Not that its ever easy, but business owners have a greater array of options than ever when seeking financing for their companies.
From private investor capital to bank debt, businesses with a good track record should have the ability to secure what they need, according to local finance professionals. In particular, they describe a highly competitive market right now in West Michigan for commercial loans and private equity investments.
Good companies have a lot of options, whether its equity or debt, said Matt Miller, managing director at BlueWater Partners LLC in Grand Rapids who works with businesses on financing.
Miller describes the present environment as probably at or near a high in terms of availability for capital.
Banks are competing vigorously for new or expanded loans and credit facilities, and equity groups are competing quite aggressively for recaps and buyouts and acquisitions, he said. A good company with a good balance sheet and earnings and good management should have lots of alternatives.
As banks take a more aggressive lending posture after repairing their balance sheets in the wake of the recession, Miller and others say they are often able to provide clients multiple loan proposals from prospective lenders in the market, whether to finance growth or an acquisition.
Jeffrey Terrill, a senior vice president at Citizens Commercial Banking who works in the mid- to upper-middle market, describes putting together the financing package for the 2015 sale of Holland-based JR Automation Technologies LLC. The manufacturer of custom automation equipment, and previous portfolio company of Huizenga Group in Grand Rapids, sold to Crestview Partners, a New York City-based private equity firm.
Citizens Bank and Bank of America were underwriting the deal and wanted to syndicate it to mitigate their lending risk by inviting other banks to participate. At a meeting in Holland on a snowy day last February, representatives from 16 banks listened to their pitch.
The deal ended up oversubscribed and we had more banks than we needed, Terrill said, illustrating the level of competition by commercial lenders to get in on a good deal.
Id love to be sitting at the other side of the table, he said.
The competitiveness in the market also has made banks more able to partner for larger commercial credits. During or right after the recession, it was virtually impossible to get a partner to come into the market to share the credit risk on a large loan, said United Bank of Michigan President Mike Manica.
The Grand Rapids-based United Bank now regularly receives inquiries from out-of-state lenders seeking to partner locally, Manica said.
Thats back to normal. We have partners and bankers banks calling on us fairly frequently, wanting to do business with us and our commercial customers, Manica said. A lot of places have accepted Michigans rebound, and they are interested in re-establishing themselves in Michigan.
LOOSENING OF TERMS
A high level of competition enables a borrower to become more selective in choosing a credit provider, whether they are basing the decision on price alone or considering other factors, such as the long-term business relationship with a bank and the services it offers as the borrower grows.
It comes down to fit in lot of cases the personalities and the culture of the parties, the bank and the borrower, and the relationship where they feel like they can work together, especially if problems arise, Miller said. We would advise our clients to look beyond just price.
The present competitive landscape has resulted in slightly better and more favorable credit terms compared to a few years ago, although that depends on the circumstances of the borrower and the lender involved, experts say.
The current market dynamics are driven in part by the moderate growth rate of the US economy. That tempers demand for credit, forcing bankers to get more aggressive for good loans to drive their growth and compete for a limited number of borrowers out in the market.
At the same time, publicly-held banks face pressure to grow at a faster rate than the economy, intensifying the competitive environment.
Youre not going to find a bank that says it wants (fewer) deals than it did last year, Terrill said. We have to show improvements to the shareholders every quarter.
Adding to the competitive pressure for lenders: Some business owners who navigated through the Great Recession are more apt today to pay for capital purchases partly or fully with cash, rather than tap a line of credit as their first option.
In part, thats because business owners harbor lingering worry about when the next economic downturn will occur, Miller said.
The Great Recession has definitely left some scars, he said. Its been so etched in our memory banks that I think people are just a bit more cautious still many years after.
Some business owners today, even with forecasts for moderate growth to continue this year and next, prefer to wait as long as they can before proceeding with an expansion or a major capital equipment purchase.
Lenders at United Bank of Michigan, which typically lends to small and mid-sized businesses, have seen some clients operate as close to full capacity as possible before expanding.
Theyre confident about their current situation, but they dont seem to have that entrepreneurs confidence that five years from now its going to be even better, yet they have orders they cannot produce with their current size, Manica said. There are still a lot of scarred people from the last eight years and they are being conservative, and probably appropriately so.
They really want to let the reins of the horses go, but they cant do it.
Still, Manica added, commercial lending at United Bank is very busy right now and the competition remains high, requiring banks to give borrowers a reason why they should change (banks) and how youre going to help them, rather than (be) just a pretty face and a good handshake.
Likewise, several banks in their most recent quarterly reports last fall reported strong commercial loan growth for the July-to-September period in 2015.
Experts say banks are particularly competitive in seeking to finance a merger or acquisition.
In the annual Mamp;A survey by law firm Dykema, more than 44 percent of respondents reported an increase in commercial or institutional debt financing for their deals in 2015. About 28 percent used more subordinate debt finance to structure a deal last year.
