Sen. Bennett promotes business in Rural Utah Part IV Raising cash to grow your business
The presenters included: Steve Price, Robert Edminster, Perry Mathews and Debbie Hatt.
Without capital, a good business idea can never succeed. But financing for small businesses can often be difficult to obtain especially in challenging economic times. Panelists representing public and private lending institutions discussed options and opportunities for obtaining business capital.
Steve Price, Assistant District Director for Economic Development, U.S. Small Business Administration. Price manages the SBA Financial and Technical Assistance programs in Utah.
"We will tell you today of some programs that may be of assistance to you. The SBA exists for one reason and that is to help small businesses. The SBA has a number of financial programs available to small businesses. The SBA has a number of different loan programs, the main one is the 7A program. The job of the SBA is to encourage lenders to loan money to small businesses. We provide a government guarantee of repayment to the lender on your behalf so they will loan you money. We co-sign on your loan for up to 90 percent currently to convince that lender to give you a loan. The lender doesn't have to take all of the risk so they are more willing to talk to you about a loan. Last year the SBA guaranteed more than $300 billion in small business loans in the state of Utah. These are loans the lenders would not have looked at without the SBA being involved. The SBA will help you open doors and get access to money that you would not otherwise get access to and get a reasonable rate and terms. Currently because of the stimulus program, the guarantee has increased and most of the fees are waived. This is a good incentive for you as a borrower, because the fees are waived and an extra incentive for the lender because their guarantee has been raised from the typical 75 percent to 90 percent guarantee. If you're interested in that program you can go to the SBA web site sba.gov. The process is simple, you just go to the lender of your choice and tell them you want to apply for an SBA guaranteed loan. They take the application and contact us for approval of that loan.
"We also have a very special loan program that came about because of the recovery program. It is called the American Recovery Capital Program or the ARC program. During this downturn recession many small businesses say, my cash flow is really tight, but if I can hang on for four, five, or six more months I think I will survive. I am just currently having a hard time because of cash flow. The ARC program is for a loan of up to $35,000. The purpose for that loan, is for you to take that money and make payments on your other debt, so that you can survive during this downturn. There are no payments on that loan for a year, after that you have five years to pay it back. To you it is an interest free loan up to $35,000. The advantage to the lender that participates with us in this loan is that the loan has a 100 percent guarantee. The lender will not suffer any loss because of a default. This is a very interesting program with a 100 percent guarantee and no interest charged to you. We pay interest to the lender so that they will make money on the loan.
"Getting access to money is not the most important thing. To me the most important thing is doing the proper homework or paperwork, doing the proper research, understanding what it is you need and how much you need and how you are going to pay it back. For this the SBA has a number of counseling and training programs. To get more information go to our web site sba.gov.
"The College of Eastern Utah has a small business development program to help you start or grow your business. We also have programs that will show you how to sell your product or service to the Federal Government and in foreign countries. We have Federal Procurement counseling and training available," said Price.
Robert Edminster, Vice President, Mountain West Small Business Finance, the commercial loan department for Zions Bank and is with the Utah State Office of Economic Development.
"I like to follow Steve, because I have been working with Steve for more than 20 years and we are a private company, we are not a government agency. Basically we do SBA financing. Steve mentioned a couple of programs the SBA has. The ARC program is a good one as well as the 7A program. Most commercial businesses by and large deal with two of the SBA programs, the 7A and the 504 program. The main difference between them is 7A program deals with working capital issues and tends to be for small amounts of money. The 504 program is strictly limited to financing fixed assets. A fixed asset is land, buildings and equipment. How do you get a lender to loan you money? The SBA despite being a Federal agency has no power to force any bank to do anything. So we try to make the loan more attractive to the bank any way we can. The way the 7A makes it attractive is to offer a guarantee.
"The 504 is for building purchases. It makes no difference if you are buying an existing building or building a new building from the ground up. For all practical purposes under our program it makes no difference. If you have a fixed asset you are planning, there are two lenders involved. Our company, Small Business Finance, effectively we represent the SBA. In most cases with most of my clients, I am about as close as the borrower will ever get to the SBA. I tell my clients that you will never hear from the SBA unless you do something very illegal or win an award.
"The way we structure these loans is typically banks and credit unions loan 50 percent of whatever the cost is. The SBA loans 40 percent and you the borrower puts up 10 percent. That 10 percent is a minimum down payment requirement. There are certain circumstances where it can go higher, but under no circumstances can it go less than 10 percent. That would be a cash down payment from you. However the SBA does accept land if you are building on the land that you already own. If you have owned it for two years we can take it at fair market value. If you have land that has been in your family for a long time and want to build something on it, it has to be a commercial building, it's got to be owner occupied. That is one of the main requirements. Whatever you build or buy you have to use it for your own business purposes.
