As any business owner knows, financing can be one of the hardest parts of starting your own business. From how to access capital to understanding the loans process, business owners have a lot of questions, and Elaine Fairman from BEFCOR has some tips.
AB- Andrew Bowen EF- Elaine Fairman
AB- Hello, world. It’s me, Andrew Bowen, your host of CBR’s B2U Podcast, bringing business resources directly to you. As always, our goal is to connect you to the information you need to start and run a successful business. As any business owner knows, financing can be one of the greatest challenges of starting and running your own business. From how to access capital, to understanding the loans process and what it looks like, business owners have a lot of questions, which is where BEFCOR can help.
BEFCOR stands for Business Expansion Funding Corporation. They are dedicated to helping North Carolina businesses by assisting you with 504 loans, and today we are excited to welcome Elaine Fairman from BEFCOR.
Elaine, thank you so much for joining us. Could you give us just a little bit of information about you and what you do at BEFCOR?
EF- Absolutely. So I am the Executive Director of Business Expansion Funding Corporation, known as BEFCOR, and I have been in the small business lending industry for 28 years, so I’m passionate about helping small businesses. I have worked with three different nonprofits that are small business lenders in North Carolina and South Carolina, and I have been with BEFCOR for the last three and a half years.
BEFCOR is a U.S. Small Business Administration Certified Development Company. We’re a non-profit. We are not a government organization like the SBA, however we operate an SBA program called the 504 Program. We are governed by a board of directors. We are statewide in North Carolina, and we also operate in Chesterfield, Chester, Lancaster and York County, South Carolina. We have three offices– one here in Charlotte; we are headquartered here. We also have a Raleigh office, and as of this week, we have a new New Bern, North Carolina office. So, we have a staff of ten–we have a very experienced staff; in fact, we have 100 years combined of SBA 504 experience.
AB- Fantastic! It sounds like with all that experience, and the SBA funding behind it, it looks like you have a lot of clout to throw around for small businesses looking for financing.
EF- We like to help when we can.
AB- Oh, that’s fantastic! Alright, so let’s get started. Can you talk a little bit about the lending process overall? Not exactly the specifics of what you do, but just in terms of what business owners need to do when they start going down the road of finding financing?
EF- Sure! And I think having some information about the process will help small businesses to be more successful in getting small business loans. The first thing I will say is that it takes time. I think a lot of businesses are surprised by how long it does take to get financing in place. So, it’s important that business owners start early, and that they are prepared and can be a little patient with the process. Also, most banks have multiple steps in their decision process. So sometimes in getting a small business loan, they will first go through an application process. Then there is the need for an appraisal and sometimes some environmental due diligence.
These steps all take time. For example, appraisals can take up to four weeks, so a business owner needs to know how to plan accordingly because it will take a fair amount of time. If they are signing a contract, for example, to purchase real estate, or a new building, or a business condo, they need to know that there are multiple steps, and they will need to plan ahead in getting a contract extension or a time for the contract so that there is plenty of time to get the bank loan.
AB- It sounds like a mortgage process on steroids.
EF- It can be…it can be, depending on the what the small business is financing. If it is a real estate transaction where a new building is being purchased, or a business condo, it will take longer just because of the appraisal and the environmental process. Banks are in the business to lend, and so they want to help, but you will not get a decision overnight. They have regulations and policies, so just be prepared for the steps and the amount of time that it will take.
Also, I think it’s important that new business owners know that their projects are going to be riskier for banks. It has always sort of been that way. A new business to a bank means that there’s just going to be more risk, it’s going to take more time, and if the business is in the emerging state or they’ve been in operation for less than two years, most banks still consider that small business to be new. So, it will just take more time. It will be more scrutinized more heavily in those situations.
Another thing I will say is that small business owners need to do their own research. In addition to conventional bank loans, there are other programs, such as the program that we operate at BEFCOR–the City has programs, there are state and federal programs that help. And so, if a small business owner does some of his or her own research, they will know that there are other resources out there in addition to the traditional bank loans.
