By Michael F. Carmichael
May/June 2009
There has been a lot of finger-pointing going on about why the economy is ailing, with much of the discussion centering around credit. There was too much of it, and that caused the problem, say some. There’s not enough of it now, say others. Corp! looked around for sources of money for small businesses and found that there’s a lot of it out there if you know where to look.
The Traditional Bank Approach
$28,152,500.
That’s how much Citizens Bank loaned out in the year that ended Sept. 30, 2008 under the Small Business Administration’s loan guarantee program, making it the largest source of SBA loans approved in Michigan. It also got them named Lender of the Year by the SBA.
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Citizens Bank is headquartered in Flint, Mich., with a large corporate presence downtown. Although based in the financially troubled town, it has $13 billion in assets and serves customers in northern Ohio, Michigan, Wisconsin and Iowa. In addition to commercial banking, Citizens also has “retail” customers, branches and ATM machines throughout its territory.
Tom Zernick is a vice president of the bank and head of its government loan program. He was also recognized by the SBA as the financial services champion for Michigan.
Corp! talked to Zernick about how the SBA loans differ from traditional commercial loans.
An SBA loan focuses on preserving cash flow for the client, says Zernick. “We can build less cash equity into the deal for the borrower than with traditional commercial loans.” As a “for-instance,” Zernick explains, “If a conventional commercial customer comes to us and says that he wants to buy a building, we would normally ask for 20 to 30 percent down, in cash. With an SBA loan we might be able to finance that purchase for as little as 10 percent down in cash, conserving quite a bit of cash for a company’s working purposes. And we would have the ability to extend the term of the loan out to 25 years so the monthly payment the client has to make to the bank is substantially less. It preserves their cash flow for working capital.”
Zernick continues, “Another benefit of an SBA loan is that there’s no ‘balloon’ payment - which has the loan coming due in five years with the additional fees associated such as new appraisals or closing costs and having to refinance it if the borrower can’t pay it off. With the SBA loan the client just continues to pay over the life of the loan, giving him much more certainty about cash flow.”
In today’s difficult time for some banks, Zernick points out “there’s the added certainty of always knowing who your lender is and not having to worry about a potential new one, perhaps with more stringent credit terms or interest rates.”
A perceived downside of SBA loans is that they take longer to approve. “Most of us,” Zernick says, “have what is called PLP - preferred loan program - status. We have direct lending authority. We can prepare the application for the client, so that once the client signs and dates the application we can send it to the SBA electronically and get same-day approval. There’s no more sending the application to the SBA for an eligibility decision or a credit decision - they trust us to do that on our own.”
An Unexpected Resource
Oakland County’s Business Finance Corporation in Michigan encourages small business owners who seek to purchase or improve a property, or buy a new piece of manufacturing equipment, to consider an SBA 504 loan.
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How did the county get into the loan business? “We’re actually what is called a Certified Development Company,” says Mary Langhauser, secretary of the OCBFC. “It’s what you have to be to do an SBA 504 loan. We’ve been around since 1982 so we have a long history.”
These loans are only for fixed assets such as equipment or buildings that are occupied by the owner, rather than a developer project, explains Langhauser.
The OCFBC is airing commercials promoting these loans which feature Oakland County Executive L. Brooks Patterson as spokesperson. “He talks primarily about the changes in the 504 loan program as a result of the stimulus program,” says Langhauser. “One is that the SBA is absorbing some of the fees for small business borrowers. They’re short lived until the money runs out.”
Financing is also available for green projects that meet 504 requirements, says Langhauser. “There is also increased money available for a company retrofitting their building to make it more sustainable or buying a building and installing an energy-efficient HVAC system, geothermal perhaps, or installing new windows or putting windmills on the roof.”
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On the fast track in Washington is an added benefit of the stimulus package. “Under the Recovery Act,” says SBA Acting Regional Administrator Judith Roussel, “We will establish a program to use the long-term loans available under the 504 Certified Development Company loan program to allow small businesses to refinance existing fixed asset loans to expand their businesses. The changes will allow a CDC to refinance existing loans for fixed assets - providing fresh support for small business expansion, providing the borrower is using the funds to expand the business and that the debt doesn’t exceed 50 percent of the projected cost of the project.”
At first glance it may appear that having a county or other nonprofit arrange loans puts them in competition with banks, such as Citizens. But that isn’t necessarily the case. “We work in conjunction with banks. They do 50 percent of the loan, we do 40 percent, and the borrower only has to put in 10 percent equity,” says Langhauser. “We are subordinate to the bank so it gives the bank a big cushion when it comes to the collateral and allows them to lend more money than they would ordinarily loan.”
With the county resource limited to real properties, there’s still a need to help start-up companies.
“We are still funding start-ups. They need a realistic business plan and go through a much more rigorous credit review - that protects them as well as the bank,” says Citizens’ Zernick. “There are agencies, like the Michigan Small Business and Technology Development Center which is affiliated with Grand Valley State University that will partner with a company and help it prepare a business plan. Hopefully, by the time we finish reading the plan, the answer is a quick ‘yes, you’re approved.'”
With banks such as Citizens and others lending to small business, we asked Oakland County’s Langhauser if activity is picking up. “The phone is ringing off the hook,” she responds happily. “CPA groups are calling, telling us they want to buy a building. Doctors are calling, saying they’re tired of leasing their building and want to buy it. There’s so much real estate out there. Also, we’re one of the very few CDCs that advertises to the general public. We help them understand the program, apply for the program, find a bank - all that hands-on stuff.”
She adds with a chuckle, “Plus we have a great spokesperson in Mr. Patterson. We’re holding on to the hope that it will be one little piece of putting our economy back together.”
