Small-business owners often want assistance from outside sources, and while that may come in the form of education on the many aspects of operating a successful business, the foremost need is generally financial.
Community banks, big banks and credit unions are the obvious places to seek additional capital for a company, but there are also nonprofit lenders in Colorado.
Seeking assistance can be daunting — especially for an inexperienced business owner — but financial institutions will not only discuss terms of a loan but also offer some education about the process, said Pikes Peak National Bank President Robin Roberts.
“Business owners are not good at everything. They’re going to be good at what their business is,” Roberts said.
Roberts, who has been PPNB president since 2004, has also been an advisory board member with the Pikes Peak Small Business Development Center since 2012. She teaches a class every other month for the SBDC, helping business owners understand financial options.
“The seminar covers all the ways an entrepreneur or small-business owner can fund their business,” she said. “It starts with their own cash injection; goes to friends, family and fools; and then goes in detail over bank financing, SBA financing and angel investment and ends with micro lending and crowdfunding.”
It can get complicated, Roberts said, and a lot of business owners don’t understand why banks won’t help them when they’re new. Simply put, they need to show the ability to repay a loan, and that means demonstrated cash flow in the form of tax returns, pay stubs and financial statements.
“They need to be able to show that for two or three years,” Roberts said. “Borrowing commercially and borrowing as a consumer are very different; they’re regulated differently, structured differently. New business owners have usually never borrowed commercially.”
COMMERCIAL LOAN OPTIONS
The most common business loans are the 504 and the 7(a); a 504 loan is generally for commercial real estate, commercial construction or heavy equipment. A 7(a) loan is primarily for working capital.
Borrowers can also qualify for a Small Business Administration 504 or 7(a) loan. SBA loans offer a lower down payment and longer repayment terms than conventional bank loans, allowing a business to hang on to more of its cash flow for operating expenses. A conventional commercial mortgage for instance, typically requires a 20 percent down payment with the bank financing 80 percent of the loan. An SBA 504 loan usually requires 10 percent down, Roberts said, with the bank financing 50 percent of the loan and the other 40 percent being an SBA loan.
“When a business owner is purchasing a $500,000 building, a 20 percent down payment can be prohibitive,” she said. “A 10 percent down payment is usually doable and leaves the business owner with some additional capital for building improvements or reserves.”
Another advantage is that the SBA part of the loan is at a fixed rate for 20 years, while Roberts said her bank can change the rate after seven years. Rates vary but are often about 5 percent for commercial real estate, Roberts said.
“In a rising rate environment,” she said, “it is advantageous to have the 40 percent loan be fixed at today’s rates for 20 years.”
Roberts said she is often surprised that business owners don’t know more about their financial situation, but banks will regularly ask for updated info.
“Banks’ commercial loan portfolios have to be monitored constantly, so if you come to me to get a $500,000 commercial real estate mortgage you’ll have to qualify just like for a personal mortgage but every year I’m going to ask you for tax returns and financial statements,” she said. “And we’re going to recalculate your debt ratios and look at how your business is performing and will look to see if there are trends where your business is improving or declining, and are you taking on additional debt? We’ll look at the whole picture.”
Wells Fargo stays busy
Wells Fargo Bank is Colorado’s top Small Business Administration 7(a) lender for the third consecutive year [322 loans for $116 million]. It is tops in El Paso County with 39 SBA 7(a) loans, although the total for those loans of $11.4 million is less than the nearly $14 million in seven loans from Live Oak Banking Company. Wells Fargo also offers 504 loans.
“We have one very busy SBA lender in Colorado Springs, and they specialize in those types of loans,” said Wells Fargo Senior Vice President of Business Banking Bruce Panter. “We have six conventional [business] lenders. So our conventional [business] loans are in excess of our SBA loans. We’ll do a side-by-side analysis with SBA and conventional to let the business owner decide what’s best for them.”
Both Panter and Roberts said business owners should do their homework before choosing a bank.
“Is what you need common to their product suite or are you a one-off to them?” Panter said. “Call the SBA, spend the time to walk through the process with each lender, and look at different options.”
Roberts said banks often have a “niche” with either smaller businesses, middle market or international corporations.
“Our niche, as the bank stands right now, is small businesses with annual revenues of $2 million and below,” she said. “We have customers with larger revenues, but because we’re a small business ourselves, that niche really works with us. We also work with startups; we’ve got about a $4 million loan portfolio on startups. The average loan size is about $75,000.”
Startups have to show outsides sources of income, however, whether that’s a veteran’s retirement income, disability income or a working spouse willing to co-sign the loan.
Roberts said she often refers potential borrowers to other banks in town or, if they can’t qualify for a bank loan, to nonprofit lenders Colorado Enterprise Fund or Accion, who have fewer restrictions.
“Those two nonprofits focus on small business lending, which we call micro lending, of $500,000 and below,” Roberts said. “They can work with some challenges on your credit, a lack of collateral and using projections because it’s a startup. We often find success in sending people to them when we just weren’t able to do it.”
CEF sponsors events in Colorado Springs and will add a full-time loan officer by next year, said Director of Marketing and Communications Alisa Zimmerman.
“As a certified Community Development Financial Institution, we are serving underserved markets and communities throughout the state of Colorado. … We take the extra risk in efforts to help promote and impact our overall community and economic development in our state,” said CEF Director of Lending Alan Ramirez in an email.
CEF announced Monday it will launch a new loan program Nov. 11 to support military veterans and surviving spouses and children of veterans. The VALOR loan program will offer a loan rate discounted 2 percent from standard CEF rates with loan terms up to 10 years and interest-only periods of up to six months.
Editor’s note: This is the first in a two-part series on resources available to small-business owners. The next installment will explore regional educational resources.