Credit starved? Small Business Administration loans are whetting businesses' appetites
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Mandli, who owns the company with his wife, worries most about the untimely political turmoil that can create delays in state and federal budgets — delays that can hamper the company’s efforts. However, as long as state DOTs need to gather this information in order to get federal funding — it’s mandated by the Federal Highway Administration — and as long as Mandli owns the enabling technology paradigm and can take the data processing piece virtual, the business should continue to scale.
Mandli feels fortunate to have an SBA loan, but notes that even though the federal government provides a guarantee to mitigate the risk for banks, the biggest bottleneck with this kind of lending is collateral. His SBA loan is secured with the company’s state contracts and with vehicles and other company assets, which does give him pause. “A technology business like mine, if you don’t fund them in the way a university spinoff funds them, through angel or venture capital investment, you have to capitalize them yourself, and that is a really tough row to hoe,” he says. “At this point, 30 years into it, most of my family’s financial worth is invested in collateralizing my loans.”
What do banks want?
Mark Meloy, president and CEO of First Business Bank, attributes the incremental improvements in business borrowing appetite to a natural cycle where, after a period of retrenchment, businesses have to reinvest in new equipment.
“What businesses tend to do when they are holding onto cash and uncertain about the future is they will be more careful with how they manage all other parts of their business, too,” he explained. “Part of that is inventory levels, how much credit they are willing to extend to their customers in terms of how long they carry a receivable. All those things stay tighter until companies tend to have more cash.
“As business heats up and businesses have more confidence, history has shown they will use more leverage in the form of bank debt in their business operations.”
To secure more traditional bank debt, prospective borrowers need to be mindful of the way bankers size them up. There are several things banks look for when evaluating borrowers, starting with company financial performance and strength. “It is the financial performance of an existing company that demonstrates a consistent ability to repay — or projected performance, where there is an expansion — that demonstrates that ability,” says Tom Spitz of Settlers bank.
Management quality is another factor, and that strength is demonstrated in management’s character and the ability to contingency plan. “It’s not only that management is good at what they are doing, but that they are going to be able to handle the twists and turns of business that either seem inevitable or just simply can arise,” Spitz added.
Meloy cited companies’ history of generating cash flow, which speaks to their ability to repay loans. “When you look at deals in the last three years, there is economic cyclicality in that ability,” he noted. “Having the ability as a lender to understand that, and for the owner to communicate that and describe what is different today and why there is more certainty for stronger cash flow going forward, is critical.”
Collateral to secure the loan is another critical factor, Meloy says, because banks want to be at a reasonable loan-to-value ratio, whether it’s real estate, equipment, receivables, or inventory. Upfront honesty is also critical because banks detest surprises. “As the bank, we want to be in a position to help anticipate needs,” Meloy says, “as opposed to reacting to them in a crisis.”
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