We’ve already talked about the paperwork needed to get a loan, as well as the pitfalls or fears of borrowing money. But what about expectations? What can business owners expect throughout this process? Elaine Fairman from BEFCOR has the answers!
Andrew Bowen: All right listeners, so here’s a question: where do you go when you want to talk business? CBR’s B2U Podcast, of course, presented by CBRbiz.com. We’re bringing business resources directly to you. I’m Andrew Bowen, and I am your host. Today we are continuing our conversation with Elaine Fairman from BEFCOR. If you’re just now tuning in, be sure to listen to parts one and two at CBRbiz.com. Alright, Elaine. We’ve already talked about the paperwork needed to get a loan, as well as the pitfalls or fears of borrowing money. What about expectations? What can business owners expect throughout this process?
Elaine Fairman: Well, it will take a little bit of time, so it is a time-consuming process. Also, the loan application process will typically start with an application form and a list of requirements that the bank needs, or a list of documents that they will need to evaluate the request. And next, the bank officer will ask some questions and want to talk with the small business owner and get some more details after they have reviewed the initial information. At some point, the bank will give a term sheet or describe the amount of the loan, and the terms and conditions under which they will lend. Not always, but usually.
And then, in the process, an appraisal may be ordered, and also some environmental reports or due diligence may be required. There’s a possibility that a business will get multiple offers from different banks if the business owner has applied for loans at different banks, so be prepared to compare the offers that are coming in. And again, look at what the business’ goals are, and the business owners’ goals, what’s the idea of the perfect offer? Make a spreadsheet. Compare the offers fairly, and then look at the closing cost. Look at the fees. Look at the terms that are being offered. Are there any covenants that are listed in there that might require the business to operate at certain ratios, or to perform a certain way in order for the loan to remain in place?
Andrew Bowen: That sounds like a good problem to have. If you have multiple offers coming from banks, right?
Elaine Fairman: It is usually…
Andrew Bowen: I guess, it’s better than the alternative of getting no one that wants to lend to you money.
Elaine Fairman: Sure. It is, and again, banks want to lend money to small businesses and so, you know, a lot of times a business will have multiple loans to choose from. And at that point, the small business owner needs to just compare them and make the right decision for that small business at that time.
Andrew Bowen: Great.
Elaine Fairman: Also, SBA loans may be offered, and SBA stands for ”Small Business Administration”. Those loans are no longer the loan of last resort. I think in the past that, no one wanted to use the SBA program unless they absolutely had to.
Andrew Bowen: Why was that?
Elaine Fairman: I think it’s just some old myths and some perceptions. I think right now that the SBA is a very good option for small businesses that are looking for long terms, and low-interest rates, and credit enhancements to make the project stronger. Many businesses are using the program to benefit their cash flow because of the low-interest rates and the long terms. And so, I think there’s just some perceptions about the SBA, but I think most business owners would be surprised to know what the many, many, many businesses that take advantage of this program and how helpful the programs can be.
Andrew Bowen: Yeah, and we’re going to talk more specifically about them in the next section I believe.
Elaine Fairman: Right. I look forward to that. That’s a great thing to talk about.
Andrew Bowen: That’s your favorite thing to talk about.
Elaine Fairman: That’s my favorite thing to talk about.
And the fees and the cost, just be prepared for professional fees such as appraisers, surveyors, environmental professionals, and attorneys. The banks can also sometimes charge origination fees, which will add a little bit more cost to the project. So the small business owner needs to be prepared for that, and also find out if those fees are going to be financed or if the business owner needs to pay for them out of pocket whenever the loan is closed.
Expect the banks to ask questions repeatedly; sometimes a business owner will answer a question, and then the bank will come back and want to dig a little bit deeper or get more clarification. So just be prepared that you may be answering the same question over and over. Some banks will offer less money than is desired, and we talked about that earlier. The small business owner needs to think carefully about whether enough money is being made available to them to complete a project or if it’s going to harm them by taking less than what they really need.
Andrew Bowen: Or if they even have the ability to scale down what their operations were expected to be, proportionally to the money they are going to get.
Elaine Fairman: Sometimes, for example, if a business is purchasing machinery and equipment, if they cannot get enough financing to support that, it may be that pulling more cash out of the business to make up the difference is so harmful, that it’s better to delay the project until better financing options are available. Sometimes it’s better to wait and to table a project, rather than to take the loan that’s not best suited for the business at that time.
