What are the financing options outside the bank? Elaine Fairman from BEFCOR has the answer!
Andrew Bowen: Welcome back, Charlotte entrepreneurs and small business enthusiasts. I’m Andrew Bowen, and I’m your host of CBR’s B2U Podcast, where we bring the business information you’ve been looking for directly to you. Today, we’re finishing up our conversation with Elaine Fairman from BEFCOR. If you’re just now tuning in, be sure to listen to parts one, two, and three, at CBRbiz.com.
Elaine, thank you again for being here today. You have given our listeners–and me also–a very,very, great deal of information about financing. But give us the scoop. We got the scoop. We gotta get a couple scoops of ice cream here.
What are their financing options outside the bank? Because we said there are a couple times where the bank may not lend all the money necessarily or say no outright. Are there any creative ways for business owners to think outside the bank, so to speak?
Elaine Fairman: Absolutely, absolutely. There are a lot of resources and financing options out there. First, I’ll say that unfortunately, grants are very rare. A lot of small businesses will call us and ask for places to go for business grants. There are a couple of options, but there are very, very few of them in this economy. So some examples of private sources to go for money would include leasing companies, particularly for businesses that are purchasing machinery and equipment. A company may be able to lease that with an option for you to buy out the lease at a later date. Also, asset-based lenders can provide sources of financing. There are factoring companies that will lend against invoices or against receivables. Venture capital firms are available, and that’s an option for cutting edge and new, emerging small businesses. Seek capital is in that same category.
The new buzz word seems to be “crowdfunding”. I think everybody is looking to crowdfunding to finance some businesses. And then investors are out there as well–people that will take a percentage of the ownership in exchange for helping the business out. And then seller financing. If you’re financing new land and building, it may be that the seller of that property is willing to take a note so that you may not have to go get a bank loan, and sometimes that can be a good way to finance a project if you need to. Friends and family have been the thing that a lot of small businesses have used in the past, particularly in the early stages of the business. There are pros and cons to that.
Andrew Bowen: Yeah, obviously, yeah.
Elaine Fairman: There’s definitely a downside to going to the family reunion and owing people money there, but it is a possibility and it is a way that a lot of businesses have gotten off the ground. There is a whole category of economic development loan programs that are provided because different organizations or agencies recognize the economic development benefits that occur whenever small benefits can grow and expand. And so some of those programs will include local, state and federal options. For example, the City of Charlotte has some loan programs that are available. There are other cities throughout the state that have their own pools of money that can be loaned to a small business. There are a number of federal agencies like the Rural Development Administration, the USDA, and also the Small Business Administration, which is what BEFCOR specializes in. The U.S. Small Business Administration is widely known for its programs to make sure that small businesses have access to capital, and the SBA has designed a couple of different programs to meet specific needs of small businesses. They’ve sort of tailored those programs so that they can make sure that these small businesses have the money that they need to grow and create jobs and feed the economy.
Andrew Bowen: Yeah, and like you said, they’re actually better options than they are sometimes perceived as.
Elaine Fairman: Absolutely, there are a lot of myths out there about SBA loans and about the SBA in general, but there are many programs that the SBA has that can offer substantial benefits to small businesses. And I’ll tell you about two different types of programs that the SBA offers. One is the 7(a) program, where a small business can get the loan that it needs from a bank and the bank will get the credit enhancement of a 7(a) guarantee, which assures the bank that if for some reason the business cannot pay the loan back, the SBA will come in and pay at least a large portion of that loan back. And so it does encourage the bank to make the loan to the small business, and it gives the bank some assurance that they will collect most of the money, either through the payments from the small business or from the Small Business Administration. That program is a widely known and widely used option for many businesses throughout the country.
And then there’s the 504 program, which is what we specialize in at BEFCOR. And that program is designed to finance fixed assets for small businesses. And fixed assets would be land and building, building construction, renovations, and up fits of buildings, and also machinery and equipment. And the 504 program is perfect because it works with a bank, and it utilizes bank financing for 50% of the project, and then the 504 program comes in behind that and finances 40% most of the time, and the small business only has to contribute 10%.
And so you have two lenders in place–you have the bank and then the 504 program through an organization such as BEFCOR–and then the small business contributing the balance. The beauty of that is that the 504 program, in second position, offers a very low fixed interest rate, and on real estate, that interest rate is fixed for 20 years. On machinery and equipment, it can be fixed for 10 or 20 years. And so it’s a little counterintuitive that the loan behind the bank sometimes will offer the best interest rate, will offer a 20 year fixed low rate and that really helps the small business’ cash flow.
Andrew Bowen: So the 7(a) and the 504 I’m sure are just two of many programs the SBA offers there.
Elaine Fairman: Right.
Andrew Bowen: Can they be used together, or are they mutually exclusive?
