By Rob McMinn, Pocatello Financial Center Manager
Zions Bank
Rob McMinn
Approximately 97 percent of businesses in Idaho qualify as small businesses. They play a fundamental role by helping to build the economy and create jobs. Small businesses — defined as those with fewer than 500 workers — start up at a rate of over 500,000 per year, but three out of 10 fail to survive for more than two years.
But nearly every business fails for avoidable reasons. And because small businesses play such a critical role in our communities, financial professionals are there to help entrepreneurs avoid potential stumbling blocks on the road to success.
Understanding Credit Approval
Whether your business is a new start up or an established firm, it helps to know what financial institutions expect from their borrowers. Most adhere to the standards of the “5 C’s of Credit.” These are: Capacity, or the ability to repay debt; Collateral, business assets that could serve as a secondary form of debt repayment; Capital, or equity in the business; Conditions, including economic and market trends that make the business viable; and Character, or the borrower’s personal credit history, industry expertise, reputation and training.
Before borrowing, business owners should evaluate their status in each of these key categories. If you identify weaknesses, it is best to work on mitigating them before applying for a loan.
Cash Flow Considerations
One of the top challenges for any small business — especially those that are seasonal — is cash flow. A business credit line can help you meet short-term cash needs, finance receivables and inventory, and increase your working capital.
If you need a short-term business financing option, you may need a business line of credit. Business credit lines can be used multiple times and typically have lower interest rates and closing costs than business loans. The borrower makes payments on the business line of credit until the balance is paid in full.
A business term loan is another option. Unlike a business credit line, business term loans can only be disbursed once, and typically require collateral. This is a great option for equipment or real estate purchases. There are also equipment-specific loans available at financial institutions.
The U.S. Small Business Administration’s 7(a) program offers up to 25-year, fully amortized loans that may be used for most business purposes, including the purchase of real estate for business operations, acquisition of equipment, and working capital. Known for their flexibility to borrowers, 7(a) loans, also known as Advantage Loans, are the most common SBA loan.
The SBA also waives guarantee fees on 7(a) loans of $150,000 or less. On a loan of $150,000, the two percent savings waived by the SBA could translate to two employees’ salaries for one month.
Zions Bank has been the top SBA lender in the Boise District — which includes the Upper Snake River Valley — for the past 15 consecutive years. Zions Bank approved 101 loans in the Boise and Seattle/Spokane districts combined in the SBA’s 2016 fiscal year, totaling more than $27.2 million. The capital provided through Zions Bank’s loans to these businesses allowed them to grow so that they could hire 320 new employees and maintain 632 positions, according to SBA data.
Refinancing Commercial Real Estate Loans
In June 2016, the U.S. Small Business administration announced a significant change to its 504 loan program that allows businesses to refinance conventional commercial real estate loans. SBA 504 loans can be used to finance capital for property and fixed assets such as machinery. To be eligible, a company must be in business for at least two years.
With the 504 program, a borrower typically provides 10 percent equity with the remainder split between a bank (50 percent) and a Certified Development Company (40 percent), backed by an SBA guarantee. The portion held by the CDC is a fixed-rate note, which eliminates the borrower’s interest rate risk on that portion of the loan.
SBA 504 loans are available in 10-year or 20-year debentures (i.e. maturities). This is attractive because most conventional real estate loans have shorter maturities (10 to 15 years), with interest rate adjustment periods ranging from quarterly to every five years.
The SBA refinancing may also include eligible business expenses such as operating expenses (salaries, rent, utilities, and inventory) as well as other secured debt. There are other requirements that must be followed; for example, the business must be current on debt payments.
Additional small business resources can be found online at www.idahosmallbusiness.com
Rob McMinn is a vice president and financial center manager for Zions Bank in Pocatello. To contact Rob, call (208) 233-6176 or email Robert.Mcminn@zionsbank.com.