AB- There is not just one place to get money.
EF- That’s right, and there is not just one place to get information as well. There are lots of different places. For example, there are the Small Business Technology & Development Centers that offer free advice. There is a service core of retired executives known as SCORE. And they provide great counseling, and that’s usually free as well. Colleges and universities are also great sources of information and free assistance. And there are all sorts of seminars and networking opportunities where businesses can talk to other businesses who have gone through the learning process and get very valuable information. I’ll also say that paperwork is involved. So, business owners need to be prepared to fill out some forms–it’s sort of a necessary evil.
AB- Speaking of paperwork, you made the distinction between a new business and an existing business, and we have talked a lot in previous podcasts about having a business plan. For new businesses specifically–they’re really building out the business plan. So, would a business plan have to be complete before this whole financing piece comes in, or should someone building a business plan be thinking of the type of financing they want as they build their business plan?
EF- I think that if the business plan has at least been started, I think that’s very helpful. I think that the process of going through creating your business plan is a very healthy process for a business owner. I think they are much more prepared when they go to the bank because they have thought through, What are my products? What are my services? Who is my target market? Who am I advertising to? How am I going to market these products or services?
And they’ve though through those processes, so that whenever a bank asks the questions, they’re prepared for the answers. I think it just makes them more equipped to get through the lending process more smoothly.
AB- That’s super, thank you!
EF- As far as the learning process, I’ll state too that a business owner has to know what they want. How much money? What’s the money going to be used for? And how they will pay it back?
Another thing is to undersand financial statements. I think that a lot of small business owners think that as long as they understand the product or service, there is no need to understand the financial statements. And in my opinion, that is a huge mistake.
There is too much at stake with the business’s finances for them not to understand. They want to know where the business is going in a couple of years. What is the cash going to be used for? Historically, where has the cash gone? What is the use of the capital? If they are growing, can they generate enough cash flow to support the business’s growth? What is their cash flow? Where does it come from? If sales are going to increase, how are they going to support that? What additional expenses will they need? And so on.
Understanding the financial piece of it and the financial statements is really critical. Also, some businesses find it helpful, when seeking a loan, to apply to more than one bank. Not having all their eggs in one basket so to speak. Because the financing process can take some time, if the business is interested in looking into multiple banks, it can save some time and generate more than one offer if a couple of banks are interested in it.
AB- So if that ends up being the case, and a couple of banks are interested, is there a suggestion? I’m sure its very case dependent on whether or not to take just one or to take multiple. I imagine people are applying for similar amounts of money, so it wouldn’t make sense to take two loans from two different banks for double of what you wanted because that wouldn’t be a pleasant experience in the long run.
EF- If you have multiple offers, you want to compare them. I always recommend a spreadsheet to put the interest rates, the fees, the terms and look at what the banks are offering. And line that up with what the small business’s goals are.
Are they looking for the longest term? Are they looking for the lowest interest rate? For the lowest fees? What are the goals of the small business? And which bank is making an offer that is more closely aligned with what that business wants?
Different businesses want different goals in getting a loan. Some people want the longest time in paying them back, and other businesses want to retire that debt as quickly as they can. It just depends on what the businesses look for. Also, the banks will need and expect reliable financial data. And a lot of businesses are not prepared to present good, up-to-date financial information. The financial statements really tell a bank what the business has done and where it has been. It sort of creates a story and the history of the business. So, if that financial data is not well put together, or is not thorough or reliable, it is going to create some challenges for the bank. It’s going to mean they have more questions and that they understand less about your business. So, the better financial information you can pull together, the stronger your request will be when you get to the bank.
AB- And less stressful, by the sounds of it, because if you give them all of your information, they don’t have to come back and ask for more.
EF- Absolutely. Something else that small business owners need to know is that you want to have a loan that is matched with what the money needs are. For example, some small businesses will finance machinery and equipment with credit cards. You’re using credit cards, which is sort of a short term source of money to finance machinery and equipment that may last for ten years. That is not the way a small business should finance. You should not finance your new building on a line of credit. You should use long term money loans to finance long term assets and to line that up appropriately so that your business’s cash flow is better.
