If money makes the world go round then, well, the world is rotating a bit more creakily than it used to.
Financing for the Nevada business community, or any business community in the U.S., still isn’t what it was before the economy took a turn for the worse. But it is getting better — thanks to a variety of factors such as lenders that want and need to lend; a shakeout that eliminated some of the weaker players and left the stubborn survivors a bit wiser; a greater appreciation of and access to business coaching; increased tourist activity; smarter borrowing; and the realization that many times a loan and the debt that goes with it are simply not what a business needs.
The fact is, there is money out there for businesses – but the situation, the timing and yes, the businesses themselves all need to be just right.
“As you go through it the deal really comes down to this,” says Edward Cadena, Director of the U.S. Small Business Administration’s (SBA’s) Nevada district office. “The biggest problem we’re having with a lot of our businesses is short sales, bankruptcies and stuff on their credit. But if you’re able to answer the three questions — How much money do you need? What are you using it for? How are you going to pay it back? — and if there is verifiable cash flow, there is plenty of money for any business.”
The key phrase, of course, is verifiable cash flow — receipts, tax returns, accounts receivables, bank statements, contracts or anything else that will show there is money in the bank, or that a business is actually generating the amount of income it claims to. “A lot of folks will come in and give you a lot of estimates or projections, and that’s not verifiable,” says Cadena. “It’s still tough to get a loan, and all the bankers I talk to are wanting to make loans. But they’re looking for good businesses and people with good credit.”
The landscape has changed, of course, and dramatically. Five years ago “you could have walked into pretty much any bank and used your home equity as your business loan,” Cadena recalls. “Let’s say your house was worth $250,000 and you owed $125,000: you could pretty much borrow up to 95% of that value.” Today, however, that doesn’t happen “because frankly the values of the homes have gone down significantly. So in today’s environment the bankers are looking for verifiable cash flow.”
Bankers are especially seeking good businesses, he continues, “because banks are in the business of making loans. A lot of them are friendly neighborhood bankers who have a lot of cash, but they’re also being conservative in how they lend as opposed to five years ago, when they probably were a little more liberal. And so the difference is that bankers are being a little more cautious, for obvious reasons.”
“The first thing you have to do is realize that banks are cash flow lenders, not collateral lenders,” says Larry Charlton, Nevada Regional Executive of City National Bank. “Based upon underwriting standards, no matter what bank you are you’ve got to look at somebody’s cash flow and the revenue trends of that business, no matter what it is, and see if it’s trending upward, downward or even.”
No matter how deep their pockets, Charlton explains, banks can only do so much. “Bluntly, if you’ve got businesses with trending-downward revenue streams they are very, very difficult to finance. When the regulators come in and look at them they would downgrade that loan right off the bat. The politicians say, ‘We’ve got to get money out there,’ and banks want to loan. Depending on the bank, it could be anywhere from 60 to 90 percent of income from lending. That’s what we do as a bank: buy money low and sell money high. It’s that simple. But you’ve got the regulators who are banging you, and so banks have to be very, very careful.”
Charlton says that City National has excess deposits in the billions of dollars, and that he “needs to get it out there working. The balances on our balance sheet are liabilities because we owe them back to the depositor. But we loan the public’s money and we cannot turn those liabilities into a toxic earning assets; we just can’t do it, because the regulators look over our shoulders. So it’s really hard on banks right now to get enough loans out.”
During the robust economic times the story was quite different, he recalls. Charlton estimates that for every 100 commercial loan applications he would receive, City National would respond positively to perhaps 55. Some of them “just don’t work from a project standpoint. If a person wanted to amortize the loan for 20 or 30 years, well, we couldn’t do that.”
Nowadays, Charlton continues, City National might decide to lend in only six or eight of those hundred instances. “It’s pretty difficult to find viable businesses out there, and it’s real tough on banks.” While he stops short of calling the situation a Catch 22, he does note that “banks want to lend, have got to lend, politicians want us to lend, the business owners want us to lend – but the regulators are sitting there saying, ‘Don’t you dare turn out any more toxic assets, which cause banks to fail.’”
“We’re trying desperately to make all the loans we possibly can,” says Stan Wilmoth, president of Heritage Bank in Reno. “The primary and secondary sources of repayment for most borrowers have been either compressed or challenged over the last two or three years, which makes it difficult to qualify them. We have not changed our underwriting one bit. It’s the borrowers who have, because of the economic tsunami we’re in today, become less qualified for borrowing.”
Heritage has been trying to use the SBA 7(a) loan program to shore up some of the weakness in the system and get money out into the community. For instance, one of the business programs available in 2010 was the Arc loan, which Wilmoth describes as a “catch-up loan, just $35,000. The borrower needed to use that money to catch up on his bills.” Out of the 23 such loans that were made across the state of Nevada, Heritage Bank made 18 of them.
“We’re not making any money, frankly, on a $35,000 loan,” Wilmoth confirms, “but there are 18 families whose businesses are still in existence because we made those 18 loans. It’s not about going and getting folks’ stuff and foreclosing on things. It’s about trying to pull families through this economic tsunami we’re in today.”
