With real estate values on the rise in Nevada, what better way to capitalize than using home equity as collateral for small business loans? City National Bank, formerly Business Bank of Nevada, is doing just that. The bank has enhanced its accelerated loan product, allowing business owners to use the equity in their primary residence as collateral for business loans up to $250,000.
The accelerated loan product was developed four years ago for small businesses that needed to access smaller amounts of capital in shorter periods of time. It also featured a simplified application process, limited financial data and rapid loan decisions and funding. “Since introducing this product several years ago, we have seen a dramatic increase in the average size of small business loan requests both at our bank and throughout the state,” said Mark Phillips, senior vice president of City National Bank. The maximum loan amount for the product was originally $150,000 but the bank was able to increase it to $250,000, due to the increased demand of the product.
Different products are available within the accelerated loan family, including a revolving line of credit and a term loan. With a revolving line of credit loan under $125,000, the bank collects one tax return for both the individual and the business. If the loan exceeds $250,000, the bank collects the past two years’ tax returns for both the individual and the business. Term loans allow payments to be made over a three-, four- and five-year timeframe. “Small business owners typically face a number of challenges in the first few years of operation because they can’t generate enough cash flow to access the necessary capital to grow and expand their businesses,” said Phillips. “The appreciation of home values in our market over the last several years provided us with a great way to help small business owners secure the capital they need by using the home equity to fund their business needs.”
City National has some guidelines for business owners who are interested in using their home equity as collateral. The bank requires that businesses have been established for at least two years since most business failures occur within the first two years of operation. From a business standpoint, it gives them more seasoning and an improved outlook. “This allows us to take a couple of shortcuts on the information,” said Phillips. “We can go with a one-year or two-year financial statement and layer in a credit score on top of it.” The bank does not allow restaurants or real estate developers to run through this product. Restaurants have some specific nuances that require more in-depth attention. Real estate developers do not have steady cash flows. “Real estate is an up-and-down industry,” said Phillips. “Cash flows are low one year, and the next, they skyrocket.”
The accelerated loan product can provide cash flow relief for business owners during certain transactions. “Sometimes businesses need an extra boost,” said Phillips. “Leveraging personal real estate equity affords this support,” Phillips continued.
“We have a streamlined process to get evaluation on the property and from a title perspective.” With the home as collateral, the bank gives the business price breaks. The underwriting process is typically the same from a cash-flow perspective. Residential appraisals and title costs range from $300 to $500, but City National can eliminate a significant portion of these costs because the house is collateral. With real estate values going up, small businesses owners and home owners can tap into that collateral. “If you have a lot of equity in your house, you have a higher advantage to leverage,” said Phillips.