A Gap Business Lenders Can Fill

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Wojtowicz founded Indianapolis-based Cambridge Capital Management Corp. in 1983. Wojtowicz founded Indianapolis-based Cambridge Capital Management Corp. in 1983.

In our job, we talk with small business owners all over Indiana. Most are confident about the future of their companies and surrounding communities.

National studies reflect this optimism. Dun & Bradstreet’s 2017 year-end survey found 84 percent of small and medium-sized business owners expecting better years this year than the already-good year they had in 2017. Other indicators are equally positive. But 55 percent of small business owners also say it is “difficult” to qualify for debt financing. And only 37 percent of small business owners report success in getting bank loans to finance projects at the end of 2017. (Those are mediocre numbers, but they are better than the end of 2016.)

There is a noticeable gap here, and it creates a question: how can small companies create jobs — as many say they will — if fewer than 40 percent of them are successful in arranging financing? Apparently, there is a gap between the number of small companies that readily gain small-business financing and the much larger group of small firms that need a capital infusion to fund realistic growth.

Close to home, the SBA’s 2018 Indiana small business profile reports that a million people have jobs in Hoosier companies with fewer than 100 employees. This is 40 percent of our state’s 2.5 million employees in private companies. Companies in this group added more than 16,000 jobs last year, along with equipment and buildings to accommodate them. These expansion trends are continuing this year.

That’s a good market for small business lenders such as banks, certified development companies and other providers of alternative financing to aim for. Fortunately, there are several programs to fill the gap with affordable small business financing.

Take the SBA 504 program as one example. It is one of the SBA’s most successful programs. Small businesses use SBA 504 loans for real estate and equipment while gaining two key benefits: a down payment that is about half the down payment required by a regular commercial loan; and a long-term, fixed interest rate that protects owners from higher rates down the road.

The SBA recently upgraded the 504 program to strengthen a borrower’s chances for success. SBA 504 borrowers may now have 25 years to repay loans at a fixed rate. Extending repayment to as long as 25 years (10-and-20 year terms already are in place) helps borrowers solidify budgets while keeping more cash for other important expenses. As noted in the national press, interest rates are expected to increase over the next few years.  This is an ideal time for borrowers to lock in rates using the 504 loan program which can provide fixed rates for 10 year on equipment loans and 20 or 25 years for real  estate loans.

There are other programs that business lenders can use to help meet their client’s needs including small mezzanine funds like the Indiana Community Business Credit Corp or programs aimed at a certain segment of the market like Lynx Capital Corp which provides growth capital to companies owned by racial minorities.

If you are a small-business business lender, challenge yourself to be up to speed on all alternative financing programs. Regulations often change, but so do enhancements such as the SBA 504’s extended 25-year payment period.

If you own a small business, your opportunities do not end if you are turned down for a conventional commercial business loan. Become informed about your alternatives even before you approach your banker. Be  aware of alternatives that might help get you the most advantageous loan package. But don’t expect to know all of them. Work with a trusted lender to navigate through the many lending programs available to find one that works best for you.

Financing is far from a small business owner’s only problem. Finding qualified workers tops many lists of needs. But the difficult tasks of interviewing, hiring and training workers and ramping up production always depend on reliable financing.

Working together, business lenders and owners can meet to fill the gap between available financing and expansion needs.

Jean Wojtowicz is president of Cambridge Capital Management Corp.

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