Bank Financing Options for Small Business Owners

Lee Goldberg Blog

Every small business, as it grows, will require some sort of financing to fund its growth. The reason is that, as companies grow, they need to buy more inventory, hire more staff, expand their office space and work area, buy more equipment or carry more accounts receivable.  Unless your company is able to obtain cash up front for its products or services, it is more normal that you will bill for the product or services and expect to be paid within a reasonable period, normally 30 days. In the meantime, you will need to pay salaries and other weekly business operating expenses.

There are many ways you can obtain the needed cash to fund your operating expenses, expanding payroll, growing inventory or other cash needs. Some small business owners who don’t have the luxury of putting in their own personal cash to fund the growth will start putting more charges on their Amex or other credit card. This can be an acceptable way to borrow money, but, unless you pay the credit card in full each month, you will end up paying 18% or more in interest charges to the credit card company.

The SBA offers a loan guarantee program in conjunction with banks, some of whom are preferred SBA lending partners. A preferred lending partner is delegated authority to process and approve a loan request, resulting in faster loan and SBA guarantee approval. Under this arrangement, you can borrow from the bank and they will obtain an SBA guarantee of 75 – 85% of the loan amount, which would be paid to the bank in the event you default and cannot repay the loan. The only problem is that the bank also acts as the loan monitoring and collection arm for the SBA. So, you and your spouse will be required to sign personally and you may be asked to provide the bank with a mortgage on your personal residence as collateral to support the loan and the SBA guarantee.

The SBA Express program provides for secured loans of up to $350,000. With this product, the SBA guaranty is limited to 50% of the loan amount. The monitoring requirements from the SBA under this program are less onerous than for larger SBA guaranteed loans, so more banks are willing to work with you under this program.

As with traditional bank financing facilities, you need to have a good understanding of how you expect to repay the loan before you sign up for an SBA guaranteed loan. The reason is that the bank will have no choice but to pursue its collateral in the event of a default and non-payment, including the possibility of foreclosing on the mortgage against your personal home.

Once your borrowing needs exceed $350,000, however, the monitoring requirements change under the SBA loan guarantee program and generally require a higher level of monitoring of your business operations by the bank.  Banks that do not have sufficient enough monitoring capabilities to meet these SBA loan monitoring requirements may be reluctant to use an SBA guarantee to make you a larger loan. This is because their inability to comply with the more stringent SBA monitoring requirements may result in their not being able to collect under the SBA guarantee.

Issuing a check for a loan

There are other programs available in addition to the SBA guarantee program, including loan programs provided by Community Development Finance Corporations, such as SEED Corporation, Nonprofit Community Lenders and Micro lenders, such as Accion, Mass. Growth Capital and Common Capital.

These programs include the SBA 504 Loan Program, where you can obtain up to 90% financing in participation with a bank or credit union for an owner occupied commercial real estate project and/ or machinery and equipment financing. Loans of up to $250,000 are also available for start-up or existing businesses with a low fixed rate of interest, 10 year maturities and longer repayment terms and micro loan programs with loans from $1,000 up to $50,000.

Once your financing requirements exceed $350,000, banks will utilize the SBA 7A or 504 Loan Programs to meet your working capital or investment needs, provided you can demonstrate sufficient historical cash flow or an acceptable cash flow forecast using reasonable assumptions to support the loan request.

If your company is more mature and profitable, you may qualify for non-SBA guaranteed financing. These other financing options include obtaining working capital financing based on your accounts receivable and inventory or term loans supported by a collateral security interest in machinery and equipment and/ or real estate.

Under the working capital financing facility, an asset based lender will require that you provide a weekly or monthly borrowing base certificate that will allow them to monitor the amount of accounts receivable and inventory collateral. They will usually lend up to 80% of outstanding accounts receivable that are within 90 days of invoice date and 50% of raw material and finished goods inventory. Interest rates are usually pegged against the prime rate and will vary as the prime rate increases or decreases. These loans usually have terms of up to 12 months, but will likely be renewed by the lender as long as there have not been any issues during the prior 12 month term. Some banks will also offer lower interest rates or reduction in fees for veteran owned businesses.

Under the term loan facility, the loans are normally based on the cost basis of new equipment or real estate or an appraisal of the used machinery and equipment or real estate. Loans on new equipment and real estate can be financed at up to 90% of purchase price, while loans on used equipment or real estate are usually financed at 50% of the appraised value of the equipment and 75% or more of the real estate value.  The loans will be for terms of 5-7 years for equipment and 10-15 years or more for real estate loans and the interest rate will be at a fixed rate for these term loan facilities.

These are just a few examples of the different types of financing available to you as a small business owner. The important thing for you to know is that there are many options when it comes to seeking financing to grow your business. You should always anticipate your future financing needs, talk with more than one bank and ask about their different financing programs before the need arises and prior to your signing up for additional financing with a lender. You should also seek out professionals who deal with lenders all the time and can help you identify which lender and finance product is the right one for your particular business. One of the more important services that VETRN provides to its participants is access to professionals and other financing resources that are available to make bank introductions to you and to discuss with you which alternative financing options and lenders in your geographic area are best suited to your particular financing needs.