Need a small business loan? Here's what you should know
For small businesses, raising capital can be a confusing obstacle. Workshops at the Virginia Small Business Conference titled “Small Businesses Thinking Big” at the Chesapeake Conference Center last week aimed to alleviate the small business financial maze.
“Financing is tricky business and not to be left to luck,” said John Meeks, community affairs specialist with the FDIC’s Money Smart for Small Business program. “It is something to consider before you open the door and after you open the door. “You cannot run a business without money,” he said.
Small businesses employ a great majority of people. According to the Small Business Administration, a small business is one that employs 499 people or less, Meeks said. Before any business can obtain capital, a business plan must be created, he said.
Crystal R. Rivenbark, assistant vice president and business banking relationship manager for SunTrust Bank in Suffolk, said her organization provides small business counselors to structure credit.
“People have the perception that banks are not lending money to small business,” Rivenbark said. “We are. It is just now structured correctly. Way back, a business had to have a reason to borrow. Then during the crazy time, when everything was relaxed, money was being lent for no reason. Now we are back to the rules to make sure the line of credit is being used properly.”
Philip Smith Jr., senior vice president and business banking officer at TowneBank, Chesapeake, said “There are several basic reasons for borrowing money."
The reasons range from maintaining operating expenses until sales are converted to cash or rapid sales requiring inventory purchases, he said. The reasons also include the need to purchase equipment, decrease in profits from an unexpected cost or competition, or the need to finance the company’s survival until it can be turned around, Smith said.
“When borrowing money, business owners should have the five C’s of credit. They are the basis of every loan decision,” Smith said.
Smith defined the five Cs as character, capacity, capital, collateral and conditions.
“And you need to be sure your personal finances are in order,” Smith said. “There is high correlation between how you handle your personal finances and that of the business. If you are starting a new business, it is probably not wise to purchase a new home or car. The primary cause of new business failures is the lack of capital to survive during the start-up phase, which can be as long as two to three years or more.”
There are several ways a bank can finance a small business. Short-term working capital notes and lines of credit are used to help with inadequate cash. They are called short term because within 30 to 120 days the loans must be paid. Smith said an example is an electrical contractor who has an increase in sales and needs to pay employees or purchase inventory before payment is received from the customer.
Permanent capital and equipment installment loans are for expanding a business. These loans are usually repaid in a set time of three to seven years, Smith said.
Commercial real estate loans allow for acquisition of existing commercial property or the construction of new property. They are set-up for a long payment period of between 15 to 20 years. They usually require between 20 to 25 percent cash down, he said. While financial institutions can help, there are also programs from the state and federal governments.
The Virginia Small Business Financing Authority Small Business Microloan Program helps existing small businesses with short-term loans to help create new jobs and retain jobs that are at risk, said Mary Jo Sisson-Vaughan, project finance manager for the authority. Eligible borrowers must meet one of three criteria including having less than $10 million in annual revenue over each of the last three years; a net worth of $2 million or less; or having fewer than 250 employees. The maximum loan amount is $10,000. However, special consideration may be given to approve up to $25,000, she said.
Loans funds can be used for financing accounts receivable and inventory, contract financing permanent working capital or fixed asset purchases, leasehold improvements, purchases of equipment and to add technology infrastructure, Sisson-Vaughan said. Loans cannot be used to refinance or restructure an existing bank debt or compensate for a fundamental weakness in the business, she said.
James A. Williams, lead business development specialist with the U.S. Small Business Administration, said he wanted to make it clear his organization does not provide grants to small businesses or offer direct loans except for disaster relief. However, the SBA does guarantee a portion of the loan.
“With a SBA business loan, the three principal players are the applicant [small business], the lender and the SBA,” Williams said. “The loan is made directly by the bank with SBA backing.”
The 7(a) loan guarantee loan program makes a loan more affordable with terms of seven years or more at 2 3⁄4 percent interest,” Williams said. “The business must be for profit and the max allowed is $5 million.”
There are other programs as well, Williams said. It is up to the bank to decide which SBA program it will use when lending to a small business, he said. Williams also mentioned the Patriot Express lending program for military veterans and military members that can be used for startup businesses, expansion, equipment, working capital and inventory or business-occupied real estate purchases.
DID YOU KNOW
Virginia has resurrected a popular loan program for small businesses that are replacing equipment to meet environmental standards.
Since 1999, the Virginia Small Business Environmental Compliance Assistance Fund has provided more than $2 million in loans to 42 businesses. It had been dormant for the last several years as recipients repaid the loans and the program re-accumulated funding, said Mary Jo Sisson-Vaughan, project finance manager for the Virginia Small Business Financing Authority.
In July, the authority and the Department of Environmental Quality reinstated the program, which is especially helpful for dry-cleaners, agricultural businesses and manufacturers. Companies that qualify can receive up to $100,000, with an interest rate of 3 percent.
To apply, visit http://vdba.virginia.gov/ and click on “Financing.”