Elaine Fairman: They can be used together, and in some projects where, for an example, a daycare is being constructed, we can use the 504 loan to finance the land and building and then use the 7(a) loan to finance some of the professional fees and also maybe playground equipment or furniture and fixtures. And so, it’s not unusual at all to use the programs together, in tandem, and it’s a beautiful way to match up the needs of the small businesses with the right programs for what they’re financing, and we’re delighted to help a small business structure that and to help them find a bank partner and a 7(a) lender if needed. Sometimes the bank partner in the 504 loan can also be the 7(a) lender. So the programs work together beautifully.
Andrew Bowen: And that’s what you specialize in over there at BEFCOR, right?
Elaine Fairman: Absolutely.
Andrew Bowen: Awesome. And then, like, you were saying they usually work really well together. So if these are such great options, why even go to a bank separately for a loan?
Elaine Fairman: It depends on the needs of the business and what the business will qualify for. Some businesses will just want a conventional bank loan, and sometimes a business will qualify for an offer from the bank that they’re pleased with, and they might have extra money for down payment that the bank will require. On a real estate transaction, such as land and building, a lot of banks will require 20% down payment, and so some businesses will choose to pay that without realizing that they only have to use 10% and, you know, take advantage of the 504 program. And some banks specialize in just conventional financing, and then other banks will offer 504 to most of their small business clients, just to make sure that they have that option and understand the benefits of the program.
Andrew Bowen: Kind of give them the menu of choices.
Elaine Fairman: Absolutely, absolutely.
Andrew Bowen: So are there minimums or limits on either of these programs in terms of the loan amount?
Elaine Fairman: There are. Under the 7(a) program, a business can get a loan guarantee for up to $3.75 million. So a $5 million project with a 75% guarantee, would be $3,750,000. Under the 504 program, for the 40% of the project that we finance, our loan can range anywhere from 25,000 to 5.5 million. So we’re financing very small projects, and we’re financing very large projects. On the upper end of us being able to finance 5.5 million, we could be looking at a $15- or $20- million project. On the lower end, we could be looking at a project of $100,000.
Andrew Bowen: Wow, that’s fantastic. So what do you normally do at BEFCOR over the course of the year? Do you have a volume number? I know that’s a very strange question.
Elaine Fairman: It’s not strange. We will finance anywhere from 30 to 60 businesses, and that’s a bit of a range, but usually somewhere between 30 and 60, depending on the economy, depending on what banks are financing. We can only make 504 loans when a bank or a private lending institution partners with us. So when the banks are not lending, then we are not lending, but when banks are active, we are typically active. And sometimes it can depend on, you know, how the banks are deploying their capital, if they prefer the 7(a) program for a certain period of time, or whether, you know, they are using the 504 program more aggressively. But in a typical business, we’ll look…a typical year, we’ll look at somewhere between 30 and 60, or 70 businesses.
The banks are looking at a lot of different types of businesses and that’s the beauty of the 504 program, is that we have the ability to work with doctors’ offices, we have the ability to work with manufacturers or distributors, very high-tech and IT companies. We work with small mom and pop operations with one or two employees, all the way up to businesses that have several hundred employees. Some of our companies have sales of $100,000, while others will have sales of up to $50 million. And so there’s a wide variety of businesses that will qualify for SBA loans and specifically for 504 loans. We can help a number of businesses.
And just so people may have a question about the size of business, SBA considers a small business to be a business that has a net worth of $15 million or less, and their profit after tax (averaged for the last two years) of $5 million or less. And so most businesses are going to be small businesses. I think a lot of people don’t consider themselves small, but there is a wide variety of businesses that meet the SBA definition of small business and that would be eligible for 504 financing.
Andrew Bowen: That’s great, that’s really good information. I always thought that the small business was limited to a specific number of employees or revenue, but you’re saying it’s net worth and income.
Elaine Fairman: It can be, and if the business is too large for that, then we can look at revenues and the numbers of employees. But the SBA has designed its criteria to make it possible for as many businesses to be eligible as they can. They really want to make this program available to job-creating businesses and growing and expanding businesses.
Andrew Bowen: That’s fascinating. So we’ve had four segments, would you like to sum up all four segments in a sentence for lending and the SBA?
Elaine Fairman: Sure, BEFCOR is a great resource for small businesses that need to finance fixed assets, and there are a lot of options for small businesses that need to grow and expand, and check your resources out, and find out what those options are. Call BEFCOR at any time that we can help you, and encourage your bank partner, as you’re seeking a loan, to come to us and to let us try to help.
Andrew Bowen: Alright, it has been an absolute pleasure hearing from you, Elaine. This was the fourth and final part of our conversation with Elaine Fairman from BEFCOR. Listeners, if you want to learn more about the financing process, visit CBRbiz.com, or follow us on Twitter @CBRbiz. Thank you again for tuning into CBR’s B2U podcast, presented by CBRbiz.com. Until next time, we mean business.