Commercial lender says businesses need to think over details | Q&A

As a senior vice president and business team leader for Peoples Bank, Terry Daughters oversaw new local commercial lending last year that totaled more than $180 million. But for many small companies and startups, getting bank loans or opening new lines of credit can be daunting obstacles to getting the financing they need to be successful.

Yet Daughters said small-business owners and startup entrepreneurs have some reasons to feel confident, as long as they pay close attention to detail and are prepared to live and breathe their business endeavors.

When an applicant presents a business plan, what do you look for? 

We can typically tell what kind of experience they have, if they’ve done their market research, if they know what they’re going to sell their “widget” for and what it’s going to cost to put out in the market.

There’s a lot of information [commonly put] in a business plan, including your marketing plan, who’s your competition, what your sales are going to be, and if you’ve really thought about expenses.

A business plan, if it’s done correctly, really lays out the whole program.

Are there components that applicants tend to overlook? 

When you think about going into business, you really need to understand that you need to be in for the long-term.

The average success rate of a business in the first two years is about 70 percent, but when you get out to five years it drops to 50 percent. So, you’ve got to really want to live and breathe the business, and even be able to do that seven days a week, if you have to.

A lot of people think you can turn it on and turn it off. But when you’re in business for yourself, you can’t do that.

So sometimes business owners don’t realize the level of commitment that might be required? 

Exactly.

The other piece that’s pretty important is their past experience and how that will benefit their success in the future. And if they understand their cash flow. You got to be able to estimate the cash needs of your business well in advance, because if you run out of cash, then you’re in trouble.

Do loans typically go to already established businesses, rather than startups?

I think it’s real typical that the majority of our loan growth comes from existing customers, companies that have been around, have already been through the startup phase and now they’re growing their business.

We typically see a lot more revenue or loan growth in existing customers than in new.

The SBA [the U.S. Small Business Administration], when it identifies small business, says 93 percent of small businesses have revenues of $250,000. And 57 percent have annual revenues less than $25,000. So a start-up, when you look at revenue, is typically pretty small.

When you’re looking at [Peoples Bank’s] loan generation over a year, start-up transactions are a small, small percentage. Our annual commercial lending for 2012 was about $181 million in new loans and commitments to local business. A lot of that is to existing companies that have already been in business for a period of time.

When startup entrepreneurs are willing to increase the amount of personal investment into their businesses, does that make them more attractive candidates for loans?

I’d say yes, it definitely helps. The more cash the owner has, the chances for survival increase. The number two reason why a business fails is because the owner hasn’t brought sufficient capital into the company to cover the potential, or eventual, cash needs. So, the more cash we see that an individual has access to or can bring into the business, that will definitely increase their success.

The best kind of cash to bring in is the kind that you don’t have to pay back right away, [for example], if you have an investor that’s willing to lend you some money and you don’t have to worry about paying them back right away.

Do business borrowers need to have 100 percent collateral to get loans? 

In traditional transactions, there is a buffer between the amount that’s loaned and the amount of collateral that’s required. But there’s an analysis that goes along with that thought process. It really depends on how long the company has been in business.

If it’s a start-up, then yes, we prefer to have adequate collateral, because we don’t know if they’re going to be successful in their new business. So it helps if there’s 100 percent, even 125 percent collateral.

Often it depends on how large the loan is, how long one would need the loan and what the loan is going to be used for. But typically on startups, we would like to see adequate collateral to support the loan request.

Where you can get away from that is the fact that [Peoples Bank] is a prefered lender on small-business loans, which means that we’ve got approval from the Small Business Administration to make SBA-guaranteed loans.

The SBA doesn’t necessarily have a collateral requirement. In that case, if we’re a little short on collateral, but all the other variables look good—good cash flow, good management, a well thought out business plan—we often times will go ahead and make a SBA-guaranteed loan without sufficient collateral.

What factors help you determine an acceptable risk to take on as a lender?

Of course, we want to see that there’s good management, but along with that is that we analyze the primary and secondary sources of repayment. The primary source is the successful operation of the new business, and because it’s a new business—if you’re looking at new business—we don’t really have a track record to analyze. So, we also look for secondary sources of repayment, like the collateral, or maybe the business has access to other assets.

Risk is analyzed with many factors, but the primary and secondary sources of repayment are pretty important if you understand what those are.

If you have at least one strong source of repayment, then you can often justify in one way or another that the risk is acceptable. You’ve got to understand, in a lot of cases we’re lending out our depositors’ funds, so we’ve got to make sure that people we are loaning money to are paying us back.

What do think is the most misunderstood aspect of commercial lending? 

A lot of times I hear that the only people who get loans are the ones who have money. That’s not always the case.

It helps if you have access to some cash, but depending on the size of the transaction and what you’re attempting to accomplish, there are other resources out there that we can bring into the picture to help mitigate some potential weaknesses.

As long as we have a good understanding of how your business is going to operate, sometimes you don’t have to have money to get a loan, you just need to have some assets that will help the structure of a loan transaction.

Evan Marczynski, lead reporter for The Bellingham Business Journal, can be reached at 360-647-8805, Ext. 5052, or evan@bbjtoday.com

SMALL-BUSINESS FINANCIAL RESOURCES

Bellingham Score
1313 E. Maple St. #591
360-685-4259
www.score.org 

WWU Small Business Development Center
115 Unity St., Suite 101, Bellingham
360-778-1762 (Director Jennifer Shelton)
cbe.wwu.edu/sbdc/

U.S. Small Business Administration
www.sba.gov 

City of Bellingham
Community Resources for Business

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