Andrew Bowen: So if that were the case for a business owner, in your experience is it something that they make these decisions on their own, or can they come to someone like you, or SCORE, and say, ”Here is the conundrum I have. I want to do this project. I wanted this much money, but I’m only getting this much. Can you help me think through what the best choice is to make, whether I can scale back or should I wait?”
Elaine Fairman: There are a number of places to go for that sort of information or to get people to serve as resources for that, and we certainly can help with that scenario. And as a matter of fact, some loan programs will finance the difference that the bank will not finance. The 504 program is an excellent option for that, and so there may be other places to go for the money that the bank is not willing or interested in financing. So, for sure, talking to other people to get ideas and reaching out for guidance is always a good idea.
Andrew Bowen: Perfect.
Elaine Fairman: Something else is collateral. Collateral is required by banks to secure the loans. So, for newer businesses, an owner may have to pledge some additional assets and occasionally, there may be some life insurance requirements. So just be prepared for the collateral questions that the bank will have. What do you have to pledge, and is it sufficient to adequately secure the loan? Something else is that sometimes business owners can be a little disappointed and again, don’t take it personally. Banks are looking for different types of businesses at different times, and so it may be that your particular type of business is one that the bank has experienced losses in the past. And they may decide that right now, they cannot finance a business in your particular industry. Just keep in mind that the risk appetite for a bank can vary and that different banks have different market and business preferences at different times.
Andrew Bowen: Yeah. Especially after…Speaking of time, I feel like we talk about time a lot. After investing all the time, and going through the process just to be told no, it’s hard to not be disheartened by it. I have this question for you…business owners, and many small business owners, like you were saying earlier, wear many, many hats. They run the business, they sometimes do the books, oversee other projects, and then have their own lives to run as well in the background. When we say to business owners that this takes time, there’s time from start to finish, but then there is also the time it actually takes in between. So, an hour a day, two hours a day, having to leave your business to go to a meeting with the bank. I guess, how many meetings would there be with a bank or how frequently would you have to go back and discuss to them, to kind of plan for, if I’m not going to be able to be there to run a business, I need to find out how to let everything keep running, while still going over here and making sure I can get money to keep moving.
Elaine Fairman: That’s a really tough question. I will say that most banks are very willing to meet whenever a small business owner can meet, and so, if the business requires that the owner be onsite during the business day, many bankers will meet clients for breakfast or will meet them after traditional work hours just to be able to try to help. They’re in that business to lend, and so the loan officer is going to want to be available as much as possible, and accommodate a small business owner’s schedule.
Outside of that, as far as the amount of time, it really varies based on the age of the business and the type of loan. Some loans are just simply more involved. Some businesses have, for example, high-tech companies that may take a bank a little bit longer to understand that business, and they can help them much better if they have a deeper understanding of what the business does, and how it functions, and how the money flows through the company. So, I would say it really, really varies, but it is a huge time commitment for any loan that is going to finance land and building or machinery and equipment. It just takes some time, but your banker will accommodate your schedule, and if the banker isn’t willing to, then that may help you to find another option. The bankers that we work with are all very, very accommodating for the small business owners’ schedule. They are very sensitive to what it takes to get through the process, and how busy small business owners are.
Andrew Bowen: That’s great. It’s nice to know that the lenders are also willing to work with the business owners, and meet them where they are, literally, sometimes to make sure that they can lend money if it’s possible.
Elaine Fairman: Small business owners have a lot of options for banks. There are national banks. There are local banks. There are regional banks. There are banks that have exporting services and international services. There are banks that offer a lot of individual attention. There are some banks that offer small business presentations and seminars and counseling. There are banks that have a national presence or offer lines of credit or letters of credit. So it’s a good idea to talk around with some other small business owners and find out what their experience has been with different types of banks, and to figure out what’s best for your business and what bank is going to be able to grow with your business, and accommodate your business as it grows.
Andrew Bowen: Perfect. Thank you very much, Elaine, again for coming onto our show. It’s been an absolute pleasure hearing from you. This was the third segment of our four segment conversation with Elaine Fairman from BEFCOR. Stay tuned because next time, we’ll be asking her how business owners can think outside the bank. Listeners, if you want to learn more about the lending and borrowing process, visit CBRbiz.com or follow us on Twitter @cbrbiz. Thanks for tuning-in to CBR’s B2U Podcast presented by CBRbiz.com. Until next time, we mean business.