We prepare hundreds of business plans each year for clients that intend to submit their plans to a commercial bank with the hope of securing a loan for a new business opportunity or to expand an existing business.
Given the high level of interest in commercial borrowing, we thought it would be helpful to interview our friend, Nancy Beckwith, CEO of Executive Element. She specializes in commercial financing placement and related services. Executive Element offers its clients a full range of commercial loan options to ensure the best fit for a company’s financing needs.
Each Lender is Different
Cayenne: Nancy, thanks for taking the time to share some of your knowledge and experience with our readers. Your website says that not all lending institutions are created equal. Can you explain?
Nancy: All banks have their own credit parameters and level of tolerance for certain industries. For example, some lenders won’t do ground-up construction, but other lenders have a full back office ready to support a ground-up construction transaction. Some banks won’t finance a non-real estate deal, yet other lenders are very supportive of business acquisitions without real estate.
That is why, as a business owner attempting to obtain a business loan, it can be frustrating and confusing when trying to understand where to go for capital for your specific needs. This is where a loan broker can be extremely useful – they already know what the banks will accept and won’t accept and how to ensure that a business loan is appropriately presented for greater chances of approval.
Who Can Benefit?
Cayenne: What types of companies do you most frequently work with?
Nancy: I would say that the types of loans I personally see are start-ups. But, from an industry perspective, I have all types of clients representing a variety of businesses such as farms, machine shops, automotive businesses, surgery centers, fitness centers, restaurants, RV parks, and retail. I also can finance equipment, large machinery, and even trucks, and I do a lot of debt restructuring. Although I do not specialize in one industry or transaction type, I specialize in SBA and USDA government loans.
Term Loans vs. Lines of Credit
Cayenne: What is the difference between a term loan and a line of credit?
Nancy: The simple answer is that with a term loan, you are borrowing all of the capital in a lump sum and you will pay off that debt over a period of time via principal and interest payments. Term loans are typically used for a specific purpose, such as to buy machinery or even a business.
With a line of credit, the borrower will be approved for a certain credit limit but can withdraw the amount they want and need without taking the full credit limit at one time. The borrower has continuous access to the line of credit. This gives the borrower the level of comfort that the money is there if they need it, but they don’t have to pay for that capital until they use it. Perfect for most businesses that have the need to, for example, buy a bulk of raw materials for a particular purchase order. They use the capital they need for that purchase and then only pay interest on that particular withdrawal. The capital available via a line of credit can be borrowed at the full limit amount or in smaller amounts and can be repaid at any time when the borrower’s cash flow allows.
What Does the SBA Do?
Cayenne: The Small Business Administration (SBA) has an important role to play in lending to small and medium-sized businesses. Can you explain their role?
Nancy: One of the biggest misconceptions I have seen with borrowers is that when they seek an SBA loan, they believe they are working directly with the SBA. That isn’t how it works. The SBA approves banks and non-bank lenders to be a part of their PLP program (preferred lender partner). This PLP accreditation allows lenders to extend credit to borrowers via the SBA program without the SBA underwriting the loan directly—which saves time and allows for the borrower to have direct contact with their lending partner.
The upside to the SBA involvement is that it reduces the lending institution’s risk. The SBA will guarantee up to 75% of the loan for the lender. This means that the SBA will reimburse the lender for 75% of the outstanding balance in the event of a default. As you can assume, this guarantee is very attractive to lenders who want to lend more capital to their customers but can’t withstand the potential of defaults on large loan amounts. The lower risk of loss enables more funds to be available to entrepreneurs across the country.
In addition to providing more access to capital for entrepreneurs via this program, the terms of the SBA loans are more manageable for most entrepreneurs. The LTV (loan to value) can be much higher than conventional commercial loans, the equity injection (down payment) for business loans is much lower, the terms are longer, and the rates are reasonable. Further, the rates are capped with the SBA. Lenders cannot place a higher rate than the capped rate – further protecting the borrower from usury tactics.
The Role of Business Plans in Commercial Lending
Cayenne: How important is a business plan when applying for a business loan? Do all commercial lenders require business plans?
