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Small Business Funding with Small Town Banks
-August 26, 2012



There was a time that if you wanted to grow your small business you would cross the street to the town’s bank and request a business loan. There, like in the Jimmy Stewart film, It’s a Wonderful Life, you would find your neighbors and fellow business owners working and waiting in line and your community banker waiting to be of service. Then the banking boom of the 1980’s hit and big, national banks became the lending force carrying all of the low-interest clout and attractive loan packages that small businesses needed. Today, according to a new report by B2 Credit’s June 2012 Small Business Lending Index, the trend is reverting back to Main Street bankers like credit unions and locally controlled community banks. So George Bailey had it right after all!

If you’ve tried accessing funds via the big banks without any success, perhaps it’s time to rethink your neighborhood community lender. Since the passage of the Jobs Act of 2010, additional funding and more attractive interest rate packages have become accessible to smaller banks with the sole purpose of spurring small business lending and increased growth. Community banks are ready and willing to lend money and often do it with less reliability on FICO scores and financial statements and more on the integrity and character of the small business owner, according to a report in the Huffington Post. Approximately one-third of entrepreneurs borrow from banks when they need capital, says a recent Census report. While the need is rising, it has become more difficult to find loan funding, leaving nearly half of that one-third unable to find the funding necessary when they needed it over the last four years.

The good news is that smaller, local community banks are lending. Even better news, they’re lending with less restrictions than their large corporate counterparts and relying more on the integrity and personal reputation of the borrower. Small banks are also offering more SBA 7(a) express loans to entrepreneurs and small enterprises. Chris Hurn, co-founder and CFO of Mercantile Commercial Capital agrees. “The SBA has been working hard to provide small businesses with financial options to help keep their businesses running and growing,” he said in an online interview. The most popular loans are the 7(a) express and the Community Development Company/504
Loan Program.

The 7(a) express loan is good for start-ups and those businesses in need of working capital or that want to obtain financing for business acquisition. The loan is available on a guarantee basis, which means that the SBA lender structures the loan according to the SBA’s requirements and receives a guarantee for a portion of the loan. The 7(a) loan is intended to provide longer term financing and have more open-ended requirements in order to create a broader pool of applicants and recipients. Lenders look for:

  • Good character
  • Ability to repay with solid cash flow
  • Management ability / skill sets
  • Collateral
  • Owner’s equity contribution
  • Owner’s ability to contribute 20 percent or more to the guarantee of the SBA loan

The 504 loan is a co-lending program between private sector lenders and a CDC, making it a good fit for more mature businesses looking to purchase commercial real estate or add new employees. The loan offers financing for up to 90 percent of the loan to value amount and provides the best value beating the rates any bank can offer alone. The 504 is backed by a 100 percent debenture. Generally, one job must be created or retained for every $50,000 in SBA funding. There is an exception for small manufacturing businesses that must create or retain one job for every $100,000 in SBA funding received. The 504 also includes an option for meeting public policy goals. If a small business sets one of six public policy goals which include:

Business district revitalization expansion of exports
Expansion of minority business development rural development
Increasing productivity and competitiveness
Expansion of minority business development
Restructuring because of federally mandated standards or policies
Changes necessitated by federal budget cutbacks, or
Expansion of small business concerns owned and controlled by a veteran; the SBA debenture is increased to $2,000,000.

Benefits of the 504

  • Low down payment
  • Below market fixed interest rates
  • Long-term financing
  • Loan fees can also be finances
  • Loan is assumable

Hurn also offers advice for small businesses that are seeking funding.

  1. Ask for terms from vendors. There are always better options when it comes to negotiating payment terms with your vendors. If you haven’t had a conversation with your top vendors about terms, now is a great time to sit down and work out options that will free some of your cash for longer time horizons.

  2. Preserve cash. Above all else, if your business is in a cash flow crunch, stop spending! Of course there always certain expenses that must be carried, but try to restrict unnecessary spending and reduce inventory purchases to only what will quickly move off of the sales floor.

  3. Prepare for your bank meeting. It’s critical to have a plan for how you will use the cash influx (loan). Banks, including community lenders will want a full explanation of every part of how the loan will be utilized. Have a full business plan in hand, your profit and loss statements, and a complete set of books for their review. “Practice your pitch before you walk into the bank,” advises Hurn. There’s little time once you’re in the meeting to waste it fumbling for answers and trying to grasp the words to describe your plan. Write down your sales pitch, practice it and then hold a mock bank interview in order to work out your responses in a concise and timely manner. All of these little details will add up to a great impression on your community banker and increased odds that you’ll be approved for the loan.

If you think that an SBA loan would benefit your small business’ plans for growth, talk with a Fiducial Advisor about how you can work together to provide your community lender with solid financial picture of your business’ health. A Fiducial Advisor can be found by calling 866-FIDUCIA