"The advantage of the 504 program is, that the bank loans out 50 percent and we take a second position on whatever we finance. Collateral is sometimes a real hindrance. If you go to a bank and try to do a non SBA commercial real estate loan, they will say fine 30 percent down and you have a deal. By bringing in the 504 program through the SBA, the bank instead of loaning 70 percent it is loaning 50 percent. Granted there is only 10 percent down, but from the banks point of view it looks like you're are coming with 50 percent down. Why? Because we will subordinate to the bank. We take a second position and that makes the banks very happy. The bank is concerned primarily in repayment ability and is the collateral sufficient to cover the loan.
"The SBA has no power to dictate to banks what the rates and terms are on that bank 50 percent position. I would say to you as borrowers, make your best deal with the bank and understanding the bank is not in as risky a position as they would be without the SBA. Bear that in mind in your negotiations.
"The SBA 40 percent portion is at a fixed rate, 20 year term. We have an option to do 10 years, but very few people take that option. It is a full 20 year amortization, with no calls, no balloons and the good news is the rate is fixed for 20 years. The fixed rate starts when the building is built or purchased and not when the loan is approved. We have no way of knowing what the rate will be locked in at.
"Qualifications: you have to be an eligible business, obviously you have to be small, hence the S in SBA. I am sure that no one in this room is so large, they would be simply too big for a loan. We think of it the same as the banks do. How well thought out is your request. The bank wants to know, are we going to get our money back? That is true whether it is a government program or not. Repayment ability is important. We like to have businesses that have some history, but that is not absolutely essential. We have financed some pure start up businesses with no financial statements of any kind. "We want to know that you the borrower has some experience in that type of business. It is very important for you to know the field that you are going into. The kiss of death is, when you go in to talk to your banker and your banker knows more about your business than you know.
"We always make sure that the business we loan to has adequate working capital. The last thing we want to do, after that new building has been built is to have your business collapse, when the first utility bill comes in. Much of the business that we do is financing people out of leasing a building into owning a building. Leasing a building is buying the building for the landlord. The ownership of a building builds equity. For most people the sole function of a building is to keep the rain off of the paper work. Buildings by and large do not make people money, they are expenses, they are not revenue generators. The minimum SBA requirement is that you the owner has to occupy 50 percent of the building. Built from the ground up that requirement is 60 percent. You can have some tenants, but it cannot be the majority of your revenue.
We do not like to underwrite loans based on tenants that may or may not materialize. Other than that the program will work with any bank. We have offices in several cities around the state of Utah to help you," said Edminster.
Perry Mathews / Business and Cooperative Program Director, USDA Rural Development, he helps administer approximately $30 million in USDA loans and grants to assist rural Utah businesses.
Rural Development was born out of the reorganization of the Farm Home Administration. Rural Development is one of the three agencies that came out of that reorganization in the 1990s. Farm Service Agency is another and Natural Conservation Service is the other. The focus for Rural Development is to increase economic opportunity and improve the way of life for all rural Americans. Rural Development has multiple programs. We have more than 45 different programs that we administer in our communities through financial and technical assistance. Our programs are primarily community programs. So if you are looking for anything that would be essential to your community such as a police station, a fire station, senior assisted living facility, things like that. We also have water and sewer infrastructure that we can finance, and then we have housing programs. We can look at portable housing for communities.
With the business programs we can provide financial assistance to small businesses or large businesses. Our lending authority in Utah is $5 million and that will be going up to $7.5 million. Keep in mind that our focus is on rural communities and how we can empower or impact those communities in Utah. In regards to our program it is very similar to the SBA. We have an 80 percent guarantee up to that 5 million threshold. If it goes above that $5 million threshold then the guarantee drops down to 70 percent between the $5 and 10 million range. At the $25 million range we have a 60 percent guarantee. We can actually go up to $40 million on some packing facilities.
Keep in mind that Rural Development is in partnership with FSA, Farm Service Agency. Farm Service Agency provides financing to the agriculture producers directly. We provide financing to the processing facilities. Our rates and terms within rural development is negotiated between the borrower and the lender. You look at the guarantee from us and take that to the bank. The bank at the same time has to look at having something that they can sell to Secretary Martin. We can make a loan for up to 30 years on real estate investments, equipment we can go 15 years, in addition we can do seven years on working capital. The borrowers that we can provide financing for are public bodies, non-profit, Indian Tribes, Cooperatives and to private industry. We will work with you to find the best nitch for your project.