Nancy: A business plan requirement is primarily dictated by the nature of the loan request. All start-ups need a business plan with accompanying projections and assumptions. Most expansions need a business plan as well. A business plan isn’t needed if someone is buying a piece of real estate to merely replace their current lease.
The importance of a business plan from a lender’s perspective is that the lender needs to understand fully the borrower’s prospective business model. The lender wants to be comfortable that the business is one they believe is feasible and will thrive. After all, they want to ensure that the borrowing business entity will have the ability to repay the debt.
From my perspective, I believe that every business should absolutely have a business plan. Not only is it a roadmap for the business, but it also enables the business owner to truly think through their plans, their objectives, and the end game. There is a huge benefit to memorializing the global picture by pulling together the various business processes, cost centers, and profit centers into one document with a collaborative, common directive. No one ever ‘loses’ by creating a business plan.
Can Startups Get a Business Loan?
Cayenne: Will commercial lenders make loans to startups?
Nancy: Absolutely. However, that is predominantly an SBA type of loan. Conventional commercial lenders typically shy away from start-ups. Even many equipment lenders don’t want to lend to start-ups. This is another huge advantage to entrepreneurs in our country – the SBA is willing to participate in their dreams of owning their own business.
I would like to caution many entrepreneurs who want to do a start-up. It is far better to obtain a loan before you start the business and while you still have some capital. You can use the capital you have for your equity injection (down payment), and the bank can finance the rest. Many business owners will come to me after they have been open for less than a year and now require operating capital. That is very difficult to obtain. It is easier to obtain operating capital with a start-up loan which includes equipment, furniture, fixtures, etc. It seems counter-intuitive to not try to do it on your own first, but it is far easier to obtain financing BEFORE you open the doors rather than wait a few months and then seek a loan for just working capital. Of course, every situation and business differs as to when is the best time to seek money.
It is advisable to seek guidance from a loan consultant and/or broker before you start your business IF you know that you will most likely need financial assistance soon after opening.
Tips for Securing a Commercial Loan
Cayenne: What are the best tips you can give our readers when they apply for a commercial loan?
Nancy: First and foremost, set your expectations to reality. There are very few instances in which a lender will offer 100% financing for a business venture.
The lenders are there to provide you with money for a viable and sound business endeavor. But they also expect that you will be bringing capital to the transaction. As hard as it may seem to understand, lenders want the entrepreneur to have some of their own funds and to be somewhat liquid. That liquidity and/or capital can be presented in many forms. I assist clients in understanding exactly what they need from a liquidity perspective before and post-closing of the loan.
As for preparing yourself for the loan process, it is data-intensive. You will be asked for a great deal of documentation and depending on how long the loan process takes, you may have to provide updated financials since they expire over time. Just focus on the goal – obtaining the money you need for your business and providing the information requested as quickly as possible to keep the loan process moving.
When approaching a lender, borrowers need to ensure that they have a clear directive and they have identified, with specificity, the use of funds. The bank needs to know how much you need and what you need it for presented in a detailed format with supporting documentation (e.g., invoices, purchase agreements).
This is where an independent third-party/broker can be of unparalleled assistance. Companies like Executive Element ensure that when you approach the bank, you have the right information that is presented in a way that is attractive to the lender.
Cayenne: Nancy, thank you for this awesome advice. You have been a valuable resource to many of our clients and now we are able to share your information with so many more.
Nancy: You are welcome. Your clients are always welcome to contact Executive Element when they think we might be able to help.
Through Executive Element, Nancy Beckwith brings her business acumen and financial expertise to Main Street, offering her skill and expertise to America’s entrepreneurs via her boutique loan consulting firm. Nancy graduated with a marketing degree from Cleveland State University. She has been recognized in the Harvard Business Journal and has attended various Harvard University workshops for process improvement, project management, and negotiating skills. She is the recipient of an ADDY Certificate of Excellence for Television Advertisement, the Merit Award for Total Advertising Campaign & Newspaper Advertising, and an ADDY Citation for Excellence Award. She can be reached at 949-424-4198.