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Nov 5, 201912:38 PMOpen Mic

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Helping small businesses finance large projects

We’ve all heard the saying, “It takes money to make money.” Small business owners, solo practitioners, and budding entrepreneurs may feel the pinch of this statement more than most when trying to grow their companies to the next level.

When small businesses — or young businesses — are in growth mode, their cash gets sucked up in the form of reinvesting in more raw materials, purchasing new equipment, or hiring additional personnel. When it comes to a large purchase, like expanding production space, building or buying a new facility, or upgrading to bigger, better, and more efficient equipment, they don’t always have the working capital to fund that kind of opportunity.

So how exactly do small businesses finance large purchases, new construction, or other development opportunities?

Explore your financing options

There are several options for tapping into outside funding, each with their own set of pros and cons:

  1. Typical commercial loans;
  2. SBA 504 loans;
  3. Local government development agencies, such as Madison Development Corp. and Middleton Area Development Corp., to name a few; and
  4. Venture capital investment funds, such as Bascom Ventures for university students and alumni.

Personally, I’m a fan of the SBA 504 loan program, perhaps in conjunction with one or two of the other options. Here’s how it works:

  • The loan is intended for purchasing business real estate or large equipment with as little as 10 percent down. The existing, growing company cannot be a large investor or developer. It seems to be especially helpful for standalone niche businesses not tied to a franchise, such as a fitness club, child care facility, boutique hotel, or family restaurant.
  • An SBA 504 loan can finance up to 40 percent of the entire project using a debenture that’s handled through SBA channels.
  • The loan terms can last for a period of up to 25 years, with a 10-year declining penalty period for prepayment. After 10 years, the prepayment penalties go away.
  • The SBA 504 program also added a secondary feature that enables consolidating and refinancing existing business debt.

As long as a business has a solid 10-year horizon, the SBA 504 program is a great loan product.

Seek out small business experts

Whether we’re talking about an accountant, an attorney, or a commercial lender, small business owners and entrepreneurs should seek out professional partners who specialize in working with businesses at this stage of development.

Not all banks or all bankers offer the same loan products, not all attorneys are familiar with regulations in every industry, and so on.

For example, I recently spoke to a local hotel owner who had accumulated debt to deal with flood damage last year. His banker suggested a second mortgage to cover remodeling and repairs. As I explained the SBA 504 loan program, he wondered why his banker hadn’t suggested that also. The truth is that not every lender has experience working with this program, which requires specific knowledge and expertise in navigating the regulations and requirements.

I like to compare it to the medical field. You may have two surgeons who are both renowned experts. However, I wouldn’t want an orthopedic surgeon to perform heart surgery or a brain surgeon to perform a hysterectomy. Find an expert who has knowledge and experience working with small businesses with cash flow challenges in growth mode.

In fact, I have found that working at a medium-sized bank in growth mode offers insight into helping a small- to medium-sized growing business. Professional partners who work regularly in this area can help you navigate a project like this, which is likely to be your first time going through the process. We can recommend other professionals who can help and can suggest other financing options that may benefit your situation.

By researching all your options, trusting partners with expertise in small business growth, and concentrating on taking advantage of growth opportunities, your small business can enjoy the same access to financing as larger, more established organizations.

Dennis Haefer is a vice president–commercial banker and business relationship manager at State Bank of Cross Plains (SBCP). With more than 30 years of banking experience in Dane County, Dennis has a special interest in working with and advocating for small-to-medium business owners and local entrepreneurs.

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Nov 5, 2019 04:58 pm
 Posted by  Mark Schubring

I agree with Dennis that an SBA 504 loan can be an excellent choice for a larger project. The SBA 7(a) program can also work well when there is greater urgency in closing. With the right lender a 7(a) loan can close as quickly as a conventional commercial loan while offering the advantages of low down payment and a long, fully amortizing term.

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