Owners of small and medium-sized companies in Nevada increasingly seek bank loans to finance their growth into new and expanding markets as the state’s remarkable economic rebound continues.
The good news: As the recession slips farther into the past, many companies are beginning to show three, four or five years of the solid financial performance that bankers want to see from successful loan applicants.
However, not every company is ready for bank financing. Seven of the state’s top bank lenders along with the director of the Small Business Administration (SBA) in Nevada recently shared their thoughts on the lending business (it’s improving), interest rates (still attractively low) and the steps that borrowers can take to make their companies attractive to a loan officer.
Is it easier for businesses in Nevada to gain access to bank loans than it was a year ago?
Thomas N. Traficanti, Executive Vice President and Chief Credit Officer, Heritage Bank of Nevada: Absolutely. The improved economy and businesses’ improved business balance sheets makes it easier than it was a year ago.
Robert Holguin, District Director, U.S. Small Business Administration, Nevada District: We’re getting a lot of inquiries. Our loan volume has been going up by 3-5 percent a year for the past three years. The size of the loans is going up, too. We’ve seen more activity in our 7a loan program (an SBA-guaranteed loan for working capital, purchase of a business or establishment of a business). We’ve seen somewhat less activity in our 504 program (loan guarantees for purchases of real estate and equipment), probably because the commercial real estate market has been a little slower to recover.
Cassaundra Johnson, Senior Vice President and Director of Sales, Nevada State Bank: The market is in a recovery mode after the recent economic downturn. The financial climate has changed with an upward trend over the past year. The financial statements of clients have improved, in particular, cash flow. Borrowers are becoming more comfortable with expansion, buying new equipment and purchasing real estate. The bank anticipates a stable and positive outlook for the remainder of 2015.
Mike Murdock, Senior Vice President and Commercial Lending Manager, First Independent Bank: We’ve been lending through the whole ‘Great Recession.’ We’re not doing anything different than what we were doing three, five, even seven years ago. But the large banks really retracted during the recession. Now they’re back. From a global perspective, there are many more banks lending.
Erich Bollinger, Executive Vice President and Chief Banking Officer, Plaza Bank: In Nevada, there have been banks that have pulled out of the market. Now some of them are returning. My criteria for lending, however, have been virtually the same for the past three years. My appetite has not changed.
Chad Osorno, Nevada Business and Government Banking Manager, Wells Fargo & Co.: It is probably easier today for some of the new-stage companies because of the recovering economic cycle. But if you have a successful business, capital always has been available. It’s almost always available for stable and growing companies. Wells Fargo recently set a goal of lending $100 billion to small business owners nationwide over the next five years. Our goal is to get that capital out. It’s a tremendous commitment on our part.
Bruce Ford, Senior Vice President and Business Banking Regional Manager, City National Bank: Loans always have been available. It was a misconception that banks didn’t have money available. Banks had money to lend, but many people didn’t meet the banks’ lending criteria. Now the economy is improving, so more people meet the criteria.
What do rates look like today?
Osorno: Rates are all over the board, but the one common element is that they are at historic lows. Short-term variable rates remain attractive, and long-term rates are still attractive. The rates for an individual borrower all depend on the risk profile. It really depends on the company and the type of collateral they are putting on the books.
Murdock: It’s hard to quote any particular rate. Every deal is unique. But many are in the high 4s to the low 6s today.
Traficanti: For us, there’s a whole pricing matrix, depending on the term, the credit and the risk. For an A-credit, extremely well-secured, it may be prime (3.25 percent). For a smaller credit, maybe 3 percentage points over prime.
Bollinger: We see a pretty wide spectrum of rates out there. Some of it depends on how hungry a bank is to get credit on its books.
Johnson: The rate environment remains very attractive, especially for good companies. If you’re a trophy company, every bank wants to win your business.
Ford: Rates are very low. We’re forecasting an uptick in short-term rates, so this is a good time to get a loan.
What barriers do business borrowers face these days?
Murdock: It’s simple. The biggest barriers are inadequate cash flow or inadequate collateral.
Howard Stewart, senior vice president, Bank of Nevada: Asset values are still depressed, and we struggle with the value of the collateral. Real estate values have come back, but they are just starting to come back.
Bollinger: Sustainable cash flow can be a barrier. What do we mean by “sustainable”? In the Nevada market, after what we have gone through, we need to be able to show that a business has gone through a challenge and is on the right track for a period of time. Plaza Bank is a direct SBA lender, so I’m sometimes able to use credit enhancements via the SBA, but sustainable cash flow is always important.
Ford: Does the borrower have the ability to repay the loan and does the borrower have a positive credit history? If they could afford to repay a loan in the past and didn’t, maybe through a strategic foreclosure, that’s a strong negative.
Traficanti: Credit history is probably the biggest barrier. There’s a lot of variation among banks about the importance they place on short sales or bankruptcies in a borrower’s credit history. That takes time to rebuild.
Holguin: The biggest barrier we see is the readiness of borrowers. People haven’t done their homework. They don’t have a business plan. We’ve seen that the likelihood of success goes up if they work with one of our partners such as SCORE or the Small Business Development Center.
