By Ashley Mitchell
Financing a business or project is no small feat, especially in today’s economy. The lifeblood of any operation, financing lately seems to be as easy to come by as water in the desert. So that being the case, there is no better time to discuss traditional as well as alternative financing.
Questions and concerns over financing can come in many forms: How do I fund the start of my business? How do I fund growth or just sustain day-to-day operations? But all of these small details lead up to one underlying question: What financing is available?
The reality today is that many small businesses are not completely bankable yet, said Jennifer Shelton, director of the Small Business Development Center, a free consultation service for local businesses. She said there are several programs available for business that don’t fit in the box of a traditional lender. These can include programs banks don’t know about and ones in which a bank can partner with, she said.
According to the Center for Economic Vitality’s Web site, one of the main reasons businesses are denied bank loans is because they don’t understand the bank’s requirements and restrictions. In order to obtain a loan, banks require the business to put together a loan package, which includes an in-depth business plan and future projections.
The key points and documentation a traditional lender will review includes what has come to be known as the “five Cs,” Shelton said. These include management capacity, cash flow, collateral, credit, and contribution.
“This is where our program comes into play,” Shelton said. “We help businesses who don’t meet all five of these put together their loan packages, so when they present to a lender, whether traditional or alternative, they have a higher success rate of securing the loan.”
Alternative financing exists in many forms, but government loans are a big chunk of that. For small businesses, there are numerous Small Business Administration (SBA) loan programs available.
SBA programs don’t offer direct loans, said Elizabeth Rusnak, vice president and senior loan officer of the Northwest Business Development Association. SBA sets guidelines for loans in order to guarantee they will be paid back, making a business less of a risk to a lending partner, she said.
The SBA 504 Loan Program is what the Northwest Development Association is specifically licensed to facilitate. This loan program is intended to facilitate financing to businesses to allow acquisition of fixed assets, such as commercial buildings or major equipment. The idea behind the 504 Loan Program is on average, for every $65,000 dollars given, a job should be created or retained, Rusnak said.
The SBA loans up to 40 percent of the proposed funding and then partners with a lending institution, which pays up to 50 percent, allowing the business owner to pay as little as 10 percent down, Rusnak said.
“Direct bank financing often requires a down payment of 20 percent to 25 percent, so that can end up being a lot of money saved and funneled back into the business,” Rusnak said. “SBA also carries a fixed interest rate for the entire 20-year loan, which is almost unheard of.”
Businesses in rural areas can look to the U.S. Department of Agriculture (USDA). The USDA offers various loan and grant programs, except they work through partnerships with public and private community-based organizations and financial institutions.
These loan and grant programs target rural areas with a population of 50,000 or less. The average equity required is at least 10 percent to 20 percent for new businesses, and interest rates vary because they are negotiated between lender and borrower. Terms can be up to seven years for working capital loans, 15 years for equipment loans and up to 30 years for real estate loans.
At the state level, the Washington State Department of Commerce offers grants and loans to small and medium-sized businesses through loan capital for start-up and expansion projects. They offer seven programs ranging from private business loans to gap financing resources for rural businesses.
Most state and local governments offer industrial revenue bonds, a loan to a company to build or buy a facility or buy land and/or equipment, as a way to encourage relocations and expansions of companies to provide jobs and help local communities. Locally, the Port of Bellingham’s Industrial Development Corporation offers tax exempt financing to qualifying companies through these bonds.
Bond amounts can range from $1 million to $10 million, have fixed- or variable-rate features, and long-term repayment, plus the projects can be located anywhere in Whatcom County.
When it comes to nonprofits, traditional lending can’t help in the way it used to either, said Che Wong, associate loan officer for Seattle-based ShoreBank Enterprise Cascadia, a certified nonprofit community development financial institution. Many banks are under regulatory orders to put bigger restrictions on their reserves, and nonprofits are being turned away.
Being certified by the Department of Treasury enables banks like ShoreBank to help existing organizations geared toward community development, Wong said. These organizations can include ones owned by women, minorities, low-income individuals and businesses with an environmentally-friendly component. They are selected on the types of projects they do and, just like a traditional lender, have their own requirements and restrictions.
“We are able to take on a little more risk,” Wong said. “We don’t take deposits, or open up savings or checking. We are a business lending bank, only we’re more flexible.”
All loans through ShoreBank must be secured by collateral, although the collateral assessment may be more flexible. Interest rates vary depending on the risk and payback terms are generally one to five years. Loans are available from $25,000 to $750,000.
Some lesser-known options
Alternative financing options exist everywhere, especially on the Internet, Shelton said. For example, social lending is an online lending option for businesses.
Social lending doesn’t require a business plan, and numerous Web sites are equipped with personal lenders looking for an investment. Most Web sites only require an intermediary credit check and then it matches you up with a potential lender. Some examples of these Web sites are www.virginmoney.com and www.prosper.com, Shelton said.
“People always think to go to the bank, but online is yet another option,” Shelton said. “People are taking their savings from the bank and lending it with higher interest to businesses and individuals in need.”
The Bellingham Angels is a larger group of accredited investors who are interested in providing equity capital to early and mid-stage entrepreneurial companies in Whatcom County. The local group is part of a national organization consisting of similarly functioning groups in other cities.
Prospective buyers have to pass the company screening process and are then required to make a short 15-minute presentation to the group at one of their bi-monthly meetings. If an individual investor chooses to invest, then they work out the details between the borrower and lender. Investments typically range from $150,000 to $1.5 million.
Some counties have specific loan funds for community and local economic development, Shelton said. The Northwest Economic Council offers a Revolving Loan Fund and an Economic Development Investment Plan to help local manufacturers and public facilities in need.
The Revolving Loan Fund can fund up to $75,000 for any single project in Whatcom County and sets the interest rates below rates in the area. It must be a job-creating activity and at least 20 percent of the financing must come from the applicant. The maximum applicant portion of the loan is 30 percent.
The Economic Development Investment Plan was developed when the Washington State Legislature authorized rural counties, such as Whatcom County, to collect a portion of the sales tax collected to finance public facilities. This program is intended to fund public facilities and create and retain jobs.