The Truth (About Loans) is Out There
If you've never applied for a small business loan, approaching a bank can seem daunting, and add to that the troubles in the financial sector that have made bank loans even tougher to get. Oh, and more than 130 banks closed in 2009 alone, according to the FDIC. So there are fewer places to apply. It doesn't sound good.
But with good preparation and a strong proposal, bankers say, it is still possible for a startup business to get a loan. We asked three experienced small-business lenders for their insight into today's loan market: Mike Clarke, president/CEO at Access Bank in Reston, Va.; Tom Burke, Wells Fargo senior vice president for Small Business Administration lending; and Joe Harpster, executive vice president and chief lending officer at year-old Herald Bank in New York City.
ESU: There's been a lot in the news about troubled banks and how hard it is to get a bank loan. Is that still the case? What is the current environment for small-business loans?
CLARKE: The current environment for small-business loans is healthy if you find the right lender, especially when it comes to Small Business Administration [backed] loans. The total volume of SBA lending is down, in both the dollar volume of lending and the number of banks engaged in it.
When the stimulus package passed last fall, that increased the level of SBA's guarantee from 75 percent to 90 percent, which increased loan activity tremendously. Within our own bank it went up significantly, from $1 million a month to between $5 million and $7 million. In November that package expired, but our reading of the tea leaves is that the SBA will be able to reallocate some of the stimulus funding and put $100 million more back into this program, and turn it back on.
HARPSTER: I think it's always been difficult for new business owners, and it's more difficult now. If it's an unproven business and an unproven entrepreneur that doesn't have a following--I don't want to say it's impossible, but it's difficult. They'll have a hard time getting bankers even to talk to them.
BURKE: We're seeing a very incremental increase in businesses coming in and applying for loans. The press never seemed to have any positive news about what's going on, so a lot of business owners stayed on the sidelines because they were concerned they may not be able to be immediately successful getting a loan once they start their venture.
Though the stimulus measures expired, we still have a lot of business owners who are continuing to pursue their loans at this time. They have a sense the economy may be turning around and they're sticking with their plan to move forward.
What are the essential elements of a successful loan request from a small-business owner in the current economic environment, either an existing business looking for growth capital or a new business?
BURKE: Things have not changed so dramatically. A business owner should follow the same guidelines they've needed to follow for years.
No. 1 is have a business plan, spend some time on it and understand it. Understand your financial situation--if it's a brand-new business, have an accountant help you prepare business projections so you can demonstrate to a lender you have the capacity to repay the loan.
Also make sure you have as clean a personal credit [record] as possible. We're looking at the personal credit as well as the business credit.
HARPSTER: You're going to need collateral. Most end up putting up their houses as collateral. Existing businesses should bring their accounts receivable agings [how much clients owe and when it's due to be paid]--that helps us come up with your borrowing base.
Use previous relationships. If you previously were the chief financial officer of a company and know your business sector well and developed a relationship with a bank [back then], go to them. The key is to have a relationship with a bank that knows you and trusts you.
CLARKE: From a documentation standpoint, you need copies of historical financial data for the business, financial statements and tax returns for the owners of the business. Nine out of 10 times, the owner's home is part of the package for a small-business loan. The business either has to have demonstrated cash flow to show they can make the payments, or a business plan and an incredible forecast that shows they will be able to service the debt in the future. And just an overall business plan, a management team that's capable, and a demonstrated market they can serve.
How is the situation now different from two or three years ago?
CLARKE: Overall credit conditions are much tighter than they were, and loan policies across the board have become much tighter, because of problems in the real-estate sector. The second point is nontraditional sources of credit, which would include credit cards, equipment leases and direct financing [dried up]. The purchase of a $30,000 high-speed copier used to be a lease that wouldn't come from a local bank. But those leases aren't happening, so that business is going to their local bank. Some of the guerrilla financing tactics that were available to a smaller, emerging business are becoming more scarce, making SBA lending all the more important.
What do business owners who get loans do better than those who are denied loans?
CLARKE: Every proposal is getting a lot more scrutiny now, so it requires the entrepreneur to be more diligent in their preparation. I would say successful entrepreneurs in this type of environment have a very well-thought-out, detailed business plan. Not only have they thought through the primary plan, but they have evaluated it and thought through contingencies in case things don't go as well as expected. They can say, considering the environment and overall economy they'll be operating in, what's their most-likely scenario, their conservative and their aggressive scenario. We like to look at a proposal from all three views.
BURKE: What makes an entrepreneur stand out is the marketing piece. And do they know what makes them better [than competitors]? What makes them more reliable in terms of repaying the loan?
harpster: The entrepreneur was able to make the case better to the decision maker. They've really conveyed the message, gotten across what their business is all about, what the drivers of value are, why they'll succeed vs. the competition.
