Business Administration has established the following minimum loan package requirements:
• Articles of incorporation and bylaws or a business certificate
• Business financial statement: Year-end statement (if in business for three or more years, include financial statements for the most recent three years). Current quarterly business financial statement (within 60 days, including the company’s balance sheet and profit and loss statement.
• Personal financial statement (principals only)
• Corporate tax returns (last three years)
• Individual income tax returns (last three years)
• Resume (owners and key employees)
• Work-on-hand schedule (construction firms only)
• A business plan: description of use of loan proceeds
• Integrity reference letters (previous owners and general contractor recommendations, their names and telephone numbers)
• Trade reference letters