What do you want to see from a loan applicant?
Ford: We want to see three years of tax returns, both for the borrower and the business. We also want to see a personal financial statement. If a borrower doesn’t have one, we can help. It’s not difficult at all.
Traficanti: Remember that the more you share with us, the more clarity we can bring to any issues that might arise.
Bollinger: We want to see good financial reporting. In a small business, QuickBooks and a tax return may be sufficient. As the company grows, company-prepared or CPA-prepared financial statements generally will be needed. Bankers are financial people. We want to see that business owners understand their own business financially. They may be great operators, but do they understand the finances of the business?
Osorno: We want to see sensitivity in forecasting, sensitivity in budgeting. Test your forecast against all sorts of scenarios that are coming your way. What if sales fall short? What if the economy weakens? Can your cushion help? We don’t want to see a picture that is too rosy.
Stewart: We want to see that the borrower is matching the use of the funds with the type of the loan they are requesting. If they are buying some equipment, it doesn’t make sense to use a short-term line of credit. Borrowers need to be aware of the different types of loan products and make the loan match their purpose.
Murdock: We want to see a proven history of sustained profits and cash flow, a history within its industry, management experience in its industry and adequate capitalization, although this varies from business to business.
What’s the single most important attribute you seek from a borrower?
Johnson: The first thing is exceptional character. The personal character of the individual applying for the loan is very important. At the end of the day, it’s character that matters. It is desired for a lending candidate to have a history of three years business profitability, consistent cash flow, modest leverage and good liquidity. If the business is seasonal, does it follow the same sales and profitability pattern as the rest of your industry? We look for the company’s ability to pay back borrowed funds. We work with the borrower to determine if there is enough cash flow or other financial wherewithal to repay debt.
Traficanti: The most important attribute always is cash flow. It’s future cash flow that repays the loan.
Bollinger: For me, it is simple: Who am I doing business with? What’s their character? How responsible are they? But most important of all is good communication. We hope this is going to be a long relationship. There will be ups and downs along the way. Good communication will be important.
Osorno: For us, the single most important attribute is a successful history in the business. That tends to repeat itself. And if you have had a successful history in one industry, it would be a great sign if you plan to start a business in another industry.
Murdock: We want to see consistency in the earnings, the longer the better. Three years are ideal. If someone has five years of history, and there was a one-year bump, that’s okay. But we want to see consistency.
What role do relationships play in a company’s ability to win a loan?
Stewart: The approval process is based on the qualification criteria. But we take the relationship into account as part of that. We are a relationship bank. We are not looking for a one-off transaction.
Osorno: It’s paramount to establish a relationship with an established institution. Maintain that relationship through ups and downs. Tell your story and make sure your bank is your partner and not just a low-cost provider.
Johnson: Knowing a company over a period of years is very important. It’s easy to lend to a company when times are going well. It’s the relationship that will carry you through the tough times. You’re in partnership together.
Ford: It certainly helps. All things begin equal, if you are a client of the bank, it bodes well for you. Knowing the banker is important. They can provide you with advice.
Bollinger: Especially for a community bank, relationships are critical. We get the vast majority of our business through referrals. It’s almost all about relationships in a community bank.
Traficanti: Relationships play a bigger role when you are in the gray area of qualifying. If we have gotten to know you through a checking deposit or a smaller line of credit, it will help us say ‘yes.’
Murdock: Borrowers also need to remember that a loan has to stand on its own. We’re not going to give them a loan just because they have a deposit with us. Banks don’t approve loans that way. We are looking for cash flow, collateral, earnings growth.
What are the red flags that might arise when you’re considering a loan application?
Murdock: Net losses for the company or a poor personal credit history are serious red flags. Another red flag for us is that the applicant is a startup. Most banks don’t lend to startups.
Traficanti: We look closely at the sustainability of the applicant’s income, making sure it’s not just a short-term gain. In business lending, there are multiple factors to consider, and they can outweigh each other. You may have a number of issues, both positive and negative, and they will balance each other out.
Bollinger: Vendor issues can be a red flag. A fast-growing company may be doing well. But when we look at their accounts receivable, we might see that they are paying their bills over an extended period of time. That’s a stretch on their capital and shows they have a challenge in meeting their obligations.
Johnson: Bankruptcy is a big red flag. Another one is the borrower has no experience in the business field. Other red flags are low liquidity, high leverage, or slow-to-delinquent financial reporting. If a customer is hesitant to give us information or omits full disclosure of information, this is cause to worry about the financial health of the company.
How important is a borrower’s cash flow?
Murdock: We are cash-flow lenders and collateral lenders. We base nearly 100 percent of our decisions on cash flow. If we need to look a little further, we sometimes look at the collateral. But we make most of our decisions on cash flow.
Bollinger: We always remember, too, that cash-flow needs change over time. As the company grows, it needs more cash flow just to sustain its growth.
Osorno: The ability to service debt and the strength of the balance sheet are very important. The companies that have survived have shown that they are resilient. Now they are able to use that cash flow to finance growth.
Ford: The two most important things to me are cash flow and credit history. If cash flow is positive, you are well on your way to getting a loan.
