By William J. Lynott
Credit is the oil that lubricates the machinery of business. Whether it’s a loan to buy inventory or supplies, to support renovation or expansion, to make a capital purchase, or to meet payroll or other operating expenses, almost every convenience and petroleum retail operation depends on credit.
The upheaval in today’s economy has resulted in a “credit crunch” that seems to have made it tougher than ever for business owners to swing a loan, and newly imposed requirements aren’t making the process easier. “In my 30 years in the business, I’ve never seen it tougher,” said Jay Ricker, president of Ricker Oil Company in Anderson, Indiana.
Still, for those in the know, there are enough options available to make the task a little easier. Money may be tight, but business loans are being made every day to those who know how and where to ask for them.
“The news media tends to lump all banks together when it comes to tight money,” said Bob White, president of Abington Bank in Jenkintown, Pennsylvania, “but there are big differences among banks. Like many other community banks, we have always followed conservative lending practices. As a result, our default rates haven’t suffered and we’re in the same healthy position for making loans now than we were in two years ago.”
Gus Olympidis, president and CEO of Family Express in Valparaiso, Indiana, agreed. “Look for a resurging presence of community banks in business financing,” he said. “Many community banks have avoided the sub-prime mortgage problem. As a result, their default rates are low and they are in a strong lending position.”
Olympidis, who just recently applied for and received a business loan for his 52-store chain, said that banks are actively courting him for business. “It’s no longer enough for the bank to examine the credit of the applicant,” he cautioned. “In today’s economy, it’s important for a sophisticated business borrower to examine the financial health of potential lenders.”
If you’re looking for business financing, some important choices and tips will improve your chances of getting the money you need.
The first place many business owners turn to for a loan is their local bank. That’s why it’s essential to build a solid business relationship with your bank long before you need to ask them for money. Familiarizing your bank with convenience retailing and specifically, your business and how it’s progressing, sets the stage for the time when you need to ask for a loan.
For small, relatively new businesses, many experts like the time-honored system for establishing good credit. “Take out a small loan — say $5,000 or $10,000. Put that money in the bank where it will draw a little interest. Then, a few months later, pay off the loan in full, plus interest. Now the bank knows you, and you have a solid credit history,” said CPA Tom Normoyle in Huntingdon Valley, Pennsylvania.
Even after establishing a relationship, some convenience retailers meet with frustration when the bank turns down their loan application. Most bankers agree that this is usually because the owner has failed to come prepared with the information a lender needs to make a positive decision. Smart convenience retailers come prepared with industry data, such as that found in the NACS State of the Industry Report, to show banks the health of the industry and to demonstrate how they are doing relative to other operators.
“How to find the money to finance an expansion or acquisition is the last thing many business owners think about when they plan a project,” said James G. Marshall, vice president of Fulton Bank in Lancaster, Pennsylvania. “It’s best to have a team lined up behind you when you begin to plan a major financial move — and your bank should be a member of that team.”
How should you prepare for a meeting with a bank loan officer? Marshall suggests that you come armed with:
- Financial statements for your existing business
- Accountant-prepared financial projections and cash flow analysis
- Marketing feasibility study for the project
- Owner’s personal financial statements and tax returns
- Information on the background and experience of owner(s)
“With this information,” said Marshall, “the bank can give proper consideration to your loan application.”
Be careful to avoid the red flags that may raise concerns. “One of the things that would turn me off,” said White, “is an applicant who has over-leveraged himself or recently financed the purchase of an expensive asset. And, of course, it’s absolutely essential that the applicant be honest and up front with all pertinent information.”
Ricker, who recently swung a loan for his 35-store chain, agreed. “Be prepared to divulge everything,” he said, and don’t be surprised if a personal guarantee is part of the loan package. “They may have been out of style for a while, but I expect them to become almost universal in today’s economy.”
If you’re thinking about acquiring a competitor, it’s important to have a clear understanding of the value of every asset in your acquisition target. Banks or commercial lenders are more likely to look favorably on a deal that has already been inventoried and valued by individual asset. Before going to a lender, you should count, confirm and value every single hard asset you are able to identify, including all operating equipment, furniture and fixtures.