And the last thing I’ll say is credit card debt either on the personal side or the business side can be a problem if a business or business owner carries a high level of credit card. It can indicate that more spending is going on than needs to be going on, and that the business may not be managing its cash well, or the business owner may not manage cash well, so I caution people against high credit card debt.
AB– I think business owners and people in general, when you’re asking for more money for a separate entity, including a business, it makes sense that you don’t want high credit card debt.
EF- If you can prove that you’re managing with the resources you have, then it’s easier to ask a bank to go into a lending relationship with you.
AB– That makes perfect sense. So, Elaine, what are some of the key things that lenders really want applicants to know that they might not always when they come to apply for a line of credit?
EF- One of the things is that banks are structured differently, and they have different processes. Obviously, we have some very large banks. In North Carolina, we have some very small banks, and some regional banks in the middle, and so different banks have different processes. And the way that loans are approved is different at different banks, so the loan decision may be made by someone other than the person that is meeting with the small business owner when he goes in to get a loan, and so I think small business owners need to know to respect the process, even though it can be lengthy.
Banks want to make good decisions, and they want to help small businesses, but sometimes they have to go through multiple layers to get a decision. If a small business owner understands that, it will be easier going into the process. Also business owners need to have ownership of the lending process, and they need to follow up with their banker. They may need to gently ask questions about how things are going. Not from an unreasonable standpoint–but just a periodic check in to find out how things are coming along.
Also, if you are talking to different banks about your loan, if you are sort of what’s called shopping your project, you want to let all the lenders in the process know that other banks are looking at it. It just makes it a level playing field for everybody and makes it fair, and so it’s helpful if everybody knows that other banks are looking at it.
If there is anything on your credit report or in your business’s history that is negative information, it’s better to go ahead and talk with the lenders about that up front, rather for waiting for them to discover it. For one thing, it will help to establish your credibility, and also it gives you an opportunity to address it and to give the story before they find out and form their own opinions about it. So you want to be up front about anything, such as poor credit, judgments, tax liens, or anything like that that’s going to be negative. Have your explanation ready; it’s always a good idea to go ahead and put that on paper, and be prepared to address it up front.
In the lending process, patience is definitely a virtue, so you need to respect that the bank is going to take some time, and be prepared to be patient, and that goes back to starting early. I think a lot of times business owners will go into a bank, and say There’s no risk in this project. There is risk in every single loan that is made, whether it’s a new business or an existing business; every single business has the potential to fail. Unfortunately, that’s just the way it is, and so the lender knows that there is risk, and they want you to know that they see risk and that their job is to try to minimize that risk as much as they can.
Be prepared as a small business owner to know the what ifs in your business. What if you don’t get the loan? What if you don’t meet your sales goals? What if expenses are higher? What expenses can you trim if you have to make cash flow stronger? What if you have unexpected expenses? So just be prepared for those risks, and be prepared to address them.
AB- Do they actually expect to have these scenarios played out? And you show…like, if something happened today, what would I look like in two years from now based on the changes I would have to make?
EF- I think that if you are prepared to share that with the bank, it helps the process, and it helps the bank to know that you have thought through the what ifs and that you understand there are risks in your business. Some businesses, for example, will come to us with three sets of projections: the projections that they think will happen, the projections of what could happen if they hit their sales goals, and then the projections of What if things don’t work out quite the way they expected them to?
AB- Thats great.
EF- And so they’ve planned for the what ifs in that scenario, and then the bank sees that, they’re going to know that the business has carefully considered what could happen.
EF- And that they’re prepared for it. Also, banks want to know that you’re committed to your small business and that whatever is needed to make the business successful, that you’re committed to it. And they also want to know that, if the business gets into a tough situation, that the business owners will reach out for help early enough, and that they will go to the resources that are out there and address the situation.