Are there certain industries looked on more favorably than others right now?
HARPSTER: If you're working with the major airlines now, that's more difficult. It could be any industry--maybe it's a caterer. The commodities are good, though: oil, energy, and wholesalers and distributors. People have to buy food, so the food industry's been good, anything supplying food.
BURKE: Industries tied to consumer discretionary spending [are tough]: restaurant, retail to a certain degree, service hospitality. Those industries have been hit more than others in the last 14-16 months. We don't see a lot of startup manufacturing now, unless it's a startup job shop that's already got government contracts.
On the other hand, professional services is a fast-paced, growing area: medical, legal, accounting. Anything that has to do with a professional license or degree seems to be doing better.
CLARKE: We're in the Washington, D.C., market, so we're heavily influenced by what's going on at the federal-government level. In our market any business serving government is doing well, and there is plenty of space for new entrants. Cyber-security is really big, and anything having to do with data security, privacy or healthcare automation. Anything having to do with taking advantage of the tax credits and other public initiatives for improving energy efficiency. For example, solar energy is big.
What do loan officers want to hear from applicants when they talk about their business?
CLARKE: It's very important in the verbal presentation to make sure it's concise and doesn't go on for hours. Ideally, 15 or 20 minutes of demonstrating the opportunity in the context of the [economic] environment, the industry, the skills and experience of the management team, and translating the market opportunity into the financial case of the business projections, and how that's going to generate cash flow for repayment of the loan. Demonstrate extreme knowledge of the subject matter and show commitment, without going overboard. Sometimes it's like asking what time it is and they tell you how the watch is made.
BURKE: I want to hear someone speak with confidence. My expectation is the potential owner will have a good enough understanding of their business plan that they shouldn't have to bring in their accountant to answer questions. The financial side is important, and you ought to be able to talk about it. I want to see you have a basic understanding of cash flow, and that if you've got accounts receivable you've got to collect them to be able to take home some money.
What are the things that can sabotage a loan request?
HARPSTER: Sometimes they're too high up in the clouds and can't bring it down to a simple level, especially with technology ideas. Others can't explain how they're going to do all aspects of the business process, from importing materials or inventory, how they'll manufacture it, and then bring it together and integrate it--and explain it to the banker.
CLARKE: If there's a lack of [financial] commitment by the principals' families, that takes the wind out of my sails. When the business proposal or plan is "the bank takes all the risk," and the entrepreneur is not willing to take an appropriate amount of risk, either by putting cash in to a level that's reasonable or putting their personal assets in the collateral pool.
Another thing that kills me is when someone says, "Well, my wife (or husband) isn't behind this, but I'm doing it anyway." If your spouse is not supporting you professionally, the commitment's not going to be there. It's really got to be a family decision, or we won't support it and the SBA won't support it. In today's environment we see a lot of people who find themselves unemployed so they take a run at starting a business, but they haven't really gotten the spouse's buy-in.
Oftentimes, the owner/entrepreneur will misunderstand the SBA's guarantee. They think it somehow reduces the risk to the entrepreneur, but it does not. The guarantee relieves the risk to the bank, not the borrower.
BURKE: Be honest. If you're not honest, we'll figure it out. People sometimes try to hide details because they think it'll harm their application, but it's amazing what people may have done in their past that may not impact their loan request. With SBA loans you have to fill out a personal-history form and answer three questions: if you've ever been arrested, put on probation or convicted of a crime.
Every once in a while someone doesn't want to answer those, and that can kill their chances of ever getting an SBA loan in the future. Where if they answer affirmatively, we ask for an explanation, and it doesn't necessarily mean they won't get their loan.
What are the differences between using a community bank compared with a big national chain bank? Can you discuss the strengths of your bank type as a place for small-business loans?
HARPSTER: Big banks like things to be cookie-cutter. They're not into customized solutions. But we will help you put your presentation together for an SBA loan. If you want to talk to a lending officer with the authority to make changes, because you want a smaller prepayment penalty or want to give a smaller deposit, we cater to those needs.
Also, you want the lender to come out and see your business. I recently made a loan to a candle manufacturer here in New Jersey, and I could bore you now for 20 minutes about how to make 50,000 candles a day. They had us all over to the plant. Big banks usually won't do that.
BURKE: We are the largest small-business lender in the country, with more loans under $100,000. We are a preferred SBA lender and SBA Express lender, and we make loans in all 50 states. We have been in business with the SBA since they existed. We have expertise that many community lenders may not have because of their size. We are familiar with almost any kind of industry you can imagine, and we have a wide variety of [loan] products and services.
We have a large number of salespeople and their job is to get to know the customer. Each loan is decided by a person. We don't use an automated process. It's hard to be cookie-cutter because every business is different.