Commerical Lending and Your Small Business
How small businesses can get the most out of commercial lenders.
Two years after opening Toni Ann’s Catering, Frank Carlisi was ready to expand. He had already grown the White Plains-based corporate catering business he'd started in April of 2011 into a significant enterprise, but was looking to expand even further.
Initially, Carlisi established Toni Ann’s Catering without commercial lending. A client Carlisi met while working for another company supplied him with a loan, which covered operating expenses and startup costs. And RPW Group, one of Westchester’s largest commercial real estate developers, allowed Carlisi to assume the lease of the café space in one of its office-building venues.
But now he wanted to take steps such as hiring a pastry chef and performing much-needed renovations that involved more capital. So he turned to Webster Bank, a regional bank that serves areas from metro New York to Boston. It was a decision, he says, that “would dictate the future.”
The most obvious benefit the bank gave him was a small-business loan, which he used to complete his hiring and renovation goals, as well as create a website, implement a marketing plan, and serve new types of cuisine to draw in clients. But he also received a confidante, a banker named Maria Freburg, to whom he could turn for business advice—now and in the future. “Finding someone you can really trust and confide in and let them know, ‘This is what I’m going to use the money for; what do you advise?’ was key,” he says. “Having that advisement piece was something that stood out for me; it gave me the confidence to take our business and put it on track to the next level.”
Commercial lending institutions and the products and services they offer can be a valuable resource for small businesses. Does a company need new equipment, a vehicle, an office building, real estate to use as an investment, or cash to buy last-minute inventory? There are loans for all those items. Does it have a cash-flow problem? Perhaps it needs to make payroll on Friday but isn’t getting paid by clients until Monday. Banks can extend a line of credit. They also issue credit cards, set up payment services, manage cash flow, and secure funding from other sources including the Small Business Administration.
But, as Carlisi will attest, banks are much more than commercial lenders; they are also a great resource for small-business owners seeking advice on how to take their next steps or manage their finances. (After all, the bank wants you to succeed so it will recoup its loan.)
“I want our customers to look at us as financial advisors, just as they look at their attorney as their legal advisor and their accountant as their tax advisor,” says John Bartolotta, first senior vice president at Hudson Valley Bank, headquartered in Yonkers. “If I’m a business person, I want those resources at my fingertips; I should be able to pick up the phone and call my banker and discuss something with him just like I would with my attorney or CPA.”
The good news for small business owners is there's an abundance of commercial lending institutions in Westchester. “We operate in one of the most affluent regions of the country, and you have every major money lender—regional, super-regional, and community banks and credit unions—competing for the same pieces of business,” says Bartolotta. “The borrower really is in a great spot.”
But even with all these resources floating around, it can still be difficult for new business owners to get the right financing. So we reached out to some local experts for tips to make the most of these resources.
Selecting the right bank and banker
Not all banks welcome small-business owners as clients, especially owners who have an unproven track record or little credit history. “Many banks don't lend to startups unless [the owner] can show from past experience that this is already their second or third company,” says Chris Jones, a small-business owner who advises other business owners through the Westchester Business Council and Westchester Community College’s entrepreneurship branch. So it’s important to choose a bank that's startup-friendly.
Perhaps the clearest sign that a bank welcomes small businesses and startups is if it is a preferred SBA lender, says Webster Bank's Freburg. “The first and most important step in the process is to sit down with a banker who has experience in not only conventional lending, but also SBA lending. Because there are so many opportunities to work through the SBA, sometimes it could be a little daunting.”
It is also important to choose a bank that understands the industry that you are working in and is familiar with its processes and norms. Jones, who had trouble securing financing for his personal business, Durante Rentals, a company that provides equipment rentals for construction sites, said that his bank turned him down for a loan because they didn’t understand how he was going to make money, and were thus hesitant to tie themselves to an unknown field. “You may have this great business model that produces money hand over fist with great margins, but if you can’t explain your business to a bank, no matter what your numbers show or your projections, they are going to say no,” Jones says.