When your best efforts fall on deaf ears at your local banks, all is not lost. Alternate sources of business financing can still meet your needs.
Most states have loan programs designed to provide small business financing. “Some of these programs provide loans at lower than market interest rates provided the business will create jobs in the state,” said Donna A. Holmes, director of the Small Business Development Center at Pennsylvania State University. “Some state programs will take a subordinate position to the bank, giving the bank a better collateral position and an incentive to make a loan that they may have otherwise rejected."
For information on small business financing programs in your state, contact the office of your state representative or state senator.
The federal government also has loan programs to assist small business owners. The most popular of these is the Small Business Administration’s guaranteed loan program that guarantees as much as 80 percent of the loan principal. “This program gives your bank an incentive to lend to a borrower who does not otherwise meet the bank’s lending guidelines,” said Holmes.
Among other SBA small business loan programs is the 504 loan. Established in 1980, the 504 Loan Program provides long-term, fixed-rate financing for major fixed assets, such as real estate, facilities construction or expansion, or other fixed-asset needs.
If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The SBA’s guaranteed loan process is rather complex, so you want a lender who has experience working with them. To find certified or preferred lenders, visit the SBA Web site or call your local SBA office for guidance.
The SBA has local and regional offices in every state. You’ll find their phone number in the federal government section of your local phone directory. Or, for detailed information on all SBA programs, log on to www.sba.gov.
SBICs are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans and some provide both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.
For information on how to contact an SBIC, check with your local SBA office or log on to www.sba.gov/inv/.
“Your local Chambers of Commerce or other business group may have some revolving loan funds available to businesses specific to your community,” said Holmes. “Generally, these funds come from a variety of local resources and have specific guidelines for their use.”
Holmes recommends that you begin by contacting the director of your local Chamber of Commerce to see what help might be available for the specific purpose you have in mind.
When conventional financing options seem out of reach, many business owners have had success seeking out individuals or commercial lenders willing to invest in a business expansion, either with debt financing or by taking an equity position in the business. When you find an “angel” investor, you’ll probably find that this option is more flexible than a bank loan or government program.
If you don’t know anyone with the economic firepower to fund your expansion, don’t give up. There is an entire industry of professional investors looking for opportunities to invest in growing businesses.
Be advised, though, that unless you’re willing to give up an equity position in your business, working with a professional investor is not for you.
Depending on the size and economic health of your business, the only source of expansion money available to you may be what you can dig up on your own. Be advised, though, that each of these money sources carries special risks.
If you have a friend or family member able to help finance your growth, you may find this to be the easiest type of loan to obtain. Use caution, however. Most financial experts agree that mixing business and personal relationships can lead to destructive problems in both your business and personal life, especially if you aren’t aware of the pitfalls. If you do take a loan from a friend or family member, make sure that all details are carefully spelled out in a written contract.
If you have enough equity in your home, a second mortgage may provide all the money you need. While the interest rate on this type of loan may be among the most favorable, keep in mind that it also puts you at risk of losing your home if your business falters.
If your needs are modest, you may have credit cards with lines of credit substantial enough to fund all or part of your expansion plans. While it can be tempting to simply charge everything, this is arguably the riskiest and least desirable of all financing methods. The burdensome interest rates charged by credit card issuers can become impossible to meet if your business hits even a minor bump in the road. The result could be a severely damaged credit rating — or even the loss of your business.
In today’s difficult economy, traditional — and usually effective — financing alternatives may not be as viable as they have been in more settled economies. Among the newer alternatives making their appearance is the Mars Funding program. Founded by a group of financial professionals, Merchant Advance Resource Solutions offers a funding program based on a business’ future cash flow determined by historical and future credit card sales. Buyer beware, however. The risk lies in what percentage of credit card fees are being paid to Mars Funding. If it’s already hard to run your business on 100 percent of sales, imagine how tough it might be to run it on 85 percent or 90 percent of sales.
When you need to raise money for your business, say most experts, a thorough and detailed business plan is the key to the safest and most desirable types of financing. While other than conventional sources of money may seem the easiest to find, they are seldom the wisest choice.
William J. Lynott is a former management consultant and corporate executive who writes on human interest, business and financial topics. He can be reached at wlynott@cs.com or through his Web site: www.blynott.com.