Credit starved? Small Business Administration loans are whetting businesses' appetites

Through June of 2013, Wisconsin banks collectively lent about $1 billion more to commercial and industrial borrowers than the year before, but as impressive as that sounds, it’s still roughly half of the annual increase that could be expected if the economy were growing at a boom-time pace. 

At least that’s the assessment of Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association, who still points to the improving profitability of Wisconsin banks — 95% are in the black — and to the continuing reduction in the percentage of noncurrent loans.

While those metrics provide sources of comfort, community banks are also making some headway in convincing national and international rule-makers to treat them differently than the big investment banks that are more responsible for the nation’s 2008 financial meltdown. So while the economy is not yet firing on all cylinders, there is plenty of reason to be optimistic about the 2014 lending landscape. 

“Wisconsin banks are very well positioned to meet borrowers’ credit needs,” says Oswald Poels. “The thing I continue to hear from our membership is an actual lack of demand. Businesses are really still sitting on the fence to see what happens nationally in terms of stability with our federal government and the economy in general.”

When Miriam Kuhn's bank experienced financial troubles, another bank recommended SBA lending for the high borrowing needs of her company, Contrail Aviation Support, a Verona-based broker of aircraft engine components.

Bankers cite a number of factors to account for this comparative lack of appetite, including still-fresh recessionary nightmares and the technology-enabled ability to do more with the same workforce, but there is no doubt they have ample money to lend. 

Tom Spitz, CEO of Settlers bank, says banks have mostly dealt with the fallout from the financial crisis, especially loan-quality issues. The post-crisis period, when they were more focused on problem resolution than on new business development, has passed.

“Banks actually have a lot of money to lend, and they are looking for good credit in order to do so,” stated Spitz. “I hear that from virtually every banker I interact with.”

In a growing number of situations, U.S. Small Business Administration loan programs have not only whetted the business appetite for borrowing, they have also addressed a variety of business needs, from basic lines of credit to construction projects and other expansions. 

The SBA has two business lending programs. The most heavily used SBA program is the 7A, a guaranteed program in which borrowers work with a local bank or credit union lender for everything from working capital, to machinery and equipment, to buildings and real estate. The SBA’s 7A loans are guaranteed up to 85% to a maximum of $150,000 and up to 75% for loans between $150,000 and $5 million. Borrowers can also refinance under the 7A, which last year accounted for 1,456 Wisconsin loans totaling $522.2 million. 

The SBA’s 504 program covers fixed assets like buildings, real estate, and equipment, and borrowers can work with local lenders or a certified development company. Under a 504 loan, 50% would come from the financial institution, 40% from the SBA, and 10% from the borrower; the local lender gets first collateral position.

Eric Ness, Wisconsin district director for the SBA, notes that the guaranteed program removes much of the risk for banks, incentivizing them to make loans they would not otherwise make. Another benefit: As of Oct. 1, SBA is not charging fees on loans under $150,000 for the lender or the borrower. “I think that’s going to generate a lot of small business lending in the state because the lenders will have our guarantee under 7A and be able to get that guarantee on a lot of businesses around the state,” Ness stated. 

Ness also contends the availability of SBA funding is reliable and says it was unaffected by the recent government shutdown. Nationally, the SBA supported $29 billion in loans under the 7A program last year. “We won’t run out of money,” he stated.

Inside, we profile three local companies that believe the lending waters are fine and that have taken advantage of SBA loans for a variety of business purposes.

Taking inventory

Rhett Roeth, owner of Madison-based Discount Vials, admits to being afraid of credit since childhood, and as a general business philosophy, he has tried to do without it whenever possible. But when you need to restock, that’s not always possible.

Roeth, a service-disabled veteran who holds down a full-time job at the Milwaukee Street post office, doesn’t have a lot of formal business training, and it took some convincing to get him to pull the credit trigger. “I was raised [to believe] that credit is probably one of the worst things this world has ever seen,” he says, chuckling at the memory. “As a small business owner, borrowing to me was something that was very scary.”

In 1999, he founded the company that would eventually become Discount Vials, an online distributor of glass packaging, and he moved it out of his basement and into a warehouse facility only two years ago. About the same time, he secured an SBA loan for a line of credit, not for the purpose of expanding but to occasionally replenish inventory.  

Some of the fear of being overleveraged was removed by the fact that he can get a short-term loan, quickly pay it off, and move on at a relatively low cost. Roeth says he “bumps into” the SBA line of credit six or eight times a year, typically for a very short term of 10 to 15 days. The interest rate is between 7% and 8%, which he viewed as competitive with the traditional bank lending he investigated, and there was also a small SBA funding fee.

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“I use the line of credit pretty liberally,” says Roeth, who employs five people, including his wife, Laura. “It’s usually a matter of having to pay a vendor before an invoice from a customer comes through, and it’s just a little stopgap type of thing. We would not dip into that for payroll needs.”

