Business Lending at its Best

Written by: Brady Drake

From SBA loan programs to local economic development programs, the right lender will help identify the best financing packages for each client.

Financing is a necessary component of doing business. Whether starting up, expanding, making an acquisition, or purchasing assets, capital is needed to make it happen.

Most banks offer business lending, but they don’t all have the expertise and capabilities to provide the appropriate financing package for every situation. Terms and conditions vary, and so do the types of loans available for certain businesses and purposes. There are almost as many financing options as there are types of businesses; the right lender will use their skill and creativity to develop a plan that helps their client achieve their goals rather than keeping them up at night.

Pandemic Considerations

Despite widespread uncertainty at the beginning of the pandemic, many businesses actually fared quite well, such as construction and home renovation companies. Those businesses may now want to expand — organically or through acquisitions — or invest in other business enhancements. The additional liquidity brought on by federal government stimulus programs means banks are ready to lend and rates are favorable. But scrutinize the full loan terms and ensure you are working with a lender who has your best interest in mind rather than theirs.

Cole Keney, Senior Business Advisor, Alerus

“Banks have a lot of liquidity right now so they are eager to get loans on the books, but that also means lenders may not be doing everything they can to put together the best financing package,” says Cole Keney, senior business advisor at Alerus. “That’s why it’s important to work with an experienced lender who views your business as a long-term partnership instead of a transaction. They will focus more on the available opportunities and how they fit into your overall plan and can provide guidance that will help you through good times and bad.”

Of course, other businesses were negatively impacted by the pandemic and are just now beginning to build back. The service industry was particularly hard hit by regulations and labor issues. In other industries, supply chains broke down, disrupting business operations and preventing them from meeting demand. The Paycheck Protection Program (PPP) kept many businesses afloat during the worst of things, but as those funds dwindle businesses still need capital to recover. It can be more challenging for those types of businesses to obtain financing, but not impossible.

“From a banking standpoint, we look at your history, so if 2020 wasn’t the best year for you due to COVID-19, what was your business like prior to that year?” says Mark Yahna, senior business advisor at Alerus. “If your business was a PPP recipient, we’ll factor that in, and then we look at how 2021 has been going and how you expect the rest of the year to perform. We’re going to really lean on your prior history and projections, because we understand the past year or so has presented unprecedented circumstances.”

Financing Options

Every lending request should start with a conversation between the business owner and their advisor. From there, they can determine what options might be available and if the lender can meet their needs. Not all lenders are the same. Smaller institutions may not have the capability to meet large requests. National institutions may have the lending capacity but lack the personal connection or drive to put together the best possible financing package.

“A lender who is working in their client’s best interest go the extra step to find opportunities and introduce all options to them,” Keney says. “If the right combination of financing includes other lending agencies, they will make referrals and introductions to organizations that can help and foster those relationships for the client’s benefit.”

For example, banks can collaborate with certified development companies (CDCs) to secure U.S. Small Business Administration (SBA)-backed 504 loans for fixed asset purchases up to $12.5 million. These types of loans provide long-term, fixed-rate terms and require a smaller down payment from the client than traditional loans, which can make them an attractive option building purchases or other expansion-related initiatives.

Mark Yahna, Senior Business Advisor, Alerus

There are eligibility requirements and restrictions on what the loans can be used for, but a skilled lender can help a business owner quickly identify whether this type of loan is an option worth exploring.

As a board member for Dakota Business Lending, North Dakota’s largest CDC, Keney is well-versed on CDC options as well as the current lending climate for business clients. CDCs have been busier than usual in 2021 as business owners take advantage of SBA incentives, including a guarantee fee waiver that runs through September 30, 2021, but that type of financing isn’t right for everyone.

“There can be a little more work involved in those types of packages and some borrowers simply just don’t need CDC financing,” he says. “The right lender will be a true business partner and identify all available opportunities to produce the best combination of financing to help you succeed.”

