Business owners can use the equity in building to grow.

Business owners who are looking for a way to bring new capital into their businesses should consider using the equity in their buildings. This much-overlooked source of funds can help business owners borrow to pay off suppliers, gain working capital, buy new equipment, and hire new workers.

Often, their monthly payments on this real estate-financed debt are lower than what they are paying each month to service their existing debt, according to Penn Ritter, executive vice president of Business Lenders, a non-bank Small Business Administration (SBA) lender. "It does not matter what kind of business it is - retail, manufacturing or distribution. Refinancing a building can improve cash-flow and reduce monthly expenses," he says.

For the past two years, Business Lenders has earned the status as one of the Northeast's most active SBA lenders.

Ritter offers this example of how one business owner used the equity in her building to finance growth and meet growing competition: The owner of a large retail company felt more pinched for cash than at any other time during her 20-year career. The two chain stores that opened near hers were capturing a large part of her market share. In the past, her cash-flow allowed the business owner to pay off her suppliers within 10 days and receive discounts. That was no longer possible. In addition, without her usual amount of cash, she also was unable to make large purchases of inventory to fill her five stores and compete against her new, larger neighbors.

Luckily, she owned her own building. She had only four years remaining on a 15-year note. She had always wanted to be debt-free and leave her business to her children without any liabilities. So, the idea of refinancing the building bothered her at first. But, when she looked carefully at the bottom line, business prudence reigned over sentiment. Refinancing allowed her to reduce the principal amount of the loan to less than $800,000. Even with the cost of refinancing, she was able to decrease her debt from $142,000 to $91,000 by amortizing it over 25 years (instead of the remaining four from her previous loan). This gave her business an additional $50,000 a year to take advantage of supplier discounts and regain its purchasing power.

"This woman is typical of the business owners we deal with every day," says Ritter. "Many are uncomfortable at the thought of taking on debt. It goes against their instincts and their sense of independence."

The firm put together a list of points that business owners should consider before deciding to use their real estate to finance growth:

* Make sure the refinanced loan goes out as long as possible to receive the greatest monthly relief. The lower the payment, the more cash a business has to grow.

* Be sure there are no pre-payment penalties. "When times are good, many business owners want to pay off the debt early," says Ritter. "There is no reason they should be punished for this. It means they have been running their businesses well."

* Do not sign on for a "balloon payment." "Small business owners have enough stress without living with the tension of future big payments," says Ritter. "There are many lending options today that offer long-term financing without a balloon."

* Avoid loans that include "call provisions." Call provisions allow a bank to demand full payment of the loan if certain provisions, or agreed-upon cash flow formulas, are not met. A borrower could be paying the loan faithfully but still find that he has to pay off the loan upon demand of the bank. While banks are calling in loans less often than five years ago, a small business owner still does not want to face that possibility because of one bad quarter.

"A good lender is one who will work with a business owner for the long-term health of the business," says Ritter, whose firm has written 200 loans in amounts ranging from $50,000 to $1 million in eight states totaling more than $50 million. They recently earned Preferred Lender Status from the SBA, which allows them to expedite loans for strong credit borrowers. "When structuring a loan, remember that these four areas are negotiable," concludes Ritter. "Keep your eyes open fog them, and 'shop' for the fight lender for you. With the fight refinancing arrangement, you should be able to breathe new life into your business and maybe even get home in time for dinner."

Business Lenders is one of the most active SBA lenders in the Northeast. The U.S. Small Business Administration recently ranked Business Lenders fifth in the nation, citing an increase in small business loan growth of 267 percent since the non-bank lender opened its doors in 1994. The company works with many types of business, ranging from day-care centers to manufacturers, from start-ups to mature businesses. Business Lenders has offices in Connecticut, Massachusetts, New Hampshire, New Jersey, New York and Rhode Island and also lends in Delaware, Maryland, Ohio, Pennsylvania, Virginia, and the District of Columbia.