Whether you’re looking to start a new business, expand your current business, purchase new equipment, or obtain working capital for raw materials or inventory, you’ll likely need a dependable lender to help you finance your goals.
Whether you’re looking to start a new business, expand your current business, purchase new equipment, or obtain working capital for raw materials or inventory, you’ll likely need a dependable lender to help you finance your goals. Luckily, your access to a commercial loan is within reach. Community banks tend to offer the most face-to-face interaction, making them an excellent choice if you’re hoping to obtain a commercial loan.
There are many types of loans available, but for the most part, all have the same intention: to fulfill new opportunities for you and your business.
“This all leads to increased revenue and profit, which is a primary goal of any business,” says Jim Wang, Stillman Bank Vice President and Business Resource Officer.
While the worst of the pandemic is hopefully behind us, commercial banks are still seeing businesses requesting loans to stay afloat in the current economic conditions. However, lenders are also seeing many of their clients thriving during these times.
“We have experienced and supported many businesses in the past year with growth and expansion opportunities,” says Wang. “They have not only weathered the storm but figured out a way to grow and reach new customers while leveraging preparedness and planning, which is key for any business regardless of what’s happening in the world.”
During the early days of the pandemic, Paycheck Protection Program (PPP) loans from the Small Business Association (SBA) significantly helped local businesses, especially in the service industry, adds Amy Brewer, Illinois Bank & Trust Senior Vice President/Commercial Team Lead. In addition to these loans, local banks were able to help.
“We provided a lot of aid for our local small businesses,” Brewer says. “We did interest-only loans so that businesses could save cash instead of paying their principal payments. I did short-term lines of credit for different types of borrowers just to supplement them through those times. Looking at it now, they’ve either been able to pay those loans back, or they’re on a short-term repayment plan. But at this point in time, I’m not seeing as many requests for the COVID part of it.”
Brewer noticed that her clients in the manufacturing industry were hit harder from about June to September 2020. Initially, manufacturers were able to finish up projects that they still had in progress when things shut down last spring. But as businesses started to slowly open back up during the summer, there wasn’t a typical backlog of projects for manufacturers.
“We saw manufacturers having a bit more of a downturn in that third and possibly fourth quarter,” Brewer says.
But now, projects are starting to resume again. The manufacturing industry is getting back on track, and it seems most other industries are picking up as well.
“I have new construction for businesses that are expanding or moving locations, and I have some new businesses that are looking to open,” Brewer says. “I don’t have a lot of service businesses in my portfolio, like hotels and restaurants, but I do have a lot of manufacturers, software companies, commercial real estate and medical practices.”
If you’re looking to obtain a commercial loan, know that there’s heavy competition for your business. Commercial lenders want to be able to help you achieve your goals.
“I’ve been in this industry for 30-plus years, and I would say the best thing is to be able to go out to businesses and just see what they do day-to-day,” Brewer says. “If you ask a business owner how they got started, you’ll hear how they’re so proud of what they’re doing, and they should be. Just meeting business owners and helping them take that next step, whatever it is, and being that trusted advisor to do what’s best for them – I think that’s the best job in the world.”
Still, if you’re hoping to obtain a commercial loan, it’s important to put in the work. Commercial loans typically require more scrutiny than residential mortgages, since the industry considers businesses to be a riskier investment. Even though banks are competing for your business, they still need to analyze your company’s debt service coverage ratio, your businesses’ credit score and other factors.
So, while you search for a commercial lender, start gathering your documents early on.
“One of the most important steps in seeking to obtain a loan is to be prepared in knowing what your exact needs are and putting in the work to have all necessary financial documents ready for the lending institution to begin their due diligence process,” Wang says. “Banks are ready to lend, and requests usually get delayed due to businesses not being prepared for what a bank needs to underwrite the loan request. The better prepared a business is, the faster and smoother the process will be.”
Especially after a year like 2020, banks are extra-cautious when making sure you’ll be able to pay back your debts. Typical repayment options could range from a fully amortizing 5-year loan for equipment and machinery purchases to a 20-to-25-year loan amortization for commercial real estate purchases, says Wang. Banks typically work with the client to structure a loan that best fits the company’s needs and cash flow availability.
“Heightened due diligence is at the forefront as banks weigh how 2020 impacted a business, the owner(s) and the regional economy,” Wang adds.
What Documents Do I Need for a Commercial Loan?
There are many types of commercial loans available. However, commercial lenders will generally require you to provide the following:
• Up to five years of tax returns,
• Your company’s financial reports for up to the past five years or since inception, whichever is shorter,
• Your projected cash flows for the life of the loan,
• The credit reports of both the business and all owners/partners,
• Your state certification as a corporation or limited liability entity,
• A business plan that explains how the property will be used, as well as an explanation of the company’s management expertise and commitment,
• In some cases, proof of citizenship.
