BANKING & FINANCE: Alternatives to traditional bank financing
Although your new business concept and business plan show terrific promise, even enough to convince your banker of the great potential, you may find it impossible to obtain traditional bank financing.
Why? One or more of the 5 Cs of Credit (character, capacity, capital, collateral, condition) just isn’t strong enough. It may be a lack of sufficient collateral, insufficient owner investment, or it may be inadequate character as reflected on the owner’s personal credit bureau report.
However, most often the rejection is due to lack of certainty relative to earnings and cash flow being available to repay the loan. After all, a new business has no track record of earnings or cash flow. There are alternatives however, which a well-trained banker can utilize to make your business ownership dream come true.
The most common alternative uses the U.S. Small Business Administration to guarantee a portion of the bank loan, typically up to 80% depending on the loan type and maturity. This guarantee directly impacts several of the 5Cs including collateral, capacity (longer maturities and thus smaller payments) and capital and thus gives the bank that needed level of comfort.
The most common SBA programs are the 7(A) and the 504 which is administered through the Columbus Countywide Development Corporation (CCDC). The 7(A) loan program guarantees a loan made by a bank for term loans to finance equipment, real estate, or for permanent working capital which would not have been made without the SBA backing. The guarantee assures the bank will be repaid to 80% on loans up to $100,000 and the guarantee drops to a maximum of 75% on loans over $100,000. There is a maximum guarantee of $750,000. The SBA has streamlined its approach significantly over the years with the introduction of its Preferred Lender Program and SBA Express and now the turnaround can be just slightly longer than traditional bank financing.
The SBA 504 program is an advantageous method of financing real estate. Under this program, the borrower can obtain long-term fixed rate financing with a maximum equity investment of just 10% compared to 20% for traditional real estate financing. The 10% owner investment is supplemented by a 40% loan direct from the CCDC while a bank supplies the remaining 50%. The CCDC loan may carry a fixed rate for up to 20 years, which is unavailable with traditional financing.
There are numerous other loan programs within the SBA including:
LowDoc This is a great program for start-up businesses using a simplified one-page SBA application for loans up to $150,000 which are processed within 2-3 days. The guarantee is up to 80%.
SBA Express An SBA guarantee up to 50% is available on loans up to $150,000 through banks designated as Preferred Lenders by the SBA. The maturities are up to 7 years for working capital and up to 25 years for real estate.
CAPLines Used to finance seasonal working capital needs, direct costs of specific construction projects and service/supply contracts. This program has a 75% guarantee.
There are a number of other programs designed to provide financing to new business owners, including those administered through the city, state and federal government.
Generally, a good start is to contact a commercial bank, one which is committed to serving the needs of small business, and establish a relationship with an experienced, savvy account officer who will take the time to understand your business needs. You would be well advised to have your comprehensive business plan in hand.
Article courtesy of Huntington Bank. Learn more about the bank’s offerings at www.huntington.com. BN