Research, documents key to opening lenders’ wallets
Reprinted from www.mydesert.com July 10, 2011 Written by MIKE PERRAULT… Link to article here.
When Wells Fargo & Co. recently announced it was more aggressively lending to small businesses, Retrotel Inc. owner Cherise Sonderman took the nation’s fourth-largest bank up on its offer.
Despite a longstanding relationship with a small Coachella Valley bank, Sonderman turned to Wells Fargo for a Small Business Administration loan and two other loans as part of a new funding package.
She and her husband, Brian, will use the money to expand the 14-year-old Palm Springs-based company that distributes and services remanufactured phones and other telecommunications equipment to clients across the country.
“We wanted to own the building next door rather than continue to rent,” Sonderman said. “That way, we can improve our processing and make modifications that allow us to innovate.”
As more banks loosen their purse-strings in the slowly recovering economy, borrowers such as Sonderman who have good credit and equity and are able to meet collateral and other requirements can get funding from banks and other SBA lenders.
She and other qualified borrowers benefit with interest rates between 3 percent and 8 percent a year.
But about 57 percent of small businesses must find financing through alternative means such as unsecured lines of credit and merchant cash advances, according to a recent national study by Pennsylvania-based MultiFunding, which helps small firms get financing and submit loan applications.
Alternative financing can cost upwards of 20 percent annually.
The MultiFunding study also showed about 15 percent aren’t eligible for any financing.
Michael Paduano formed Palm Springs-based GoodLand Capital Group to offer com
mercial financing in “unconventional ways.” The company is lending anywhere from $2,500 to more than $2 million to small-business owners even with bad credit or no credit by analyzing existing gross revenue through about six months of a business’ bank statements. The company factors those future revenues into funds that owners can get within about a week and use immediately, Paduano said.
GoodLand Capital, which has rates starting at 13.9 percent that are based on each borrowers’ circumstances, recently had more than two dozen transactions in a single week.
One bakery owner who was turned down elsewhere got $7,500 for additional equipment that will help add menu items in time for the upcoming season.
Existing small businesses and entrepreneurs who have struggled through the recession typically face the most daunting hurdles.
“Startups are having an extremely difficult time,” said Brad Mix, consultant at Coachella Valley Small Business Development Center.
“For instance, I’m trying to get a loan for a (new) restaurant,” Mix said. “Lenders hear the word ‘restaurant’ and automatically aren’t interested. And, in this case, it would generate 25 jobs.”
Startups, which are increasingly launched by people who’ve lost their jobs, often have a tough time proving to bank underwriters that they’re credit- worthy.
Mix said some entrepreneurs hoping to launch new businesses face a new hurdle. They must demonstrate they have the expertise and experience to land a job with adequate earnings to pay off the loan should the startup fail.
Small-business owners who own their homes face other hurdles.
Previously, they could count on home equity for collateral as a second source of repayment, Mix said. That’s often not the case anymore.
“That’s probably why lenders are now looking at earnings as a tertiary source of payment,” he said. “The secondary source of repayment isn’t as strong as it has been historically.”
Even franchise owners with proven business models and track records are having trouble getting financing, Mix said.
Ned Roache, chairman of the Coachella Valley chapter of the Service Corps Of Retired Executives, works with 36 counselors who volunteer to help valley entrepreneurs start companies, find financing and improve their operations.
“Lenders now are looking for a down payment of 20 to 25 percent, depending on the type of business,” Roache said.
Startups often are asked for 30 percent to show they’re committed to risking their own assets, Mix said.
Small-business owners should create a five- or six-page business plan detailing operations and cash flow, Roache said.
“Of course, the banks are being very, very cautious,” Roache said. “But the lending climate has definitely gotten better.”
Thomas Mesenbourg, deputy director of the Census Bureau, said a recent survey showed 20.8 percent of entrepreneurs dug into their own pockets and used no startup capital at all.
The most recent Census Bureau study showed 30.6 percent of firms that required start-up capital launched with less than $5,000, and 10 percent were started or acquired by owners who used credit cards to launch or acquire the business.
Experts said some entrepreneurs rejected by banks or unhappy with lending terms are considering so-called “peer-to- peer” lenders, including Internet sites run by Prosper Marketplace Inc. and Lending Club Corp.
Such sites function similar to eBay by charging pre-qualified borrowers a fee to match them up with lenders.
Calculations a key to qualifying Bruce Gordon, Wells Fargo’s senior vice president of California Business Banking, said his bank has not adjusted underwriting standards and is eager to make loans to qualified borrowers.
Wells Fargo has launched an online Business Insight Resource Center (www.wellsfargobusinessinsights.com) for small-business owners.
Doug Case, manager of Wells Fargo’s Small Business Segment, said the website provides videos, articles, podcasts, webinars and other information to help small businesses start, manage and expand their businesses.
Bank of America officials said last fall that 1,000 bankers would be hired nationwide to work with small-business clients, including 70 in Southern California and five in the Coachella Valley.
Getting needed capital comes down to basic financial fundamentals such as credit quality, overall company debt and assets, revenue growth — and the health of a company’s industry, bank officials said.
Lenders want to ensure there is enough positive cash flow to repay the loan, as well as a track record showing prospective borrowers have paid past bills on time.
Bankers said the recession has weakened overall demand for small-business loans, but the number of loan requests has been slowly rebounding.
In the first quarter of fiscal 2011, $95 million in SBA loans were doled out in Riverside County, compared to $48 million during the same quarter in fiscal 2010, SBA officials reported.
Stu Bailey, regional president for Sunrise Bank in Palm Desert, said his bank has doled out more SBA 7(a) loans in recent months.
Spokane-based AmericanWest Bank is acquiring Sunrise Bank, and officials said it can provide even larger loans to qualified small businesses.
Small businesses may want to consider getting some coaching from SCORE, the Coachella Valley Small Business Development Center and other counselors when structuring loan requests.
Small businesses that don’t position themselves properly can inadvertently weaken their balance sheets.
A business may want to lease equipment rather than buy it, start off smaller or operate leaner, and carefully account for non-recurring expenses, Mix said.
“Let’s say you had $15,000 in legal expenses because of a lawsuit,” Mix said. “Next year, you’re not going to incur that expense, so you can add that back to the net income when determining the business’ adjusted cash flow.”
Sonderman said the SBA loan process is “more thorough and intense” than in past years. So she was grateful Wells Fargo’s loan experts helped her navigate all the additional paperwork.
“You still need to have a person making sure all the parts are getting done so nothing gets tied up — like an appraisal,” Sonderman said.
Mix said one last bit of advice for small-business owners is to “run away” if a lender demands an up-front fee.