And then lastly, I’ll say that sometimes businesses will get a decline from a bank, and I encourage people don’t take that personally. It’s business; it’s the way it goes, and just understand that that doesn’t mean that the bank might not be interested in you another time. It just means that for this particular situation that particular bank is not interested or cannot make the loan at this time.
AB- Yeah, so if the bank can’t make the loan…or I guess throughout this whole process…I may be jumping ahead–is there a scenario where a business owner will go and ask for a loan, and the bank going through the process can say, “No, we can’t do it quite this much, but if we reduce the amount of money you’re asking for…After we look through the documents, we think you’re asking for 10% too much, but we can loan 10% less…”
EF- Right, and that’s an interesting situation for the business because sometimes borrowing too little money is worse than borrowing none, and so the business needs to look carefully at what it absolutely has to have in order to be successful, and so the decision comes at that, you know, do you undertake the project and take a little less money with the possibility that you may have cash flow challenges? Or do you go to another lender and try to find all the money that you need?
AB- So I feel like I did jump ahead a little bit then because we are going to talk about that in the next couple sections, if i’m not mistaken, or we can just talk about the next couple sections anyways.
AB- Alright, so the loan process. What kind of paperwork–the highlights of the paperwork–are going to be needed for someone to apply for a loan?
EF- That is largely dependent on the amount of money and the type of business, and whether it’s a new or existing business, so there are some factors that will impact the amount of paperwork.
Let’s just assume that it’s an existing business that is undertaking a new building project. Maybe they’ve leased a space, or they’re going to buy new building, so that process would include a history and description of the business. It may be a formal business plan. It may be a one page summary of the business. It be a little bit more than what’s on the business’s website, but something that tells the types of products services that this small business has to offer. A look at the competitors for this small business and what the small business’s competitive advantages are; what does this small business do better than its competitors? And also some industry information: Is the industry growing? What does the small business owner see for that industry going forward?
And again, it does not have to be a formal business plan. I’m a big proponent of bullet points. Maybe just listing that information out there–bankers typically are not interested in a 50-page or a 3-pound document. Usually, they are looking for concise information that is very specific.
And also they will want to see historical business financial statements, which will include tax returns for the last three years and an interim financial statement that is not older than about 60 or 90 days.
The newer information is always better–and that would include a balance sheet and an income statement. Also, businesses will need to be prepared to have some projections so that the bank can see where the business plans to go in the future with its financial condition.
And they want to see some personal information. They want to see personal tax returns and a personal financial statement that is signed that is fairly recent, and the personal financial statement will show the business owner’s assets and liabilities and personal net worth. A bank is also going to want to see solid cost estimates–how much money is needed, what the purposes of the loan are–so that they can determine how to offer a loan that’s going to match up with what’s being financed.
Résumé information is always helpful. It helps the bank to understand the qualifications of the business owner–what their education is, what their experience is, how much time they’ve worked in this industry. A résumé can give the banker a lot of comfort about the small business owner. And then a written explanation of any derogatory credit or other information; go ahead, and put that on paper, and sign a statement as to what happened if there is something that happened in the past.
AB- Yeah, like you said earlier, give as much information as you can upfront, because it really helps with your process.
EF- And then the banks will tell you what else they need. Different banks have different requirements. They have application forms. They’ll want an authorization to pull credit reports and so the banks will tell you after that what else they need.
AB- That’s fantastic. So that is a lot of information about lending. If you could boil it down to one sentence–what the business owner would need or should know going into the lending process–what would it be?
EF- I think it would be that small business owners have a lot of options. To be prepared to dedicate the time and to make sure that you get a solution that fits the business’s needs.
AB- That was a great sentence. Alright, well, Elaine, thank you very much. That was very informative. We’re going to have to stop there for this segment, but listeners, if you are ready to get started with BEFCOR and want to learn more, be sure to visit CBRBiz.com, and follow us on Twitter @cbrbiz. And be sure to stay tuned to our next segment where we will continue our conversation with Elaine Fairman from BEFCOR. Thanks for tuning into CBR’s B2U Podcast, presented by CBRBiz.com. Until next time, we mean business.