Laudable loans

Small Business Administration loans make financing business purchases and growth possible for many local business owners.

From the pages of In Business magazine.

A decade removed from the height of the Great Recession, it’s apparent the local and state appetite for small business borrowing has fully returned, healthy and strong.

Banks are certainly eager to lend again, which is as sure a sign as any that there’s faith in the strength of the economy and borrowers’ ability to repay their loans.

The first quarter numbers from 2018 on banking released by the Federal Deposit Insurance Corp. (FDIC) show that Wisconsin bank performance continues to be strong across the board, according to Rose Oswald Poels, president/CEO of the Wisconsin Bankers Association.

Wisconsin bank lending increased in almost every single category in a year-to-year analysis, with commercial lending showing the biggest growth (7.8%). Overall lending grew 4.9% during the same timeframe. Non-current loans (those behind in their payments) continued to decrease, dropping to $680 million, down 16%.

“Wisconsin’s banking industry reflects Wisconsin’s current healthy economy, as well as the overall national trends,” said Oswald Poels in a release. “The current economic expansion is now the second longest on record.”

That confidence is backed by a Congressional effort at the federal level to strengthen the Small Business Administration (SBA) 7(a) loan program.

Having already been approved by the House and Senate this spring, the bipartisan Small Business 7(a) Lending Oversight Reform Act (H.R. 4743) includes targeted reforms to ensure the program continues safely expanding the reach of lending and credit services to a broader range of borrowers who would not qualify for a conventional bank loan. The bill now awaits the president’s signature.

Once it becomes law, H.R. 4743 will:

• Strengthen the integrity of all SBA guaranteed lending programs by codifying the SBA Office of Credit Risk Management and Lender Oversight Committee, increasing transparency in the office’s budget and providing guidelines for lender reviews and lender appeals rights;
• Safeguard the 7(a) program from abuse by codifying the SBA’s “Credit Elsewhere Test,” which requires lenders to fully substantiate and document the reasons a given applicant cannot be served with conventional credit; and
• Stabilize 7(a) program funding by allowing the SBA to lift the cap on general business loans by up to 15% of the limit if it is determined the cap will be reached, as it was in 2015, which disrupted SBA lending.

This all comes on the heels of the Economic Growth, Regulatory Relief, and Consumer Protection Act becoming law in late May. This legislation is the first major change to the Dodd-Frank Act since its passage in 2010 and had bipartisan support in the Senate and House.

The law provides regulatory relief for banking institutions by raising the threshold at which annual risk oversight measures apply — measures such as stress tests and regulatory compliance — increasing it to $250 billion from the current $50 billion. For those institutions with total assets between $50 billion and $100 billion, the regulatory relief is immediate. For those with total assets between $100 billion and $250 billion, the relief is phased in over 18 months. The legislation also provides relief from the Volcker Rule, which banned proprietary trading by commercial banks, for banking institutions with assets under $10 billion.

These measures are a potential boon for small business borrowers seeking access to more credit, even though SBA lending alone doesn’t tell the full story of small business lending, notes Eric Ness, district director for the Wisconsin District Office of the U.S. Small Business Administration.

“To some extent, it is counter-cyclical. In other words, when the economy is good, lenders are probably doing more conventional small business loans relative to SBA-guaranteed loans,” Ness explains. “When the economy is bad, they lean more on the SBA product with its guarantee of 50% to 90%.”

During the Great Recession, for example, the Jobs Act of 2010 was intended to kick start SBA lending at a time when banks did not want to lend at all.

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.

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. Borrowers can also now refinance under the 504 program.

Ness says that the guaranteed program removes much of the risk for banks, incentivizing them to make loans they would not otherwise make.

According to Ness, lenders make the determination about whether a borrower is a good risk for an SBA loan or a conventional loan; however, SBA does look for whether the loan meets eligibility requirements for the following: size standards; the nature of the business (i.e., no lending to gambling establishments or strip clubs); how the proceeds will be used; whether the borrower could obtain credit elsewhere; whether the loan is for a sound business purpose; and whether it will reasonably assure repayment. Owners also need to provide a personal guarantee.

SBA loans are also an ideal financing source for startup businesses.

“Every SBA lender — and we have about 170 active SBA lenders in Wisconsin — is different, but typically we have seen more than one-third of SBA-backed loans go to startup businesses, and this year that number has been higher, close to or even over 50%,” says Ness.

“The SBA guarantee makes it easier for the lender to take the risk, and SBA-backed loans have longer terms, which makes for stronger cash flow for the business, as well as lower down payments,” continues Ness. “SBA also offers lines of credit.”

