Budget basics for business loans: you should talk to your financial advisor even before you need that business loan.
As a company grows, so does its need for working capital or cash for ongoing expenses. Without adequate funding, a business can spin out of control. "I've seen many businesses go broke trying to grow too fast," Veltkamp said.
If you need money to successfully grow your business-and don't have a rich uncle-lender financing may be the solution. Financial institutions in Alaska offer a variety of loans and other financing options to help businesses meet their cash flow and expansion needs.
The type of financing you pursue will depend largely on the unique needs of your business, says Ron Kukas, president of Alaska First Bank & Trust. There are loans for a wide range of reasons: buying equipment, furniture and buildings, as well as covering inventory, accounts receivables, working capital and seasonal gaps.
A company's financing needs are often based on its industry, says Kukas, a 34-year veteran of the banking business. For example, a retailer might have a short-term need to borrow to cover inventory until it is sold. He will repay the loan when he collects the receivables. On the other hand, a restauranteur won't have a receivables base. His need may be for new equipment or a larger facility.
If you're not sure which financial product is most suitable for you, don't worry. Your lender will assess your needs and recommend the best option. "That's our job to try to determine what is the best type of credit the business needs," Kukas said. "You can't cookie cutter it; you need to evaluate each need and look at the right type of loan for that need."
ALTERNATE FINANCING OPTIONS
A business line of credit is another method companies can use to finance expansion efforts. The typical line of credit lets you borrow, repay and re-borrow funds. Collateral is minimal and payments are flexible.
With KeyBank's Responsive Line of Credit, for example, no collateral is required on lines $50,000 and under and borrowers can opt for interest only payments.
Sometimes lines of credit are asset-based. And normally, the assets used are short-term in nature, such as inventory or customers accounts. "You match up the assets with what you're trying to finance," explains KeyBank Alaska District President Brian Nerland. "As inventory is sold... customers pay down the credit."
First National Bank Alaska offers an accounts receivable line of credit that provides not only funding, but also a complete package of services. The product, Business Manager, basically gives businesses up-front funds for money owed to them by their credit customers. More specffically, it buys a company's invoices, provides payment and statement processing, and also does management reporting on accounts receivable. Fees depend on the volume of sales and how fast the average accounts receivable portfolio pays. However, there are no start-up, monthly or termination charges.
Business Manager is well suited for business-to-business types of situations-manufacturing, distributing, service and retail, says Jean Reynolds-Chin, a vice president in charge of Business Manager. It allows companies to cash in on their receivables and take advantage of other opportunities. They can buy equipment, take supplier quick pay, increase inventory for seasonal purposes, retire short-term debt, use working capital to meet payables and use flexible financing options to generate sales.
"It gives you cash at a predictable time," said Reynolds-Chin. "You know you are going to have the money as soon as you perform the service."
Business Manager offers customers an alternative to the bank's regular accounts receivable financing, she said. "We're a more aggressive accounts receivable lender. Our lines of credit may be larger and may be for newer companies."
Leasing can be another remedy for businesses experiencing growing pains. With this option, businesses can obtain equipment, furniture, vehicles and other items without making a large down payment or draining their cash reserves.
Leasing products vary among banks. KeyBank, for example, has a number of leasing options, including tax-advantaged financing or a tax lease that allows companies to essentially swap depreciation for more favorable interest rates. In a tax lease, the leasing business offering the equipment owns the leased equipment for the life of the contract and claims the federal tax benefits of the ownership through depreciation deductions. However, the lessor passes those benefits onto the lessee in the form of lower rental fees. "With this, the bank actually takes the depreciation of the tax, and in turn the client gets a lower rate," Nerland explained. "They may have plenty of depreciation and ma not need it right away."
(Conversely, the non-tax lease passes the tax benefits of ownership to the lessee. While the lessor is legally the owner, the lessee may claim the depreciation and interest deductions.)
Wells Fargo Bank Alaska NA offers a similar product, called Leveraged Leasing, for large-ticket equipment such as aircraft, barges, printing equipment, rail cars and high-tech assets.
Business and personal credit cards can also provide additional funding for growth, particularly for smaller businesses, said Richard Strutz, regional president of Wells Fargo Bank Alaska. They offer fast, easy access to credit for day-to-day purchases.
Larger businesses have many of the same financing needs as their smaller counterparts--working capital and equipment loans, Strutz said. However, their needs may extend to cash management services, real estate loans, and acquisition funding to purchase a business. And, overall, bigger companies seek financial products and services with more bells and whistles.
