The financial crisis not only created uncertainty for many small business owners and entrepreneurs, but also misconceptions about the availability of bank funds for business development and growth.
As a result, owners have taken a wait–and–see approach to expand their small businesses, hire additional staff, invest in new plant and equipment and borrow money until the economy improves.
Small business lending always has been a cornerstone of community banking. Peoples Bank business lending, for instance, focuses currently on owner–occupied commercial real estate, multi–family housing, asset–based loans/lines of credit and equipment loans.
And, contrary to some opinion, community banks have money to lend. Recent government reports indicate 40 percent of all small business lending is made by banks $1 billion or less in size. Community banks continued to make loans after many bigger banks withdrew or reduced lending activity at the height of the financial crisis.
With the economy showing signs of recovery, and when you consider that we have not seen interest rates this low in a very long time, now is a good time to sit down with your community banker and explore your financing options to start up or expand a business. Typically, commercial loans help entrepreneurs purchase real estate and equipment, and provide them with working capital.
For a startup business, you will need to bring your financial history and a solid business plan that answers questions such as: "What will it cost to start your business and maintain cash flow month–to–month?" "Who is your competition and how will you market your product or service?" The Small Business Development Center and some university–based programs help entrepreneurs complete the business plan.
Business owners looking to expand or acquire assets should be prepared to discuss with the banker recent business operations and provide financial information from the past three years. This includes balance sheet and profit and loss statements, current year financial information, personal tax returns and a personal financial statement.
The business owner should clearly understand how any debt incurred will affect the cash flow of the business. If the expansion will affect revenue significantly in the next 12 months, a cash flow projection will be valuable for the business owner as well as the banker.
Relationship banking is at the core of community banking. Banks such as ours have deep roots in the community, local decision–making and know their customers and their business. As Ben Bernanke, chairman of the Federal Reserve, says, "Banks whose headquarters and key decision makers are hundreds or thousands of miles away inevitably lack the in–depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness."
We have some business customers who have had to reorganize their business model in order to remain steady during these challenging times and make tough choices that have impacted their bottom line. However, they are now seeing an increase in business and an improvement in profitability and, because of their personal relationship with the bank, they are now seeking funds to expand.
Your banker can provide you with various financing options, which may include conventional bank–only financing or financing utilizing a Small Business Administration (SBA) loan guarantee. The SBA does not make direct loans to small businesses, but rather sets the guidelines for loans and partners with a certified SBA lender such as Peoples Bank.
SBA loans are available for startup businesses or for existing businesses looking to expand or diversify. The 504 Loan Program, for example, provides favorable terms such as 90 percent financing up to a 20–year attractive fixed rate on a portion of the loan. This loan is administered in conjunction with your local community banker and a certified development company such as the Regional Development Company located in Valparaiso.
Community banks recognize that small business helps drive the local economy, providing jobs and sparking growth. To this end, the goal of the community banker is similar to that of the business borrower – to see the small business owner succeed and grow. There's never been a better time for the business owner to build a relationship with their community banker than now.