Long-term commercial loans: helping businesses capitalize on new opportunities.
"It was a complicated loan package involving a great team (Joe Everhart, Sam Mazzeo and Christie Watson) that found us the best solution for our specific financing needs," says Chief Executive Officer Peter Grunwaldt.
Wells Fargo's financing enabled Premier Alaska Tours to purchase the equipment necessary to grow its business and the infrastructure to maintain it. And perhaps more importantly, it provided structure and flexibility that was critical for the seasonal nature of the company's tour operations. Established in 1995 with a staff of three, the tour company has a year-round staff of 42 and approximately 350 seasonal employees. Grunwaldt says: "As our banking and financing needs have grown, Wells Fargo has had the resources to not only meet our needs, but exceed our expectations."
Where to Secure Financing
Premier Alaska Tours is among the in creasing number of Alaska businesses taking advantage of long-term commercial loans from banks, credit unions and other financial institutions. A long-term commercial loan is funding that's greater than 12 months, according to Generally Accepted Accounting Principles; but what constitutes a long-term commercial loan at Alaska's financial institutions varies by term, purpose and the assets involved.
First National Bank of Alaska, for instance, classifies longer-term business loans into two categories. It offers commercial and industrial purpose loans with terms of three, five and seven years and commercial real estate loans financed for up to 15 years. Alaska's largest locally-owned bank, First National Bank serves the financial needs of Alaskans with ATMs and 30 branches in 18 communities throughout the state.
At KeyBank, long-term debt usually involves loan terms of five years or greater. Regardless of the length involved, long-term business financing generally represents secured debt that carries a fixed maturity and interest rate. It requires monthly or quarterly repayment based on various amortization schedules, and the loan amount is often dictated by the collateral value. KeyBank provides commercial, consumer and private banking services, as well as investment and mortgage services in 17 branches in Alaska.
For Wells Fargo, long-term business loans are typically those that exceed seven or 10 years. In terms of dollar amount, the bank has provided long-term commercial loans for as much as $50 million, according to Alaska Commercial Banking Manager Sam Mazzeo. However, Wells Fargo extends credit to Alaska businesses of all types and sizes. In general, borrowers with credit needs and capacity of more than $10 million work with Mazzeo's commercial banking team. Wells Fargo has more than 40 business bankers across Alaska, including small-business banking teams and commercial banking teams that handle its largest customers.
Alaska Growth Capital allows companies to finance commercial real estate loans for as long as 25 years. Loans for other purposes have an average 10-year term, with up to 15 years allowed for equipment. Alaska Growth Capital is a lending and consulting company that focuses on working with small business owners and entrepreneurs by providing professional and financial support and promoting economic growth in rural and urban areas of Alaska. Alaska's only Business and Industrial Development Corp. (BIDCO), Alaska Growth is a subsidiary of Arctic Slope Regional Corp.
Types of Loans
Long-term loans are standard financial products that are used by everyone from small morn-and-pops to large corporations. They comprise a large segment of the loans that many financial institutions make. Long-term commercial loans are attractive to borrowers because they allow them to finance a purchase and repay it over time, according to Lori McCaffrey of KeyBank. "Long term financing allows a company to flee up working capital by not impacting liquidity when a capital need arises, as opposed to purchasing an asset with cash or by utilization of a line of credit," says McCaffrey, senior vice president, commercial banking and private banking in Alaska.
Some of the most common types of long-term commercial loans are used to finance equipment, commercial real estate and business acquisition. In Alaska, these loans often take on a twist, involving aircraft, fishing vessels and even fishing rights and fishing quotas.
Commercial and industrial loans at First National Bank Alaska are granted for everything from business acquisition to equipment financing. In Anchorage, these loans tend to involve large industrial clients, while about 80 percent of the longer-term loans for Mat-Su businesses are real-estate oriented, according to Senior Vice President Craig Thorn, who handles commercial loans in MatSu. "The commercial loans in Anchorage have more big industrial clients," he says. "We don't have the industrial base in Mat-Su; we're much more of a bedroom community."
First National Bank Alaska generally sets the term for equipment loans at five years, but the length of the loan ultimately depends on the specific equipment involved. "You certainly don't want it to be longer than the life of the underlying asset that's being taken as collateral," Thorn says.