"Another benefit that has come about, is that we can actually issue our guarantee prior to construction. So when we look at the risk to the lenders, a lot of time we are looking at a year in securing financing. The direction we have received from the national office is that we can issue a guarantee back to construction. So we share that risk. With regards to financing projects, as long as it is not a golf course, a gaming institution or any illegal activity we can finance it. We can look at infrastructure, we can look at acquisition, we can look at buildings, and we can also do non-owner occupied facilities.
Another program is our Rural Guarantee for America program. If a business is out there that wants to look at renewable energy systems. We can provide financing through our program that gives a 25 percent grant toward the total cost of that project with a 50 percent guaranteed loan. That borrower would have to bring in 25 percent of that equity or investments. A number of states have looked at identifying cooperatives to facilitate some of those initiatives. So if we are looking at wind, solar, geothermal, micro-hydro, any of those energy types of systems we can use the financing mechanism to do that energy generation. Another is energy efficiency improvements under the Rural Guarantee America program. If you're in business and want to add solar to it, insulation, windows any type of repairs that will reduce the over all energy efficiency and over all costs to your business, we will finance that.
We have an initiative right now where we are looking at trying to expand the opportunities in the revolving loan program. It is called the intermediary reliving program and it is a revolving loan. We have seven partnerships across the state where we are looking at some of our financing at 1 percent being loaned to small working capital type loans. We see the need with the economy and the way things are right now, to revamp and provide stimulus into some other programs and expand the revolving loan programs," said Mathews.
Debbie Hatt is the manager of Department of Economic, Community & Housing Development, Southeastern Utah Association of Government and is responsible for administration of the district's $1.2 Million revolving loan fund program.
The Association of Governments is an umbrella organization that operates a fair number of programs. Programs that the audience may be aware of, but not exactly know where they are coming from. We are also the Utah Southeastern Economic Development District and that is the organization that operates the revolving loan fund. We also house the business and technical assistance center here in Price. Other programs that the Association of Governments has are the heating programs in the district, the housing weatherization program, utility heat assistance program, food bank program, economic development programs and the procurement and technical assistance program.
The Association of Governments here in Price covers Carbon, Emery, Grand and San Juan Counties including the Indian Reservation area. For the rural areas of Utah there are five other Association of Governments agencies that provide most of the same types of services. We have a web site. Which is seualg.utah.gov from that web site there is a link to the other associations.
Our revolving loan fund is a program available in other areas of the state from Association of Governments. We are talking about small businesses. Most of the loans we make are to businesses that have less than $200,000 in revenue sales and less than 10 employees. The average is about five employees. The primary purpose of our loan program is to provide debt financing. We have to provide debt financing. We work closely with the other organizations you have heard mentioned. For instance our clients use the small business development center and the planning process while the loan is being applied for. We also work closely with the County Economic Development officers in the business expansion and retention programs. We make referrals to the various agencies involved in the process of helping businesses get the capital they need.
Our program is primarily funded with Economic Development Administration funding, although we do have a significant amount of Farm Home money. That is how long the revolving loan fund in this area has been running since the early 1990s. We will loan up to $100,000. Our average loan is $50,000. Our average interest rate at this time is 6 to 6.5 percent. We are prevented from going lower than 4 percent by Federal regulation. We try to keep the interest rate as low as we can because of current business conditions. The primary purpose for our loans is for capital equipment and or land although we can do some operating expense loans.
A good business plan is essential to show us and your banker not only the need for the capital, but also the repayment ability of that loan. Our terms are generally five years. We will go up to 10 years if there is real estate collateral or some serious capital equipment collateral. However we are willing to take a position on a lot of these loans.
Start by talking to your banker. You have to have a really good working relationship with your banker. Before you can come to these other programs you need to know exactly where you stand with your bank. How much money are they willing to loan and where they are going to want to have collateral and their position on your assets. Most of the programs have money to lend right now. This money can be applied for generally year around.
We also run a mini or micro loan, up to $10,000, where you do not have to have a bank involved. Those loans are almost always for small businesses and new businesses. The collateral is not as restrictive as on the larger loans. If you are trying to find capital for your business, try to think of the other resources rather than actual cash, that are available through the agencies. Start with your banker, start with your local Economic Development Agency and take advantage of the Bear Program available in your community," said Hatt.