Although a lender will scrutinize you and your documents heavily, you’re also allowed to shop around for the best lender for your needs. Before getting started, it’s important to know what your needs are. For example, what kind of checking and savings accounts will you need? How many transactions will you make per month?
How Do I Find the Right Lender?
Once you have a thorough understanding of what you’ll need from a lending institution, search for a lender that will truly be your partner.
“I’m going to be very fair with clients,” Brewer says. “I want to really understand holistically what their business is about, and then look at how I can best provide solutions to support them, both in the day-to-day, but also in their three-to-five-year plan. Are they hoping for growth? Do they want to sell their business soon because retirement is on the horizon? We want to build that relationship and work with you to achieve your goals.”
The process of talking to a prospect business and bringing them on board can be almost two years, Brewer says.
“That’s because they’re busy doing what they do best and running their business,” Brewer says. “And, if there’s not really anything that they’re upset about with their current bank, they’re not going to be as likely to just hop on board with you. So, it can be a long cycle.”
For anyone seeking a commercial lender, consider the responsiveness and timeliness of the banker’s communication. Questions any business owner should ask include:
• Does the lender understand my business and me as the owner?
“If rates are all you care about, that’s fine, but there’s always going to be somebody who can probably go lower,” Brewer says. “Being fair with clients is important, and we are. But there’s more to providing what a business needs than just the rate on the loan.”
• Does the lender bring value and solutions to better my business and help me grow to reach my goals?
“For example, are you hoping to sell your business?” asks Brewer. “If so, what do you need to do in the next two to three years to make your company and the financial statements look more viable so you can get a better selling price?
• Is the lender and the institution a true partner to my business, or are they just trying to fill a transaction?
“Commercial bankers should be consultative in their approach and truly understand a business and their goals before providing solutions,” Wang says. “Any lending organization that does not provide that is simply seeking a transaction rather than a relationship. Institutions that withstand the test of time always build their business on relationships, not transactions.”
Over the next few months, Brewer doesn’t anticipate too many changes in commercial loan rates. But toward the end of this year, and going into 2022, she expects we’ll see loan rates increasing as the state and the country open up.
“I think you’re going to start seeing that on the residential mortgage side also,” Brewer says. ‘We’re starting to figure out, what is the economy going to look like? Is it going to be a slow recovery? Is the unemployment going to be high? What’s going to happen with people coming back to work? Are we going to still have more work from home? Are you going to see a lot of empty commercial investment properties because maybe the company decides they don’t need as much space? And then, what businesses didn’t make it? So, there’s a lot of uncertainty.”
According to the U.S. Bureau of Labor Statistics, 20% of new small businesses fail in the first year as a result of poor planning, poor execution and being undercapitalized. However, if a bank performs the right due diligence and manages risk correctly, the default rate for small businesses is low, Wang adds.
What Else is Available?
The SBA is at the forefront of assisting banks and their clients with loan opportunities outside of conventional commercial loans.
For example, The SBA’s 504 Loan Program provides long-term, fixed-rate financing of up to $5 million for major fixed assets that promote business growth and job creation. Besides standard eligibility requirements, including having qualified management expertise, proof of a feasible business plan, the ability to pay the loan, and more, businesses must also have a tangible net worth of less than $15 million, have an average net income of less than $5 million after federal income taxes for the two years preceding their application, and operate as a for-profit company in the United States.
“Stillman Bank has worked with the Rockford Local Development Corporation in conjunction with the SBA 504 loan program used for the acquisition of commercial real estate and equipment,” Wang says. “This program offers lower rates than banks would typically offer. In addition, a 504 loan offers favorable equity requirements and amortizations to help spread out payments over a longer term.”
Brewer also refers businesses to John Phelps, executive director of the Rockford Local Development Corp., which can help with SBA 504 loans, as well as city-funded loans.
In addition to the SBA, the federal Department of Agriculture (USDA) also has programs to help businesses get loan financing, based upon where businesses are located.
“So maybe there are opportunities in Loves Park, or in some of the outlying places where there’s more development,” Brewer says. “They’re expanding across Bypass 20 near Rock Cut State Park. There’s a new industrial park, so if you’re going to do a business there, the USDA has programs that would help.”
Overall, both Wang and Brewer are optimistic for Rockford’s future as the economy continues recovering from the pandemic.
“I think we have a fantastic platform,” Brewer says. “We can do what ‘big banks’ do with solutions and products, but we’re still a community bank at the core. I think there’s a lot more to come for us, and I’m excited to see what it’s going to look like.”