Since its founding, Discount Vials has sold more than 2 million glass items — a combination of test tubes, vials, and specialty bottles of up to 8 ounces — to a diverse clientele. It includes research labs and pharmaceutical companies, massage therapists who need containers for the oils used in aromatherapy, the makers of various fragrances, police departments that use glass containers to store evidence, and even churches that need containers to store holy oil. Most customers are in the U.S., but the company also ships worldwide. “For some reason, we do surprisingly well in Australia,” Roeth says.

After going the SBA route, Roeth can demonstrate a track record of making payments, which could come in handy if he ever needs to pursue more traditional bank lending as part of a financing mix. Roeth, who has banking relationships with Chase Bank and Associated Bank, certainly does not view the lending landscape unfavorably. He’s pretty confident the required capital would be available if he needed to add new facilities or product lines.

“There seems to be a lot of offers of credit coming to me,” he says, “so I can’t imagine that if I did pull the trigger, there would be a problem.”

Jet Fuel

When Miriam Kuhn accepted the SBA’s Exporter of the Year and Midwest Regional Exporter of the Year awards last spring, she could tell just by listening to the stories of other award winners that SBA lending was instrumental to their success. As she learned about their business challenges, and how the SBA stepped into the breach, she could nod her head knowingly. 

“Without the SBA, several of those businesses would have either struggled quite a bit more or they would not have been successful,” she says. 

According to Kuhn, director of finance and administration for Contrail Aviation Support, SBA lending helped her company take flight. Contrail, a Verona-based broker of aircraft engine components, used the SBA to finance rapid growth that took the company from about $5 million in annual revenue in 2009 to $12 million in 2010 and nearly $30 million in 2011.

Wisconsin Bank & Trust, armed with SBA availability, stepped in when Contrail’s previous lender, the now-defunct Amcore Bank, was struggling and could no longer meet the company’s borrowing needs. Since Contrail finds it more profitable to acquire whole aircraft whenever possible — keeping the engines and selling the airframes to other businesses — it not only needs a lender that can scale into the millions of dollars on loans, it also needs one that understands a unique business model.

It was Wisconsin Bank & Trust that recommended an SBA loan become part of Contrail’s financing package, and while the SBA portion is not as large a component as it was in 2010, Contrail appreciates its association with SBA as it transitions to more expensive, next-generation aircraft engines. 

Contrail does not repair engine components. The company acquires engines as they come off a lease or retire, ships them to a “tear-down” facility that is certified to take the engine apart at the component level, and then sends the components to repair facilities certified by the Federal Aviation Administration. Once the components have been repaired or overhauled, Contrail sells them to aircraft maintenance facilities.

Now ranging between $20 and $30 million in annual revenue, Contrail anticipates another growth spurt as the newer engines come on line. With a bank and a financing package that can accommodate the company’s growth, Kuhn has fewer concerns about securing the necessary capital. Under the terms of the SBA loan, Contrail is required to purchase foreign receivables insurance, but Kuhn views that as a necessary business expense because 45% of the company’s sales are overseas.

“I give our lender a lot of credit because we were not aware that a loan like that would be available to us,” Kuhn says. “It’s not something we ever explored.”

King of the road

Four years ago, Raymond Mandli used his first SBA loan to establish a new technological beachhead, and his growing company hasn’t exactly been slogging along. It’s been marching on with very little resistance, even through the recession.

The technology his company, Mandli Communications, employs has been so well accepted by the target market, state departments of transportation, that Mandli’s workforce has nearly tripled to 160 since 2009, a period of time in which many local employers were content to hold on. 

Mandli deploys a fleet of vehicles — fully equipped with geographic information systems, high-end scanning laser instrumentation, and high-resolution digital cameras — to collect geospatial highway infrastructure data. The technology enables Mandli to create exact models of the conditions of highway systems across the country, which transportation planners as far away as Alaska can review from their desktops as they work to plan and maintain transportation infrastructure networks. 

To do the work, the 30-year-old company has built a fleet of 10 vehicles that it must equip with expensive technical equipment, at a total cost of between $300,000 and $700,000 apiece. Seven of the 10 are now scattered across the country, and their locations include Texas; New Mexico; Florida; San Diego’s light rail system, where the company will examine 53 miles of track; and the Oakland Airport, where it will provide data for the development of an airport pavement inventory. Mandli will soon send a vehicle by ferry to Hawaii, and also drive one to Alaska in the spring for statewide highway infrastructure projects.

As the geographic reach of Mandli Communications grows, so does its borrowing needs, which are now served by a combination of company revenue, traditional bank lending, and SBA lending — the latter for expansion purposes. The company has been with Monona State Bank the longest, and that’s where Mandli secured SBA loans in 2009 and again in 2012 to finance expansion. “We went back and added to that [SBA loan],” he explained. “We consolidated our financing and created a larger piece to accommodate expansion.”

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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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