Jeff Helminski, a managing director at Grand Rapids private equity firm Blackford Capital, said his firm continues to have plenty of options to finance acquisitions.
Were seeing a lot of appetite for our deals, Helminski said. Banks are eager to place capital.
Finance professionals who spoke with MiBiz on the current state of the market say business borrowers not only have more options from banks, but also from alternative finance sources as well.
Mezzanine financing and subordinate debt is more available today both from in-state and out-of-state lenders for fast-growing companies that need growth capital, experts say. In-state mezzanine funds, however, are not growing as quickly as private equity, Miller said.
As an option, mezzanine funding works best for business owners who are looking at high growth prospects, need capital and dont want to give up an equity stake in the company, Miller said.
It really fits with companies with strong profits and growth and good prospects companies with strong competitive positions (where) the bottom line is very profitable, and with a brave future, he said. Mezz doesnt work very well if things get bumpy.
For small businesses, credit unions have been increasingly aggressive for years in their commercial lending to members. Statewide, business loans to members by credit unions in Michigan exceeded $1.6 billion at the end of the third quarter of 2015, up 15 percent from a year earlier, according to data from the National Credit Union Administration.
Theyre active in the market and theyre seeing good deals and not-so-good deals, said Remos Lenio, a partner at merchant and investment banking firm Tillerman amp; Co. in Grand Rapids. Ive seen them do some well-structured, well-priced stuff.
So-called peer-to-peer and unregulated lenders backed by private investors are becoming very aggressive in the market as well, Lenio said.
More small business owners are also willing to look at US Small Business Administration lending programs for credit, said Mark Matis, chief lending officer at Grand River Bank in Grandville.
SBA-backed lending, which in Michigan totaled more than $140 million in the first two months of the agencys 2016 fiscal year, could get a boost with a recent change in the law. A spending bill passed by Congress in December and signed by President Obama permanently authorizes small businesses to use the SBA 504 program to refinance existing debt.
Sponsored by LoanMe, a licensed lender that offers loans to small businesses and sole proprietorships, with loan amounts up to $250,000 in most covered states and also feature same day or next day funding.
Getting a business loan of any kind requires some planning.
By gathering the required information and documents ahead of time, the whole process can go easier, so we designed a free, downloadable checklist to navigate the process.
Start by doing a little research on the kinds of documents required for all different kinds of business loans and carefully consider the options.
You can apply for a loan directly from the federal government through the SBA, or Small Business Administration. Traditional banks and alternative online lenders are also great options. Alternative online lenders, due to speed and the ease of their application process, are becoming increasingly more popular.
Related Article: The SBSS Score Explained: What It Is amp; Why It Matters When Applying for a Loan
The SBA provides a useful guide with an overview of what to expect when you embark on the business loan application process. Keep in mind that the process of applying for a loan through the SBA is much more involved than that of an alternative online lender. Make sure to understand all of your loan options before investing days or weeks gathering documents for a loan application.SBA 7(a) Loan Application Tips
If you decide to apply for a SBA 7a loan through the bank, which is one of the most common SBA loan programs, plan for about 25 hours of preparation. Make sure to have all required documents available and begin by filling out the SBA Loan Application form 1919.
Next, check business and personal credit scores before you get too deep into the loan application process.
"Most entrepreneurs dont realize that if they apply for an SBA 7(a) loan for $350,000 or less, their business and personal credit will be prescreened to calculate a FICO LiquidCredit SBSS small business score," writes Gerri Detweiler, Head of Market Education at Nav.com, in an email to Business.com. This credit score ranges from 0 - 300 and a minimum score of 140 is required to pass the SBA prescreen.
"Just as its a good idea to review your personal credit scores before you apply for a mortgage or car loan," explains Detweiler, "its a good idea to check your FICO SBSS score before you apply for an SBA loan. If its not strong enough, it's advisable to work on building better credit before you apply."
The SBA has a lengthy checklist of required documents.
Be ready to provide personal background and financial statements, including a statement of Personal History, or SBA Form 912, and Personal Financial Statement: SBA Form 413. You'll need to write up a business overview and history, in which you explain the story of your business and its challenges, with an explanation of why the SBA loan is needed and how it will help the business grow.
Next, it's time to prepare and include your business financial statements. The first of these is a Profit and Loss (Pamp;L) Statement current within 90 days of your application, as well as supplementary schedules from the last three fiscal years.
Projected financial statements are also necessary when applying for a loan through the Small Business Administration. This consists of a one-year projection of income and finances. As an applicant, you must attach a written explanation as to how you plan to reach your revenue projections. Your loan application history is also relevant to the SBA, so you should include records of loans you applied for in the past.
Related Article: What Should New Business Owners Expect When Requesting a Bank Loan?You're Not Done...