Regardless of the type of financing you choose to help grow your business, planning and preparation are the key to your ultimate success. And that planning should start long before you need a loan, says the SBA's Veltkamp.
"You have to estimate expenses and future sales," he explained. "If you can forecast the sales, then you can compute what your accounts receivable and inventory levels will have to be to support the sales."
Then you can anticipate financing needs and avoid a crisis, he said. "If you can forecast those needs and show that in say ... three months you'll need some money ... you can allow the bank an adequate amount of time to get the credit you need."
Moreover, Veltkamp cautions business owners to "keep their finger on the pulse of their cash flow." Cash flow is like a huge plumbing system, he explained. You've got funds coming in from sales, investments and borrowed money. You've got money flowing out for operating expenses, loan payments, capital expenditures, owner's draws. Then you may also have leakage like shoplifting and spoilage.
The trick is to maintain a healthy level of operating funds. And that means, always knowing your bank balance, staying on top of accounts receivables and managing inventory. It also means controlling the urge to splurge. When you have a windfall of cash, don't automatically run out and spend money on new equipment and supplies, Veltkamp said. Instead, set aside reserves so you have a financial cushion for the future.
Veltkamp also advises companies to revise their business plans quarterly or at least annually. Then, they should schedule regular meetings with their lender to discuss the changes--whether they need money or not. "If your banker's familiar with your business, he'll be better able to help you with financing," he said.
Charles Weimer of First National Bank Alaska agrees. He strongly encourages customers to stay in touch with their banker and to keep their credit files properly updated. In fact, First National loan officers strive to contact their clients annually to let them know which items in their files need updating, says Weimer, senior vice president and Kenai Peninsula regional manager.
"Then when they call (for a loan) we don't have to have them jump over 10 hurdles to get financing," he said.
Here's an example of how one First National client benefited from having up-to-date files: "One of my customers went to the Lower 48 to purchase retail inventory. While there, he saw an opportunity to make several exceptional buys, but did not have enough cash. He called me, I reviewed his up-to-date credit file, and approved a threefold increase in his credit line over the phone."
Another example is a construction company that needed specialized equipment for a project. "The primary source for the equipment canceled at the last minute, and my customer located a replacement in Seattle. The supplier required a large up-front payment, and a barge to transport the equipment would be leaving the next day. No problem. Our borrower's file was up-to-date. We gave immediate approval and made a wire transfer to the leasing company. The much-needed equipment was on the next day's barge to Alaska."
GETTING HELP FROM THE SBA
If you need help getting loan approval, a Small Business Administration loan maybe the answer. The SBA Guaranty Loan Program works with almost any type of business, and all banks are eligible to participate.
The program makes it easier for small firms to obtain long-term financing for a variety of needs, including working capital, machinery, equipment, furniture fixtures, leasehold improvements and building acquisition or construction, and in some circumstances, debt consolidation.
"This program can help existing businesses in a growth spurt ... expanding in different areas," Veltkamp said. "Sometimes they're new customers to the bank, and don't have a track record. SBA can allow longer terms on the loan than the bank generally would go on their own. Someone may need a three-year working capital loan instead of say six months."
Here's how it works: The bank determines if the applicant's credit can stand on its own. If more assurance is needed, it will ask SBA to guaranty up to 85 percent of the loan. If SBA approves, the bank disperses the loan.
"We don't just rubber-stamp the bank ... we don't approve all the loans, Veltkamp says. We try to have the policy that we don't like to turn down a loan unless our investigation shows we can't or shouldn't make it."
For additional information about SBA programs and services, contact the Alaska District Office at (907) 271-4022 or 800-755-7034, or log onto www.sba.gov.
RELATED ARTICLE: Following are SBA Loan Guaranty Program guidelines for established businesses:
* Prepare a current balance sheet listing all assets and all liabilities of the business. Do not include personal items.
* Prepare an earnings statement (profit and loss) for the previous year and for the current period to the date of the balance sheet. Also a projection of earnings if needed to show payment ability.
* Prepare a current personal financial statement of the owner, each partner or stockholder owning 20 percent or more of the business.
* State the amount and uses of the loan.
* Take this material to your banker. Ask for a direct bank loan. If you are declined, ask for a loan under the SBA Loan Guaranty Plan. In most cases the bank will deal directly with SBA.
* To speed matters, make your financial information available when you write or visit your bank or SBA.
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|Publication:||Alaska Business Monthly|
|Date:||May 1, 2002|
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