It’s been said that money makes the world go ‘round. Well, that’s certainly true when it comes to business. Whether small business or big business, a solid financial statement is necessary for any company to be successful. Unfortunately, that’s often easier said than done. Start-up financing, loans for existing businesses or project loans can be hard to get and, with the recent recession, caution rules the day. Regardless, oftentimes if a business is to grow or a project is to become a reality, there’s no other choice but to find financing.
As part of Nevada Business Magazine’s Business First Breakfast series, a panel of experts recently gathered in Las Vegas to address financing issues and answer audience questions on the topic. The panel discussion, which was held mid-March, was moderated by Connie Brennan, publisher and CEO of Nevada Business Magazine. The breakfast event was hosted by the magazine and sponsored by Snell & Wilmer and Wells Fargo Bank. Panelists included Debra Alexandre, president of Nevada State Development Corporation (NSDC), Robert Anderson, a partner with Snell and Wilmer and Guy Gugino, a business development officer for the Southwest region of Wells Fargo, SBA.
Preparation is Key
Financing is a tricky topic as there are so many variables involved depending on the type of loan needed and what the loan is being used for. The expert panelists were able to provide information for those looking to finance a business or project while addressing some of the challenges they may face. One of the most important issues for those looking to finance is preparedness.
“The biggest problem people face that I see in obtaining financing is not being prepared,” explained Gugino. “There’s certainly a supply of loans out there right now, the lending market is very competitive. People need to be prepared for what they’re going into and get the proper counseling and make sure everything’s ready to go when they are ready to do the process.”
“Prepared means a number of things,” added Anderson. “If you’re going to do a capital raise, for instance, or you’re going to bring in a minority investor, you need to do the kinds of things that those investors want. You need to have a management team that’s solid. If you’re going to raise capital, you need to have reviewed financial statements and a plan on how you’re going to use it and what you need that money for. It’s really all about planning. You’ve got to be prepared for it. You’ve got to know what you want, how much you want, what you’re going to use it for and how you’re going to deploy the capital or the loan.”
Alexandre echoes that saying, “Being prepared is probably the most important thing that any lender looks at. That’s the first impression we get of your business, how prepared you are when you come in to talk to us about financing. Some of the things you can do to help yourself get ready is to talk to your accountant. Make sure your financial package is in order, you have a good understanding of the condition of your business and know what it is that you want before you come in.” She added that the first hurdle is much easier to get over if a business is prepared.
A New World
One issue that has certainly had an effect on financing in recent years is the significantly changed lending environment. Gone are the days of “handshake loans” and bankers, by necessity, are more cautious when it comes to lending.
“I started in banking right after the savings and loan crisis,” said Gugino. “So, I was raised by guys who were angry bankers. Character is a big issue with credit. In the old days, you used to be able to shake a man’s hand and understand that meant a lot. It doesn’t anymore. What bankers want is to be paid back. It’s something we came up with in Wells Fargo about 150 years ago and everyone forgot about that in the early part of this decade. The only way to determine whether or not we’re going to get paid back is, first, the analytics of the financials, but also understanding the character of the individual. Is this someone who takes on debt or obligations and decides they aren’t important and they’re not going to pay them back?”
While paying the banker back may be a novel idea to some, for many businesses the recession was a blow to credit when it comes to new financing, but not an unsurmountable one. Anderson advises that businesses be upfront when seeking financing. He said of bankruptcy, “You need to be able to explain the circumstances that caused you to go into that. Be upfront with it and don’t hide it; embrace it. There’s a lot of companies that went through bankruptcy in the last couple of years. The tidal wave of the economic recession was something they just couldn’t avoid. You just need to be able to tell your story.”
“We do look at the reason someone filed for bankruptcy, how long ago it was and have they re-established credit since that bankruptcy,” echoed Alexandre. “We want to know what happened in the bankruptcy. We don’t like bankruptcies where you ran up a ton of credit card debt and just filed bankruptcy and had it all written off. [We want to know] if you have a specific reason for bankruptcy. We’re seeing a lot of them from the course of the recession. We’re also seeing things like short sales of real estate and foreclosures on real estate, also from the recession. We look at those on a case-by-case basis. What happened? Could you have paid and chose not to? That’s not so great from our point of view. If you really did suffer significant losses and there was no other option than to file bankruptcy and start off fresh, we won’t hold that against you. It doesn’t preclude you. We want to know that it wasn’t a character issue and that it was actually a financial issue.”
While some of the requirements may have changed and businesses are approaching lenders with more preparation and a better understanding of their needs, it’s a misnomer that there isn’t any money to lend. In fact, the opposite is true.
“A lot of it is perceptual,” explained Gugino. “Our balance sheets for small and large businesses and individual persons are better than they’ve ever been. We’ve developed more wealth. We have less debt than we had. Actually, most clients who come to you look better than they did five, eight or even 12 years ago, during the boom. People were so leveraged up and had so little cash. Clients are actually looking better.”
“Things slowed down while banks were taking a good, hard look at themselves and their practices, which was forced by the effects of the recession,” said Alexandre. “After a couple of years of doing that, the banks were back and ready to lend. I don’t think consumer confidence was quite there yet, we didn’t have the demand. But, now we’re seeing a lot more demand. We very rarely have a project anymore that comes in our door that there aren’t at least a couple banks competing for. That’s great for the borrower because you’ve got a lot of options out there, a lot of room to negotiate as far as rate and terms.”
In fact, the market right now is prime for those looking to borrow. Both Alexandre and Gugino affirmed that those looking for financing couldn’t ask for better conditions.
“Rates are still very low,” said Alexandre. “While values of real estate are starting to increase again, they’re still relatively low right now. If you’re thinking about taking that next step and buying or building a building, or buying some other long-term fixed assets, right now is probably the best time I’ve seen in decades.”
