How to access funds to help your small business grow and prosper
Story by Lee Reinsch
OK, so your chocolate-bunny factory needs cash. You sold some massive orders for Easter and shipped out those rabbits in plenty of time for the retail stampede.
But now Easter is over, and your customers are like tortoises when it comes to ponying up. Without money coming in, you’re low on funds needed to keep your business rolling – to buy ingredients, order new bunny molds, supplies, replace that old commercial mixer, pay the electric bills, make payroll. And of course you’re low on disposable hair nets.
To top it off, you’ve wanted to expand your product offerings to cream eggs, fudge lambs and maybe even confections for other holidays. That’ll require extra expenses, marketing dollars and new equipment.
Taking out a traditional loan isn’t the best option for you at this point because you don’t have much of a banking history. Additionally, the bank won’t agree to a long-term loan, and there’s no way you can pay back such a large amount in just a handful of years.
So are there any ways to get your hands on some greens to keep the chocolate flowing and the rabbits multiplying?
As a business owner, you could take any of several paths. Lines of credit, term loans, revolving loans, bank credit cards or community economic development programs, to name a few.
If you’re willing to endure a little extra paperwork, government-backed plans can offer flexible terms and lower interest rates than conventional bank loans.
U.S. Small Business Administration loans are open to small for-profit businesses based in the U.S. The SBA’s definition of “small business” bases itself on annual income and number of employees. While the definition varies dramatically from industry to industry, it includes most small businesses in northeast Wisconsin with a net worth of less than $15 million, as well as having less than $5 million in total net income.
Virtually all small businesses are eligible for SBA loans other than nonprofits, according to Mark Maurer, vice president of business banking out of the Green Bay office of Investors Community Bank.
“Manufacturers, service industries, hotels, motels, assisted living – all these types of business are eligible for these programs,” Maurer said.
With SBA-backed loans, lenders need some information beyond the basics to document that a business owner fits eligibility requirements. Ensuring the business owner is a U.S. citizen, has legal or permanent residency, and has no felony convictions are just a few of those requirements, said Jason Monnett, senior vice president and senior lender out of the Oshkosh office of WBD, a Wisconsin-based certified development company that prepares SBA loans for financial institutions.
“We need to clear any prior misdemeanor convictions and the like, so there are a few things related to personal history we need to dive into that a conventional lender might not,” Monnett said.
Two good options
Two of the most popular SBA lending programs are the 504 and the 7(a) guarantee.
“They can be used for pretty much most of the projects a company is looking to do,” said Maurer. “The typical project for a 504 is for a business to expand, acquire equipment, build a building.”
The SBA 504 program is for fixed assets, facility expansion and related costs. It can provide loans of up to $5 million, or up to $5.5 million for manufacturing and green buildings. SBA 504 loans provide long-term, fixed-rate financing as a junior mortgage to the financial institution loan, according to Monnett.
SBA 504 loans involve funding from a three-member team: a financial institution, a certified development company like WBD, and the business owner. The business comes up with at least 10 percent of the project cost up front.
“During the financing phase, the lender provides up to 90 percent of the financing, with the expectation that the SBA 504 funding will ultimately reduce their loan (risk) to 50 percent of the project,” Monnett said.
What the SBA 504 program doesn’t allow for is working capital or funding needed for startup costs, such as buying inventory.
That’s where the SBA 7(a) program comes in.
The 7(a) guarantee program is wider in scope than a 504 program loan, according to Monnett, though it may cost the business owner a bit more overall in total interest payments and fees. Loans under the 7(a) program guarantee are oftentimes at variable rates, though there are some options for a fixed-rate loan.
“It can be used for working capital, business acquisitions, buying out a partner in some cases – things that aren’t tied to fixed assets, such as real estate and equipment, like the 504 is,” Monnett said.
“A business will sometimes need working capital to fund growth because their accounts receivables are beginning to slow, or maybe they ship a product but don’t get paid until 30, 60 or 90 days after it’s shipped. So if they’re seeing growth in sales, they’re going to see growth in receivables, and they’re going to need to fund that working-capital need somehow.”
It’s a similar dynamic when a business’s investments are tied up on inventory.
“You normally don’t keep (inventory) forever because you hope to sell it, but you do need to pay for it,” Monnett said. “To some degree their accounts payable can help finance some of that, because they may get some terms from their vendors before they have to pay.”
That’s why it might make sense for a start-up business to finance working capital through a term loan, Monnett said. “You know there’s going to be a gap between where you are now and when you get to the point where you can continue to operate the business, based on the cash being generated, and then service the payments on that loan.”
The SBA also offers two programs to provide guarantees on lines of credit: the SBA Express program, which has a loan limit of $350,000 and provides a 50 percent guarantee to the lender; and CapLines, which can finance larger working capital needs in particular niche industries.
“They are still lines of credit. They’re just enhanced by an SBA guarantee,” noted Meghann Kasper, senior vice president and Fox Valley market manager with Bank First National. The SBA guarantee allows more flexible terms than the bank might otherwise provide.
“Say you’re buying a piece of equipment and (the bank) is not comfortable amortizing it for any longer than five years,” Kasper said. “But an SBA guarantee program will give us more comfort, and we might say, ‘OK, we’re now comfortable at seven or 10 years amortization.’”
That typically means more cash flow for the business. “If you’re amortizing over five years, that’s much shorter, payments are larger, and you won’t have as much cash flow,” Kasper said. “If you do it over seven or 10 years, your payment is smaller, so you have more cash flow available.”
Do chocolate bunnies count as livestock?
Contrary to what one might think, not all U.S. Department of Agriculture loans programs are just for farmers. One USDA loan, known as the Rural Development Business and Industry Loan Program – or RBI for short – is for a number of industries outside of the ag sector.
The USDA’s RBI program is similar to the SBA 7(a) program but allows much larger loans – up to $25 million – and nonprofits are eligible, as well.
“With USDA, you think farms, but it’s not. In fact, production farms like cattle operations and dairy farms are not eligible,” said Maurer of Investors Bank.
The catch for eligibility is organizations applying for the loan must be located in rural areas with populations of under 50,000.
These USDA loans can be used by business owners to refinance or restructure their debt. The program can be used for business acquisition, expansion, buying a new building and purchasing equipment.
Unlike SBA loans, which limit eligible businesses by size, USDA loans do not.
“It can be literally for a publicly-traded company,” Maurer said. “It’s not the typical use for it, but it could be.”
All of these government-backed lending programs – whether through the SBA or the USDA – allow for longer-term financing than might otherwise be accessible to the business, according to Maurer.
“Say you want to buy a manufacturing site in Rhinelander,” Maurer cited as an example. “With traditional financing, the loan payback would be based on a 20-year payback but is going to be a shorter term, maybe a 3- to 5-year note. The note would mature, the bank would get updated appraisals, and presumably you would renew the note.
“With USDA, in real estate, you can finance up to 30 years, and with the SBA, you can finance up to 25 years. And for equipment, it’s 10 to 15 years,” Maurer said. “Conventional financing is maybe 5 to 7 years, so what it does is allow for a more cashflow-friendly debt structure and a longer term.”
Thus allowing you more time to ponder whether to eat the chocolate ears first, or save the bunny’s head for last.
Lee Reinsch of Green Bay worked 18 years at daily newspapers before launching her freelance business, edgewise, in 2007.