Close to 200 Dane County businesses — existing or new — take advantage of the SBA’s loan programs each year for everything from purchase costs, to short-term financing for inventory maintenance, to loans for larger expansion projects. IB spoke with three local small business owners who have each dipped into SBA financing to establish and grow their businesses and contribute to the Greater Madison economy.

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Lending lessons

Brenda Fritz started the Academy of Little Vikings in Mount Horeb in 2015 when she saw a need in her community for quality childcare. In addition to obtaining SBA loans, she has worked closely and regularly with another SBA partner, the Small Business Development Center at UW–Madison, and she’s been able to grow her business from a 4K preschool program to serving children from infants to age 12.

Since reaching capactiy just four months after opening in 2015, Academy of Little Vikings in Mount Horeb already has undergone one expansion with the help of an SBA loan, and owner Brenda Fritz has designs on another.

“I became passionate about early childhood education after having children of my own,” notes Fritz, who holds a secondary education degree from UW–Whitewater. “During my own kids’ early childhood years, I realized the best way to impact a person’s life and outcomes take place in that 0–7 years-of-age time frame.”

As her children aged into their preschool years, Fritz volunteered as the president of a nonprofit preschool for four years and basically did all the things she does now as the administrator/owner of Academy of Little Vikings, only now she gets paid for her services.

Fritz also worked as a preschool teacher in various facilities in Menomonee Falls, Middleton, and Mt. Horeb while going back to school to get a degree in early childhood education. Mt. Horeb was one of the last local communities to engage in 4K and it was at this time that Fritz talked her husband into helping her open a private 4K program in the basement of the Immanuel Lutheran Church that was the forbearer to Academy of Little Vikings.

She says the learning curve she’s had from making the transition from teacher to business owner is still alive and well.

“I see being a business owner like being a teacher on the first day of school,” Fritz explains. “It’s a little overwhelming, exciting, and has a lot of unknowns. I approach the task of being a business owner as an educator would by reading, watching, and asking lots of questions from my fellow business owners. By far the best asset I have found in my journey to become a business owner is the mentor from the Small Business Development Center at UW–Madison, Michelle Somes-Booher. Our monthly meetings have proven to be very valuable in helping me get through the bumps and bruises of the learning curve.”

Without the assistance of SBA loans, Academy of Little Vikings might not be where it is today. Fritz initially utilized a Rollovers as Business Startups (ROBS) program to get the seed money to build Academy of Little Vikings through Guidant Financial. She and her husband went to several banks with their idea and we were told no by the first two. It was at the third bank, State Bank of Cross Plains, where they found banker Casey McClyman, who Fritz credits with helping them secure financing through the SBA.

“We opened in August 2015 and the center reached capacity by December 2015,” says Fritz. “We found the need to create an expansion on the near horizon. As we processed our first loans through State Bank of Cross Plains and SBA, Casey was able to position us for a second SBA loan, which allowed us in 2017 to build the ‘stable’ addition onto the facility’s main barn building.”

Fritz was able to secure $1.5 million in loans for the first addition, of which 60% was financed by State Bank of Cross Plains and 40% the SBA. The SBA loan is fixed for 20 years. The stable addition was financed entirely by an SBA line of credit for an additional $300,000. The longer fixed rate that is guaranteed by the SBA provides a significant safety net for the organization in the event market changes cause interest rates to creep back up, notes Fritz.

“Our succession plan can be more solid because we are able to safeguard the debt load of the center through the SBA financing,” adds Fritz. “We were fortunate to have a banker who knew how to help us get to SBA financing and was willing to take the time. We are grateful to State Bank of Cross Plains for taking a risk on a childcare business in an industry that has a 50% startup failure rate. Getting SBA financing was not an easy task and had it not been for this lender, we probably would have never been able to get through the process of SBA funding.”

In particular, Fritz says the business would not have been able to execute its expansion in 2017 without the SBA loan program. “We would have sacrificed the needs of our families who needed care for school-aged children. We may have looked to crowdfunding for the addition. Fortunately, because of SBA, we were able to build the expansion and continue to service the school-aged childcare demand.”

Next on the horizon for Academy of Little Vikings is a plan to further add to the 9,500-square-foot facility with a large farmhouse next to the main barn that will allow seniors to interact with the children across generations. “We see our little Vikings visiting the farmhouse regularly and sitting on the porch listening to stories that the seniors read or spin to them,” Fritz says. “Having the children exercise and play with the seniors would benefit both age groups. What an awesome opportunity to bring together two demographics with the most time on their hands and on the opposite ends of the life cycle. We hope to partner with another business or person who shares our vision and collaboratively works to get loans through SBA to help make that dream come true, too.”

Fritz’s advice to any other small business owner seeking SBA financing is to find a lender who will take the time to develop a relationship with you, just like teachers have with students. “Getting SBA financing is not easy but anything worth having doesn’t come easy,” says Fritz.

