Small Business Capital
by: Geory Stivers, VP
Homebanc, Tampa, FL
This is a two-part article discussing small business funding, lending environments and commercial loan programs. The second part discussing lending institutions will be published in the next issue of Space Coast Business.
Entrepreneurs and small business owners face many challenges on a daily basis. However, of all adversities faced, the biggest reason businesses fail: undercapitalization. Money doesn’t solve all problems, but lack of money will cripple ANY business.
So what kind of loan do you need and how will it be used?
Small business loans have some similarities. They are usually full recourse. Meaning the principles, officers, directors, owners (+20% ownership), will need to personally sign for the loan. It is extremely rare for any lender to approve a loan strictly on the merits of the business. The exceptions would be small, unsecured lines of credit and receivables financing. The lender will file a blanket UCC on all corporate assets. This is extremely important to understand and should be discussed with the lender prior to closing. Once assets are leaned, they must be released prior to sale/transfer.
Three types of small business loans:
Conventional loans are based primarily on the value of real property. Similar to residential, a lender will finance 75% to 90% of the appraised value or purchase price, using the lower number. Because the loan is fully collateralized, interest rates tend to be fixed on a balloon note. Although the bank is secured by real estate, they will need to make sure the loan can be paid back. If it is a location your business will operate out of, your business must show it can pay the mortgage, if it is an income property, the building must be self-sustaining. Closing costs are usually not included so you will need to pay them out-of-pocket.
Lines of credit can be secured or unsecured. Small credit lines, $10,000 - $50,000, can be non-recourse, and usually do not require any collateral (i.e.: a corporate credit card). Rates are variable and are typically Prime + 1.00% - Maximum Usury. You only pay interest on the money borrowed and have small, interest only, monthly payments.
Credit lines can also be secured by real estate or other assets, such as receivables. A receivable line of credit will estimate the money your company has coming in and let you borrow a percentage of that today. Because receivables are monthly, the interest paid accrues monthly. The lender will tie up these receivables and force them to be used to pay down the loan. This is a last resort. With receivables tied up, cash flow drops, seriously impacting the liquidity of the business. The rates are extreme, usually 2.00% to 5.00% per month.
The other common secured credit line is an equity line of credit. Residential lenders give out first, second and even third position equity loans, allowing the homeowner access to all the equity available. A commercial lender will rarely go into second position, forcing a refinance of a first, still at 80% or 90% loan to value. This means the only common commercial equity line would be used for construction. In this case, the line is for a pre-determined amount of money, based on contractor bids, and has a set disbursement schedule. The loan will be interest only, with payments differed through the term of the loan. In other words, the interest will be tacked onto the balance borrowed and the entire sum will be due upon completion of the construction.
Because this loan will be due in full, it will require a “take-out” mortgage to be approved prior to the line of credit approval. The bank’s appraiser will use the contractor bid, the plans, engineering and drawings to determine a post construction value and lend a percentage of this.
Government-sponsored commercial loans: There are a number of government-sponsored loan programs available. The department of agriculture offers a B&I program, Business and Industry, as well as farming incentive loans and rural economic development programs. Local governments will also sponsor incentives and loan programs to assist the growth of infrastructure or economy. Of all the government programs available to the small business, the SBA offers the most diverse and readily available assistance.
SBA (Small Business Administration):
SBA, is a government organization funded through federal tax dollars. Congress appropriates funds to specific programs yearly, based on the anticipated need and previous year’s spending. In most cases, the SBA isn’t a lender, rather a guarantor. The bank or lending institution will file an application with the local office seeking participation. If this application is approved, the bank will get a guarantee from the SBA, thus reducing the bank risk. Typically this guarantee is 75% of the amount lent. Should the bank need to foreclose on the note, all collateral will be liquidated, then a report with the SBA will be filed citing the total loss. The file will be audited to ensure compliance and accuracy, then the bank will be reimbursed 75% of the loss.
Part 2 - Lending Institutions
Geory Stivers,
Vice President of Homebanc -
has
spent 13 years in commercial banking and SBA
lending,
holding high-level management positions with a number of National lenders. Mr. Stivers was awarded The Million Dollar Plus Award in
2006 and will receive the same award in 2007 from the Business Brokers of
Florida. Mr. Stivers is a graduate of Riverside Military Academy, Brevard
Community College and fulfilled his undergraduate degree from the University
of Central Florida. You can contact Geory Stivers at
geory.stivers@gmail.com or at (407)
752-7855.
