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The Quest for Capital

by Jennifer L. Nelson

As banks tighten their purse strings, businesses seek creative ways to secure funding to help fuel growth.

The tight credit market continues to plague small-business growth across the nation, and South Jersey is no exception. But that hasn’t stopped many local business owners from putting their proverbial nose to the grindstone in an effort to gain access to the working capital they need to grow.

The less-than-hospitable lending environment is forcing some businesses to turn to alternate sources of funding, while many experts believe others are simply incapable of growth at this time.

“Businesses aren’t looking to grow because there are no opportunities to grow,” says Dennis Vogt, CPA at Alloy, Silverstein, Shapiro, Adams, Mulford, Cicalese, Wilson & Co. in Cherry Hill. A Thomson Reuters/PayNet small-business lending index reported a 7 percent decline in the overall volume of financing to small United States firms in July, while a recent Pepperdine University study found that up to 60 percent of small businesses this year have been denied bank loans. It would be an understatement to attribute the lack of available capital for businesses with the economic uncertainty that continues to afflict the nation, but in South Jersey, there are a host of factors playing a role in the dearth of funding options for business owners looking to invest in their growth.

Even businesses that have been faring well in the face of a crippling economy—and are prepared to invest in their current or future growth—may still have a long, hard road ahead when it comes to acquiring working capital.

While South Jersey-based banks like Capital Bank of New Jersey insist their lending practices haven’t changed much since before the recession, other institutions have been forced to tighten their grip on lines of credit and other capital funding.

“The days of picking up the phone and calling three banks are gone. Today’s typical borrower has to jump through a lot of hoops,” asserts Charles J. Snyder, principal at Upland Business Capital in Moorestown. Jerry McGough, principal at Total Turf Experience in Pitman, knows the crippling effect today’s lending regulations can impose on start-up businesses. After he and three associates—all of whom possess business experience and acumen—constructed a detailed business plan for a sports arena for children four years ago, they began actively presenting the idea to banks in the hopes of getting their hands on the financing they’d need to make their dream a reality.

“There wasn’t a bank in South Jersey or Pennsylvania that we didn’t talk to, and we were met with nothing but apprehension; it seemed like everyone saw the bubble that was about to occur, even in 2007,” he says. They were turned down repeatedly, and on more than one occasion, a settlement was made and materials purchased when the lending institution pulled out of the deal. “The requirements of the banking industry are steep … and that’s being generous,” McGough says.

Ultimately, the four men decided to go it alone, and ended up investing more than $5 million of their own money. At the facility’s groundbreaking in July, McGough says a handful of banks showed up wanting to offer loans—though he says he has “zero interest” in their proposals.

“Our company is about teaching kids to work hard and pursue their dreams … so how could we walk away from this project?”

According to Bill Cossaboon, vice president and commercial lending officer for Voorhees-based Columbia Bank, businesses are expected to meet a list of criteria when applying for a loan—and, admittedly, that list has tightened in today’s unfavorable business climate.

Borrowers should be prepared to contribute between 25 and 30 percent toward the cost of a purchase, as lenders will no longer offer 90 to 100 percent of the purchase for real estate or equipment. “Business owners must clearly show that the company can afford the new loan requested,” he notes.

However, Cossaboon adds that lending institutions do take the recessed business climate into account by considering the measures a company has taken to remain in business, particularly in industries that have been harder hit, like construction.

Lenders ask questions such as: How did management respond? Were expenses cut, and were new revenue sources generated? How has management adapted to the new economy? Has the business and its individual partners paid loans and credit on time?

Meanwhile, declining commercial real estate or equipment values—assets that may now be under-collateralized—aren’t doing the market any favors. Today’s climate is a far cry from the mid-2000s, says Snyder, when banks were taking credit risks. “One major problem is collateral,” he says. “Banks can’t hold on to these assets that are now undervalued, or they’re going to have a big problem with the regulators.”

Acquiring Capital
Despite a seemingly unforgiving environment, many businesses are working with their lending institutions to successfully uncover ways to access the funding they need to grow.

Many South Jersey financial institutions, such as PNC Bank, are still willing and able to assist business owners with financing. From 2010 to 2011, PNC provided more than $1.9 billion in loans to business owners. The lack of capital available from many financial institutions only constitutes part of the equation.

“The demand just isn’t there because of the economy; businesses are still skittish about taking on more debt,” explains Pamela Blue, business banking sales manager for PNC Bank. A PNC nationwide survey indicated that eight of 10 business owners said they had no desire to take out a loan or line of credit in the next six months.

"Most businesses are taking a 'wait and see' approach. They’ve cut costs and lowered expenses, and may have made changes to their organizational structure,” says Joseph Rehm, vice president and Gloucester County market manager for Capital Bank of New Jersey.