And, according to Anderson, many businesses are already taking advantage of the market. He said, “We see many more businesses coming in to Nevada willing to invest in and buy businesses here. There was a point in time in 2003 to 2007 where everybody wanted to be in Nevada. Then, there was an eight- or nine-year cycle when nobody wanted to be in Nevada. Now we’re seeing people wanting to be back. The activity is very high in terms of either strategic investors that are willing to make an investment in Nevada or strategic buyers and financial investors. It’s very hot right now and I think it’s going to continue for the next two or three years for sure.”
Even so, in some cases there is a disconnect with some small businesses not seeing that money to lend and being frustrated by hearing otherwise. Gugino agrees that there may be a disconnect but it’s one that’s easily addressed.
“I believe the disconnect is the difference between want and need,” he said. “Sometimes you have clients come to you and say, ‘I want $1 million,’ and the most revenue they’ve ever done is $200,000. There’s a gap between the realistic expectation of what’s financeable and what the next steps for them are. What clients need to do is spend the time with the bankers and build a relationship so they can understand their business and help grow it. What’s happened in the industry, and we’ve done it to ourselves, is the banking product has become commoditized so people are out there shopping for the lowest rate. They don’t realize that there are a lot things that go into the banking relationship aside from just price. There’s delivery methodology, relationship, people understanding your business within the relationship and taking you to the right places. I believe the relationship works in both directions.”
Money to Lend
So, the money is out there and lenders are ready to distribute it to companies in need, the next logical question is, what types of loans are available? The answer is, several. Between traditional financing, SBA loans and non-traditional lending, there are a variety of loan types to choose from. In this, research is key and a solid contingent of advisors to determine the best type of loan for a business makes a difference.
Traditional financing leads straight to the banks, as does SBA lending in some cases. Non-traditional financing can include anything from crowdfunding, peer to peer financing or micro loans.
“There are several alternative-type lenders,” said Alexandre. “There are micro lenders who handle the really small loans as low as $5,000 and up to around $50,000.”
She added that her organization is in the process of forming a revolving loan fund through the economic development administration to handle loans that fall between micro loans and traditional lending in the $50,000 to $200,000 range.
Crowdfunding is relatively new and creates it’s own share of stakeholders. Essentially, in crowdfunding, a business asks a large group of individuals to chip in small amounts to fund a project or new business. Success rates vary and depend greatly on attracting enough contributors to meet the funding requirements. In addition, as it’s relatively new, there is some uncertainty as to how these funding sources will be regulated in the future. Peer to peer financing falls under that “new” umbrella as well and businesses should seek expert counsel before pursuing either alternative lending options.
For the more traditional, Small Business Administration (SBA) lending, is a common tool for many small businesses seeking financing. Most banks provide SBA lending of some kind and NSDC partners with the banks to fill in any gaps.
“SBA lending has two flagship programs,” explained Alexandre. “The 7A loan, which is a bank loan guaranteed by the SBA which we can use for any business purpose and the SBA 504 loan, which is a fixed asset financing plan.” The primary difference between the two is the 504 loan deals mostly with real estate. In such a loan, the NSDC would partner with the bank. In the case of real estate, the bank makes a 50 percent first deed of trust loan to the borrower at normal market rates or sometimes lower. The NSDC then provides up to 40 percent of the project costs in a second deed of trust position. Alexander further explained that the 504 loan is particularly nice for businesses as it isn’t need based, it’s based on business growth.
“We can offer a below market down payment, typically 10 percent, as opposed to a standard conventional commercial real estate loan at somewhere around 30 percent down,” she said. “It allows you to keep more working capital in your business.”
The other type of SBA loan, the 7A is more flexible and can cover a variety of other business financing needs.
“The product I deal with is the 7A loan, the jack of all trades,” added Gugino. “I can do everything with the 7A loan from a start-up business all the way to doing ground up construction on commercial real estate and everything in between. Things I do are start-up loans, working capital loans, business expansion loans and business acquisition loans, which a lot of people don’t know the SBA does. Those are things that fall under the 7A umbrella.”
There are restrictions in lending, of course, particularly when it comes to 504 loans. Beyond those mentioned, such as credit and character, the type of business or real estate also plays a part. For SBA 504 loans, only owner-occupied commercial real estate is eligible. So, for a doctor or lawyer that wants to buy his or her building, that building must be at least 51 percent occupied by the borrower. In addition, investor properties need not apply and, of course the business must be legal and borrowers must be long-term, permanent U.S. residents.
“If they want or need money, they need to be able to explain very specifically how they’re going to deploy that money and for what reasons,” said Anderson. “It’s all about planning. Whether planning to sell the business or planning to raise capital, it’s all about planning and being prepared.”
“Especially in the case of a start-up, we ask for business plans,” added Alexandre. “I think it’s a good idea to always have a business plan. All businesses, over time, can continuously do strategic planning so they know where they are.”
As far as the process goes, business-owners should expect to share their financials with the lender. For example Gugino said, “Our package looks something like three years of personal tax returns, three years of business tax returns and business tax returns for all of the affiliates. We look at a global picture for the business. We want current financial statements within 60 days of the transaction and a personal financial statement. Then we want to understand the business and the transaction itself. It’s basically three years and current stuff.”
So where to start? For a business seeking financing, the Business First panelists recommend you start with planning and preparation and then decide on the financial partners.
“You have to find the investors,” said Anderson. “You have to find the lenders. If you’re looking for traditional lenders, then commercial lenders is where you would go. If you’re looking for a non-traditional lender, I’d reach out to people in your industry. Find out where they’re getting their funds and investments, where they’re finding capital. That would be a place to start. You’ve got to find the sources of funding. Oftentimes there are professionals out there that will help you in finding those sources.”