Having a banker who understands your area of work will also make him or her a more valuable advisor to you, says Freburg. “It is especially important to partner with a great banker who will help them understand what the industry looks like from a running-the-business perspective,” she says. “Are you billing appropriately? Are you billing on time? How are you telling your story?”
Of course, you should also find a banker in whom you feel comfortable confiding. White Plains-based Lou Gallo, a senior vice president and business banking manager at Wells Fargo, says, “It’s extremely important that you have someone that you trust, that you feel is knowledgeable, that can help you actually grow your business and be consultative and offer full support.”
Prepare, prepare, prepare
After choosing the right lending partner, a small-business owner must make the case for why he or she is deserving of money and will pay it back on time.
A big part of the application process is a company’s financials—the documents, tax returns, and credit ratings that illustrate how a business is doing financially and the amount of risk they can take on in the future. Every banker interviewed said the key to presenting good financials is employing a CPA who can not only accurately show how the business is doing financially at the moment, but can also keep the records in good shape for future funding opportunities. “Every single ideal client I have has a great CPA,” says Freburg. “One of the biggest mistakes small businesses make today is they don’t appropriately show what their business is making from a tax perspective.”
Another item banks look at when considering clients is a solid business plan. “I think the key thing for a person coming in is they have to have a business plan; that’s critical,” says Gallo. “It has to represent two to five years in terms of projection and [show] how they are going to actually make money and drive the business to move forward.”
Bartolotta also wants reassurance from potential clients that they have plans to deal with situations that may arise in the future and prevent them from paying off their debt. That could include a good succession plan (If something happens to the owner, who takes on the debt?); an alternate business plan (How does the company make money if the original business plan doesn’t work?); and other forms of equity in case a business fails (Does the owner have real estate, savings, college funds, etc., that can be used as collateral?).
“As a community bank, we’re typically not a lender where the principals are not standing behind the loan with their personal guarantee,” says Bartolotta’s partner at Hudson Valley Bank, Frank Skuthan, who heads up the Commercial Banking Group.
Once you have the relationship
Once a bank gives a small-business a loan, there are steps owners can take to assure that the relationship stays strong and that the bank will continue to lend to them in the future.
The biggest mistake business owners make, says Gallo, is not keeping the bank updated on their financial movements. “Not being timely in your information reporting to the bank always sends out warning signals to the bank that there could be potential issues in the way the business is being managed,” he says.
He also says the customers who get the most from the bank are those who are “open and honest and plan with the bank as they are growing. So no surprises—there is constant communication with the bank as things are changing.” That means that if there are problems, the bank should know about them as soon as possible so both parties can move forward with solutions.
Another mistake business owners make is getting the wrong type of loan (something that can be avoided by listening to a good CPA or banker). “Very often, small businesses come in and make financial requests that don’t match the purpose of their funding,” says Skuthan. “For example, I cannot tell you how many times I’ve had folks come in looking for a line of credit but they tell me they are going to be purchasing equipment. It makes no sense for those two items to be connected. A piece of equipment is something that you own for an extended amount of time. It depreciates over time and therefore doesn’t match the debt you pay.”
Gallo sums up the situation more bluntly: “When you get put into the wrong product, it can be devastating for a startup business.”
Although establishing a good relationship with a bank or commercial lending institution may seem daunting, once it is in place, the small business will have resources to grow and expand for years to come.
Carlisi says that now that he has a relationship with Webster Bank, he can dream bigger. He even hopes to use commercial lending to finance a move to a catering facility, or maybe even a country club in the future. “That’s our ultimate goal,” he says. “And the first call I would make would be to Webster Bank to see what I could work out for financing for that venture.”
Luckily, the commercial lending institutions also want clients to take out more loans to expand. “I really want to help [my clients] become successful, so I focus on the prospects they have for their business,” says Freburg. “And, hopefully, we grow with them."