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Perhaps your business is one of the fortunate ones seeing booming sales amid the COVID-19 pandemic. Maybe it’s time to expand with a new location, buy that new piece of equipment or make some new key hires.
The next question, of course, is how to fund that next step that could unlock your company’s growth.
Becky McClelland, market president, commercial banking at Union Grove-based Community State Bank, has seen various outcomes for clients throughout the pandemic: For some, business has been good, fueling ambitious expansions. Others have suffered, and their long-term recovery remains tenuous.
“Business and lending have been steady, but I think people are looking at the risk of the unknown,” she said. “Do you make the jump and buy a new building/piece of real estate? Or do you make what you have right now work and see what happens in the next few months? There are many unknowns, I think, and people are looking at all options.”
To find the best financing path, it’s helpful to have a well-established relationship with your banker first and to keep them apprised of your financing needs, McClelland said.
“There are a ton of options (for financing), and there are a lot (of options) that people don’t know about,” McClelland said. “So, if you’re thinking about ‘how do I grow? how do I expand?’ call your local bank you work with. The options we have and resources we have, and (ability to partner) with different organizations, we have a lot of things we can talk through.”
Traditional lending options may make the most sense for an established business looking to buy another building or land for a new building, she said. Currently, banks are asking customers to put 20% to 25% down. Depending on the business, that amount of cash may or may not be readily available, which is where SBA or other programs can provide some assistance.
McClelland points to the SBA 504 loan, which allows businesses to build a commercial property from the ground up or expand existing facilities, offering as low as 10% down for total project financing and below-market fixed interest rates with payments fully amortized over 25 years.
Beyond new construction or facility expansions, a 504 loan can also be used for long-term machinery and equipment, or improvements to existing facilities, land, utilities and parking lots.
The SBA 7(a) program, meanwhile, is an option for small businesses looking to purchase equipment or supplies, or those that need working capital or to refinance current business debt. The maximum loan amount is $5 million, and eligibility is based on the business’s income, credit history and where it operates.
“The 7(a) program is able to help customers expand and buy different pieces of equipment and possibly partner with the bank, and they don’t have to come in necessarily with such a big piece of cash to put down on it,” McClelland said. “It gives a little extra flexibility for that, and if it’s a riskier deal, it takes a little bit of the risk off the bank as well.”
Revolving lines of credit are a common option for businesses in need of working capital, particularly for those that are working with longer vendor payment periods.
“That’s when the line of credit comes in, and (businesses) are able to use that, rather than having to use so much cash up front and wait for the payments that might be extended a little bit,” McClelland said. “Especially working with some of the bigger names and vendors, they tend to push their payments out pretty far.”
While the rise in online lending options has opened new possibilities in the world of financing, McClelland said it’s important to maintain relationships with trusted advisors.
“The ease (of online lenders) at the beginning is great, it really is,” she said. “But, at the end of the day, are they going to be the ones picking up the phone when you call on weekends and you have a question, or taking time to sit down as you’re trying to work through things?”
Finding a good deal
When seeking a business loan, it might be tempting to choose the lowest-cost deal, but there are a host of other factors to consider, said Steve Yahnke, managing director at TKO Miller, a Milwaukee-based middle market investment bank. He recommends business leaders consider these questions first:
- How much money do you need to borrow? Make sure to take a detailed inventory of your business’s needs and how the cash will be used, such as the cost of equipment and installation costs, and how much working capital you will need.
- How much flexibility do you want? “Do you want to get into a deal that’s very complicated, it’s complex, it’s got a million covenants in it? No,” Yahnke said. “We want a deal that is covenant-light, maybe no personal guarantee. We’ve got to put all those things up front when we (tell lenders) ‘this is what we want.’”
- How complex is the deal? For example, do you serve foreign customers? Is your inventory coming from overseas? Those factors could make some businesses ineligible for some SBA loans, Yahnke noted.
- How quickly do you need the money? All these factors have trade-offs. If you need money quickly, it may cost you, for example.
- Finally, consider the cost, Yahnke said. “Cost comes last. People always say, ‘I want the best deal.’ Well, yeah, OK, but we’ve got to go through availability, flexibility, complexity, timing and then cost. Maybe you get the worst deal because it had the best cost, and now you’ve just limited your ability to grow because you’re constrained,” he said.
For complex deals – such as those with a time crunch or those involving foreign suppliers or customers – Yahnke recommends retaining a third-party advisor, like TKO Miller.
“Our network is huge; it’s thousands of names all across North America, so we’re going to go to a lot of the best lenders, and we’re going to boil it down,” he said. “There’s no way a lot of these clients know who the best lenders are for their situation – typically in the $10 million to $100 million capital raise space – because they don’t do this all day every day, but we do. … We just, over decades and decades, know a lot of people, so we can cut to the chase.”