SBA Loan Resurgence

When business owners think about the SBA, many now immediately think about PPP, but the SBA has a long history of providing small business owners with attractive loan options. “SBA loans can be intimidating for business owners because there are a variety of programs and they all have strict criteria and requirements,” says John Kimball, director of SBA lending at Alerus. “You shouldn’t have to become an expert in the alphabet soup of SBA loan programs to benefit from them. That’s the lender’s job. When a lender has the correct systems in place and the expertise to navigate SBA programs, they can identify the best options quickly and prevent any surprises from happening at the closing table.”

SBA programs have enjoyed a recent resurgence in popularity, due in part to PPP and helped by incentives put in place through the CARES Act, which makes SBA loans even more attractive, says Kimball.

“SBA loans provide stable, affordable rate loans for the borrower, but the trade-off has traditionally been a higher guarantee fee,” he says. “The fee can be financed, and the SBA uses those guarantee fees to finance the program, but the guarantee fee has been a deterrent for some borrowers. Waiving the guarantee fee through September 30 has had the intended effect of increasing interest in the program. Additionally, borrowers that meet the SBA deadline qualify for up to three months of waived loan payments.”

John Kimball, SBA Lending Director, Alerus

The range of businesses and loan purposes that may be eligible for SBA financing is also much broader than some may realize. Fixed asset purchases qualify for some SBA programs, while other programs are available for businesses seeking capital as they recover from the pandemic, for example.

As acquisitions continue to be a business trend across many industries, Kimball points out SBA financing as a viable option to consider early on. “Conventional financing doesn’t always work as well for buying a business because there may not be a lot of collateral and risk always increases when management changes,” he says. “SBA financing is designed to help banks reduce risk and guarantee loans when collateral is lacking, so they can be a great tool for someone who wants to buy a business, buy out their partner, or acquire another business.”

They also benefit the borrower. Keney recently assisted a client in obtaining SBA financing to acquire a business. In addition to the low down payment and low interest on the loan, Keney helped his client secure payment waivers that saved nearly $30,000 over three months. “That is a significant savings and makes a real difference in the bottom line for this client,” Keney says.

Yahna also recently utilized the SBA’s 504 loan program and combined it with other local and state financing programs to help a business client acquire a building under enviable terms.

“My client runs a specialty industrial business and had purchased the business two years ago but didn’t yet own the building where the business is located,” Yahna says. “They were a good fit for the 504 program, but I knew there might be additional programs this entrepreneur might qualify for, so I did some digging. We were able to put together a package that included an interest buydown grant using the Bank of North Dakota’s Flex PACE program and the Grand

Forks Growth Fund, and an SBA 504 loan with Alerus financing. That allowed my client to complete a low interest $1 million purchase with just $100,000 up front.”

SBA programs like the 504 and 7(a) loan programs can be very useful to entrepreneurs, but they can be complex and can also be just one component of a larger package, so it is important for SBA experts to join the conversation early. “We can help quickly identify if the borrower will qualify, and if they don’t, we can determine if there are steps they can take to help improve their chances,” Kimball says. “It’s important for business owners to get answers quickly and know their path forward. Our job is to know the options, match them with the business, explain them to the client, and let them make the decision.”

Getting Started

Before an advisor can help identify the best financial way forward, they will want to review the business’ existing financials, identify any shortfalls, and understand the borrower’s long-term goals. The advisor then works with the proper specialists to identify all potential opportunities.

Established business owners seeking financing should be ready to discuss the business’ recent history and future. Owners should remember to disclose their business partners and be frank about their goals and plans so the advisor can help make the best decisions for everyone.

If the business is a start-up or otherwise relying on projected cash flow to pay the loan, the lender may need to lean more heavily on personal financial information since the business won’t have a performance history yet. Owners may also be asked to supply a more detailed business plan with shorter and more frequent milestones. These steps help the financial institution evaluate the risk level of the loan, but it’s also done with the client’s best interest in mind. Not only can it help prevent taking on a loan that isn’t feasible, going through the exercise can also help the owner identify more firm business goals.

Disclosure: The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Alerus does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Alerus Financial, N.A. is Member FDIC.

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Brady is the Editorial Director at Spotlight Media in Fargo, ND.