The useful life of a new box van, for example, would be seven years. What determines useful life is primarily based on accounting principles, but it also depends on the actual condition of the property. "It's up to the lender to inspect the equipment and determine its usefulness," he says.
That's the principle that Wells Fargo applied to Premier Alaska Tours' loan. Since the company was purchasing a variety of assets--rail cars, motor coaches and real estate--the bank employed multiple loan terms to match the useful life of the different types of property, according to Mazzeo. He explains: "Essentially, the loan amortizes or pays down over time. This assures that the loan stays inside of the value of the asset."
Alaska Growth Capital specializes in using Small Business Administration and USDA loan guaranty programs to offer longer terms than a typical commercial bank. "We can improve a borrower's cash flow if we can 'term' equipment out over 10 years, versus a commercial bank that may do it over five years," says President and Chief Executive Officer Chris McGee. "Our lending model is more closely structured to maximize the use of the loan guarantee programs versus having them as a secondary factor."
Named the SBA 2011 and 2012 Alaska Community Lender of the Year, Alaska Growth Capital often works with borrowers who need financing for equipment, working capital, acquisition and debt restructuring. Some of its clients may be in high-risk industries such as aviation, timber or tourism or located in areas without a local financial institution.
Qualifying for a Longer-Term Loan
Banks normally require three years of financial information to review a loan request, according to McCaffrey of Key Bank. The applicant may be required to provide a business plan with a pro forma, a defined business purpose and valuation for the asset being acquired.
As with most commercial loans, she says, only established businesses with a history of profitability qualify. Also, cash flow (historical and projected) generated by operations must be sufficient to service the debt. A number of considerations factor into qualifying, including: the purpose of the request, asset being financed, financial performance, ability to service the debt, management, guarantors, industry and credit history.
Risk is also a major factor. "A lender carries more risk when it extends long-term financing as it increases the likelihood a borrower can experience financial distress," McCaffrey says. "As such, the lender will require collateral--subject to acceptable loan-to-value ratios-to secure the financing of long-term debt, may require guarantors and may be subject to financial covenants."
There are risks associated with every loan, says First National Bank Senior Vice President Commercial Lending Bill Inscho. Long-term loans may necessitate more collateral, a stronger track record and other qualifying factors, but it all boils down three things: idea, capital and management. He explains: "Any business, whether it's Starbucks or a brand new company, has to have an idea that works. You've got to have some money of your own to get it started and to support it. And you've got to have strong management. If you don't have the management skills necessary, the chances of the business succeeding are slim."
Positive Impact on Economy
Long-term commercial financing can have a positive on business growth as well as the state's overall economy. It can also enhance earnings, which in turn can lead to business expansion, acquisitions and increased shareholder returns.
Having access to capital enables companies to take advantage of new opportunities, which was the case with Premier Alaska Tours. "It allowed us to capitalize on a unique opportunity transferring ownership of transportation and tourism assets to an Alaskan owned company, creating more jobs for Alaskans in Alaska," Grunwaldt says.
Long-term debt can also be a tool that can help a business manage and improve its financial performance, according to McCaffrey. But the amount of long-term debt on a company's balance sheet is crucial, she says, and borrowers should understand that the burden of principal and interest payments could become too heavy if they borrow excessively. However, she adds, the current low-interest rate environment provides an opportunity for businesses to fix interest rates for years to come, eliminating interest rate risk volatility.
Alaska's financial institutions offer sage advice for would-be borrowers. McGee encourages business owners to carefully consider whether a long-term loan is best for them. They should weigh whether it makes sense and how it will benefit their business. He adds, "Does it strategically fit into their long term growth plan?"
Mazzeo urges businesses to develop a relationship with their banker--before they need it. "It is critical to having access to capital or lines of credit," he says.
Similarly, Thorn stresses the importance of keeping your banker fully informed. Companies should submit updated financials to their bank annually, so they can react more quickly to funding requests. Inscho encourages business owners to go visit their banker and keep them informed on how their business is going. He adds: "Let them know that you're thinking about an investment. We can give words of advice and caution and help them make a better-informed decision."
Former Alaskan Tracy Barbour writes from Tennessee.
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|Title Annotation:||FINANCIAL SEVICES|
|Comment:||Long-term commercial loans: helping businesses capitalize on new opportunities.(FINANCIAL SEVICES)|
|Publication:||Alaska Business Monthly|
|Article Type:||Company overview|
|Date:||Mar 1, 2013|
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