The SBA’s 7(a) Loan Program includes financial help for businesses with special requirements. For example, those that handle exports to foreign countries, businesses that operate in rural areas and for other very specific purposes. Among the special purpose 7(a) loans are Express & Pilot Programs, which offer streamlined and expedited loan procedures for particular groups of borrowers, and Rural Business Loans, designed to accommodate the unique loan processing needs of small community/rural-based lenders by simplifying and streamlining the loan application process.
The Power of Relationships
The very first place business owners should turn for financing is to the bank with which they already have a relationship, Charlton and most others agree. “What they should do is sit down with a relationship manager or a lender if they can,” and the ability to do that will depend largely on the size of the bank. Community banks are known for being very good at talking with people.
“When you get into some of the larger banks, depending upon the size of the credit you’re looking for, you might fall into a little bit of a less personal type of lending,” Charlton observes. “Depending upon the savvy of the entrepreneur or owner, they really need to talk to the banker and to someone who has the lending authority. Sometimes, depending upon the bank, you’ve got to search for that.”
Charlton adds that, “a lot of good businesses that have capital are not deploying it themselves for expansion because they don’t want to take on more debt. We’ve actually had clients of ours – like a veterinarian I remember in the northern part of the state two years ago – who have asked us for a loan and we advised them, ‘Don’t expand, it’s the wrong time.’ You would think saying no was bad, but that’s why you need to know your financial advisor. [The veterinarian] came back and told us, ‘Thank you for not giving me that loan.’ But that’s what you do with relationships.”
Indeed, he notes, relationships and not numbers on a spreadsheet are often the key element in financial services.
For early-stage and small startup companies, turning to friends and family and relying on credit cards has “historically across the nation been the most popular way to initiate it,” says Bob Goff, founder and chairman of funding provider Sierra Angels, which has been providing funding, coaching and connectivity to entrepreneurs for the last 14 years and a founding member of the Angel Capital Association. “When they’ve got a qualified business plan that would be attractive to a professional or semi-professional, early-stage investor such as Angel groups, they can submit [it] along with applications for funding to groups like Sierra Angels, the Reno Angels and the Vegas Valley Angels.”
SBA’s Cadena has a line he uses that normally gets him a chuckle. “I tell folks that if you can’t get a bank loan at the end of the day you reach out to FF&E — family, friends and enemies.” Beyond that, Cadena is currently in the process of trying to develop a network of what he calls micro lenders. One with which he is now working is called Prestamos, or Loans. “Hopefully we’ll get them funded in the next month.” The group will offer loans, most likely, at $10,000 and below.
In Nevada, Cadena points out, such smaller lenders are a sorely lacking commodity. He praises Texas, New Mexico and California for having what he rates as “very robust alternative-lending groups. In Nevada we really don’t; you basically go to either credit unions or banks, and there are underwriting criteria.” That said, an unfortunate truth he has discovered is that “sometimes the best thing we can do is tell people that they don’t qualify for a loan because that’s what got us in this mess in the first place: making loans just for the sake of making loans.”
Looking to the Future
“I think we’re seeing some improvement,” Heritage Bank’s Wilmoth says. “Tourism in Vegas is starting to pick up quite a bit. You’re starting to see small businesses coming back. In Northern Nevada we’re starting to see businesses wanting to expand.”
Wilmoth says his optimism remains “very high” on Northern Nevada and the potential for Nevada as a whole. “Now that we’ve got our legislative session behind us, taxes seem like they’re set now and there is no uncertainty, businesses can start to expand — and other businesses coming from California can start to migrate our way.”
Cadena says that if he knew what the future held he would “be putting my money on it. I’m hoping that we’re getting more lenders to loosen up a little bit. They tell me they’re looking for viable small businesses.”
The reason he moved to Nevada in the first place, Cadena recounts, is that “I figured there was only one way to go, which was up, and I still believe that. I would say we’ve got no place to go but up, but it’s going to be slow.” The one thing he says he loves about the people of Nevada is that they are very resilient, “and very creative. They’re definitely going to persevere through this economy. So we’ve got no place to go, again, but up, and I’m hoping that we go up soon.”
Charlton sees the state of Nevada’s economic comeback as taking another three to five years. The state has lost about 195,000 jobs here, he recounts, 70 percent of them in construction and entertainment. “Well, the Strip is starting to hire again; Station Casinos just hired a thousand people, so that’s going to be our engine. I always felt that the Strip is the engine, and of course the visitor volume is the fuel for it. And that is slowly coming back.”
Charlton, who checks the Convention and Visitors Authority’s monthly reports, said he has seen positive things happening since the first of the year. While spending by visitors isn’t quite back to previous levels, it is improving. “That obviously helps everybody who supplies the Strip, which is about 60 to 70 percent of our economy. It’s going to take the Strip getting back full blown in order to get the suppliers to where they can expand and hire again.”
Once more Nevadans get back to work “feeding, helping and supplying our engine on the Strip,” Charlton concludes, the stimulus “expands outwardly from there to the consumer consuming again here in Southern Nevada, so that the small strip shopping centers, the retailers, will have somebody spending money again. It’s going to take a number of years for that to happen.”