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Inventory management

Rhett Roeth is a service-disabled veteran who got an SBA loan to move his fledgling business out of the basement and into a warehouse, and has since expanded the business further and brought his family on board.

Rhett Roeth, owner of Discount Vials, which recently moved into a new warehouse and doubled its space, has used SBA loans for short-term borrowing over the years to help maintain inventory.

​Roeth, who IB profiled in 2013 for a similar story, is owner of Madison-based Discount Vials. Back then he admitted 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.

When Roeth started the business, he was still holding down a full-time job at the Milwaukee Street post office and didn’t have a lot of formal business training, so 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. “The condensed version is I bought a box of surplus lab glass from SWAP [UW–Madison’s surplus property store] in something of a proof-of-concept for the blossoming ecommerce ‘thing.’ A few millions vials later it has turned into an actual business. I literally started in my basement with a $20 bill.”

In 2011, he moved the business from the basement to a 3,000-square-foot warehouse, and earlier this year he upgraded to an even bigger 6,000-square-foot facility as business has continued to grow. Discount Vials now sells glassware to just about everybody, according to Roeth, including churches for anointing oil, labs and clinics, schools, and the TSA and law enforcement, as well as for use with aromatherapy, essential oils, cannabis, and e-cigarettes.

Roeth first moved the business out of the basement at 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 could get a short-term loan, quickly pay it off, and move on at a relatively low cost. In IB’s 2013 article on SBA lending, Roeth said 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 was 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.

“I use the line of credit pretty liberally,” said Roeth in 2013, who then as he does now employs five people, including his wife, Laura, and his daughter, as well as two part-time warehouse workers. “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.”

Today, Roeth says he’s blessed to be in a position of not needing to borrow often at all. He has credit lined up through Chase but rarely uses it. “I still am not a big fan of credit unless it’s very well defined and paid for,” says Roeth. “I sometimes think of it like equipment rental. If the rental is for something that you know is going to generate income, then calculate the cost and add it in to the project. To just rent equipment or borrow money in hopes of opportunities then presenting themselves is rarely a risk I’m willing to take. I tend to want a well-defined return on the cost of my borrowing.”

Roeth says his advice to other small business owners who are looking to SBA financing, especially other veterans, is there are certain lenders that are more interested in SBA or Veterans Administration loans. “There are some hoops to jump through, so it helps to have a relationship with someone to help answer the myriad unanticipated questions that pop up in these types of things,” he explains. “The other thing I would say is do your own research. Know as much as you can about their presentation before they give it to you.

“The information for most of these programs is very available now thanks to some really good websites,” Roeth adds. “The more you know about the possibilities going in, the better you’re able to assess the offerings from competing lenders because the program is the same but an individual lender’s process, cost, and availability can vary a lot.”

Buying a dream

Drew Fleming, owner of The Original Pancake House in Middleton, worked for a number of years at the business before buying it using a 504 program loan he secured through Wisconsin Business Development (WBD).

When Drew Fleming went from general manager to owner of The Original Pancake House in Middleton, he used a loan from the SBA’s 504 program to help complete the purchase.

Fleming started working at OPH in 1990 straight out of high school, beginning as a cook and eventually learning all of the jobs within the business. For most of the last 10 years he was the restaurant’s general manager.

Fleming’s restaurant experience was understandably limited prior to joining OPH. “I worked at Subway for a year and Country Kitchen for a minute,” he explains, “but while I have been with OPH since 1990, I had other jobs in food service at the same time. I spent four years at the Wilson Street Grill, where I learned a lot about the customer service aspect of a well-run restaurant, and then I had plenty of time to learn how to be an owner at OPH. The previous owners allowed me to do all the jobs I do now as owner, including payroll, ordering, scheduling, bill paying, and more.”

In early 2015 when it looked like The Original Pancake House was going to go up for sale, Fleming met with Mike Lawrence at Park Bank. Fleming explained the situation: he planned to buy both the real estate and the business, the owners were comfortable with financing a portion of the sale price, and he needed to buy out their silent partner.

“Mike immediately suggested a 504 loan with the WBD and SBA and introduced me to Diane Pasley (now Byler),” says Fleming. “The SBA portion of the loan ended up being $320,000. I’m not sure the purchase would have been possible without SBA involvement. Certainly a fixed interest rate right as the Fed started to increase rates was a huge plus. Knowing that the seller-financed portion is fixed, as well, is comforting.”

Fleming is now exploring another SBA loan to help remodel the current space. “I would advise small business owners to reach out to WBD. Their website has all sorts of useful tools and templates to get you going down the right path. I can’t say enough about how helpful Diane was, as well!”

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