“While a lot of businesses have returned to profitability, they're not at a point where they’re prepared to invest in new machinery or equipment, or to take on new debt. They want to see the economy on firm footing before they do that."

Indeed, as businesses consider different ways to stay in business—and, eventually, to invest in a profitable future—financial institutions have assumed the role of hand-holder as they take the necessary steps to sustain current operations.

“We’re here to lend money, but we do many other things to help those who don’t want to borrow right now,”

Blue says. These services range from helping businesses analyze cash flow and cut expenses to dispensing advice on ways to position themselves in the marketplace.

“We’re here to help businesses through the ups and downs,” Blue adds. “Those who have done their due diligence, remained confident and positioned themselves well can come out of this even stronger.”

Those businesses that are seeking capital, however, need not lose hope—financing is available to those who meet lending requirements and, quite possibly, who have considered lesser-known sources of funding. The Small Business Administration (SBA) and New Jersey Economic Development Authority (EDA) guarantee portions of a loan for lending institutions, and remain key players in the capital game in South Jersey. Lenders are utilizing government-guaranteed loan programs provided by the SBA and EDA as a means to approve loans that don’t meet the lender’s criteria for conventional financing.

Other sources of capital that are becoming more prominent are non-bank, asset-based lenders. Businesses can also consider private lenders or factoring, a process whereby a business sells its accounts receivable for a dis- count, enabling a company to convert these assets into cash the business owner can use to fund the operation of the business.

The first loan for Bridgeport- based Atlantic Subsea, a marine infrastructure company, was underwritten by the SBA. In its first seven years of operation, the business relied on secondary financing in the form of expensive receivable-based loans as working capital, but when Vinod Menezes, president and CEO, recognized that the business had outgrown the capital, he made the switch to conventional financing at Columbia Bank in 2001.

Since then, the business has experienced an average growth of 20 percent each year. Menezes advises businesses to focus heavily on their business plan when approaching lenders and taking the first steps toward acquiring financing.

“If the financials reflect the plan, and have met the goals set forth in the plan, then investors and bankers will add tremendous gravitas and credibility to the plan for future growth … and requesting capital does not become a hard sell,” he says.

Many small- to medium-sized businesses are finding that smaller, regional banks— which, according to Rehm, are more likely to work with third-party organizations like the SBA—may also be more willing to lend.

“We prefer lending to small- and medium-sized businesses, because those relationships tend to provide a greater return on our investment,” Rehm says. “Community banks have historically been able to be a little more flexible and creative in the way they approach financing.”

“It’s not easy, and it’s definitely a long process that takes patience, but there are more programs available than people think,” adds Amy Sonstein, principal of Sonstein Consulting Services, LLC in Cherry Hill. She recommends businesses sit down with a business advisor or accountant to consider the business’ cash flow statement, build a portfolio, and devise a financial statement that’s presentable to the financial institution—which is how Sonstein acquired capital from Columbia Savings Bank to invest in her own business. “You want to make it easy for them to say ‘yes’ to you,” she says.

Looking Toward the Future
According to a report released in May by PNC Senior Economist Kurt Rankin, significant job creation in the Philadelphia metropolitan area has not occurred in the nearly two years since the end of the recession in June 2009. Since then, the region has exhibited a moderate-at- best job recovery, with an increase of about 25,000 jobs.

The PNC Economic Outlook Report for fall shows that only 7 percent of business owners in the state expect to hire full- time employees in the next sixth months.

Job creation is of utmost importance when considering how access to capital affects the local economy. "When a business needs to grow and they're able to secure the financing they need, it helps them to invest in new technology, new machinery and equipment, and to take on additional facilities,” Rehm says. “When businesses are having a tough time acquiring the capital to grow, they’re left with having to operate under their present structure … which ultimately won’t create new jobs."

The value of hiring local workers isn’t lost on Michael P. Bray, executive vice president of Shelby Mechanical, Inc., a general mechanical contractor providing plant services based in Cinnaminson. After 35 years in the business, Bray and his wife opened their own enterprise in January of 2007, relying on their business relationships to find success on the ground floor and acquire capital from Columbia Bank to grow even in the leanest of fiscal years.

“I had a bad experience with one lender, but it’s reassuring that there are others out there who are interested in growing the local economy,” he says. As of last year, Bray had more than 350 employees on the company payroll.

While it may not be easy to acquire capital these days, there will always be options for businesses that are willing to do their homework, think outside of the box, and communicate with the lenders, accountants and other financial professionals who are available to help them survive the down- turn and return to a former state of profitability.

“Business owners who have a good financial statement and balance sheet will find no shortage of banks who want to show up to the table and offer them financing,” Rehm says. “When a good business needs financing for a good reason, they’re going to be able to get it—and at competitive rates.”

Published (and copyrighted) in South Jersey Biz, Volume 1, Issue 10 (October, 2011).
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