Round up a few more key details before you submit your SBA loan application, including a list of names and addresses of any business subsidiaries and affiliates. Provide resumes for all the business principals, as well as income tax returns.
Next, include signed personal and business federal income tax returns of your business' principals for the previous three years. You'll need to provide your business certificate or license as well. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
Finally, include a copy of your business lease, or note from your landlord giving terms of proposed lease.
Because this is a rather lengthy and involved process, it's best not to try to tackle it all in a day or two. Work on one piece of the SBA 7(a) application checklist at a time. Enlist the help of your bookkeeper or accountant. Pay attention to details and don't try to rush it. The SBA is trying to make the process easier these days with SBA Express and SBA Linc, so spend some time familiarizing yourself with these new streamlined options before you begin.Alternative Online Lender Application Requirements
If you need a fresh infusion of capital for your business, applying for a loan through an alternative online lender is another option. It's quite different than applying for an SBA loan: It's much faster. Generally, only three or four documents are required, and the whole process takes minutes instead of days. It's possible to get your funding in under 24 hours.
Bianca Crouse is a Small Business Loan Reviewer at Merchant Maverick, a website that reviews services used by small businesses.
"A lot of business owners dont have the time or the option of going through the SBA application process, either because they do not meet the basic requirements to get an SBA loan due to poor credit, no collateral, et cetera, or they dont have the time to invest in a two- or three-month long application process," she writes in an email to Business.com.
"Many businesses have been turning to alternate sources of lending such as merchant cash advances and online business loans, which often have much shorter application processes," explains Crouse. "Often, all they need for an application is proof of identity, like a social security number and drivers license, and information about the businesss cash flow from the past few months."
Here's what you'll need in terms of documents should you choose to go with an alternative lender such as LoanMe:
- Bank statement (2 months of recent statements)
- Voided check
- Proof of valid ID showing you are over 18 years of age
Because only three documents are required, it is possible to complete the online application and upload required documents in as fast as five minutes.
Related Article: Before the Business Loan: Questions That Must Be Asked
Before you begin, it is a good idea to compare APRs, or annual percentage rates, among alternative lenders. Free calculators can help you, and our template below is the perfect reference tool. Download it below for free!
The Federal Reserve this month raised interest rates for the first time since June 2006.
Rates were raised from 3.25 percent to 3.50 percent.
The Federal Reserve has two mandates: To keep inflation under control and to ensure that the economy operates at a level in which the United States can have solid employment.
With the increase, consumers will see an increase in short term loans but likely not immediately in their mortgage rates, according to Trustmark Bank CEO Gerard Host.
Host also serves as director of the Federal Reserve in Atlanta. He noted that his opinions do not represent those of the Federal Reserve.
The fed increase is really more effective on short term interest rates rather than longer term interest rates, he said.
Consumers with short terms loans, such as car loans, could see an immediate increase.
The quarter of a percent increase will slightly increase those types of loans, Host said.
Businesses could also be impacted on their lines of credit, he said. Those with a home equity line of credit will also be affected.
Prime rate has increased from 3.25 to 3.5, which is tied to many business loans, and it's tied to many home equity lines of credit, Host said. If prime goes up and if they have a floating rate loan that is tied to the prime rate, the rate will go up.
Mortgages, however, have not yet been impacted, but Host said Trustmark has seen an uptick in mortgage loans.
The reality is that mortgage rates have not changed at all, he said. Even though mortgage rates have not gone up, it seems as though people are moving more quickly to close their mortgage loans or to get a mortgage loan.
Lynette Praytor, Crye-Leike regional broker for Mississippi, said realtors were readying for rates to increase in 2016 but the real estate market hasnt yet been impacted by the increase.
We anticipate rates to go up next year but I don't think the immediate impact of The Fed raising the rate will affect the bond, Praytor said.
She added, We never thought we would see rates this low but we have them right now. The best information available right now is if you want to buy it's the right time to buy.
According to Brooks Mosley, president of Security Ballew in Jackson, consumers are unlikely to see a significant return in the short run on their CDs (certificates of deposit) or cash sitting in the bank.
It's going to take some time before the consumer sees any significant increase in the earnings on your typical CD or money sitting in the bank, Mosley said. The spread on what they loan their money out has been so narrow...it's highly unlikely the interest being paid to the consumer is going to rise any time soon.
However, consumers with notes will be negatively affected, Mosley said.
People with notes, with a variable rate, they're going to see their interest rate rise, he said.
Rates are projected to rise a quarter of a point each quarter in 2016. Host said the current increase wont have a significant effect on day-to-day banking operations.
In terms of day-to-day operations, the quarter of a point change in the increase will not have a significant impact on the operations of the bank of Trustmark, Host said. It's more impactful if interest rates continue to rise rapidly over a short period of time.