Current Issue Previous Issues Subscribe for FREE
The Right Financing

by Jennifer L. Nelson

Most entrepreneurs know that establishing a successful small business takes hard work and perseverance, but the other key to success often boils down to access to working capital—which in today’s cash-strapped economy may not always be easy to obtain.

But for South Jersey businesses, help is but a stone’s throw away at one of the region’s many lending institutions. Whether a business owner opts to seek capital from a small community bank, a larger commercial bank, a credit union, or through a less-traditional source of funding, like angel investors or even crowdfunding, the money is out there for entrepreneurs who can take the necessary steps to prove themselves worthy in the eyes of a lender.

“Businesses have to do their homework. In order to impress someone at a bank, they have to take the time to think things through and be able to show how the debt is going to be repaid,” advises Harry Scheyer, partner at Pinnacle Financial Advisors, a financial planning and wealth management firm in Marlton. To that end, the best tool for entrepreneurs often proves to be a well-written, thorough business plan.

Developing your plan
“Writing a business plan is the hardest part of the process for many business owners, but it has really become a prerequisite to obtaining financing,” agrees Ellen Kuiper, president of ABCO Federal Credit Union in Rancocas, which offers all varieties of business lending and checking accounts in addition to insurance. Kuiper says most business loans offered range up to $200,000, and credit unions can often offer better interest rates than many banks. “The loan process does seem to be a little stricter now, but if businesses come to the table with the right elements, they still have a pretty good chance,” she adds.

While all business plans should contain necessary information like a company description, business owners must take the extra steps to make the business stand out in the eyes of a lender. “Many businesses will try to use some kind of canned business plan, but there has to be more to it than that if you’re going to convince a lender to offer financing,” Kuiper says.

Of course, financial institutions often have to dig a little deeper when evaluating a business’ loan application. According to Daniel Sulpizio, senior vice president and director of retail banking at ParkeBank in Sewell, while an effective business plan and a good history and payment track record are important, any bank will also want applicants to demonstrate what he calls the “five C’s of credit”—character, capacity, capital, collateral and condition. “Don’t be afraid to share your thoughts with us … where you see your business going, or the impacts of the industry. That’s the kind of information that can bring additional light to your request,” he adds.

When seeking financing from a financial institution, entrepreneurs should also be aware that their credit score is going to play a crucial role in just how much capital—and at what rates—will be available to help grow their business. “They should really be aware of what’s on that credit report before coming in to ask for a loan, and take care of any issues they can ahead of time,” advises Lisa Fisher, marketing and communications coordinator for the Campbell Employees Federal Credit Union in Camden.

According to David J. Hanrahan, president and CEO of Capital Bank of New Jersey in Vineland, traditional bank loans might just be the way to go for most business owners.

“Bank loans are just about the least expensive financing option a business has,” he asserts. “While other options are also available to a business owner, such as investor capital or asset-based lenders, those options will be more expensive and onerous.”

A five-year-old community bank, Capital Bank of New Jersey maintains a business lending focus, with more than 95 percent of the loans made being commercial in nature, he says. The bank offers a full complement of commercial loans, including commercial mortgages for both owner-occupied and investment real estate, lines of credit, equipment financing, letters of credit, working capital financing, and more.

Though a more established business may have an easier time proving that it’s “bankable,” there are still ample opportunities for startups to obtain financing. For newer or less-proven businesses, a bank may still be able to approve financing with a guarantor and/or involvement by the Small Business Administration (SBA), which offers an array of options for small businesses. Its 7(a) Guaranteed Loan program is made available through approved local lenders for working capital, leasehold improvements, the purchase of real estate, machinery and equipment, the purchase of an existing business, and refinancing.

The SBA also offers short-term microloans for small businesses, while its CDC/504 loan is a long-term, fixed-rate financing tool targeted to spurring economic development within a community.

“If they’re already established, a business needs to present a history, and if they’re a startup, they need to create a future,” Scheyer adds. “A good provider of funds is going to try to balance a business’ history and its future, and if you can help a lender visualize that, you have a much better chance of getting the money—and at favorable rates.”

Fortunately, when it comes time to grant the loan, most financial institutions will go out of their way to match the financial package to the business. “Just like a doctor diagnosing a patient, when you tell them the symptoms and they prescribe the medicine, it’s our job to recommend the appropriate solution for the customer’s needs,” Sulpizio asserts.

Thinking outside the box
While banks and credit unions are often the first stop in a business owner’s quest for capital, for those who may be experiencing difficulty accessing the necessary funding, or who simply want to take a different approach, there are other options available. In some cases, the answer to a business owner’s prayers may come in the form of an angel investor.

“If businesses can’t get financing from a lending institution due to a variety of factors pertaining to challenges in cash flow, collateral coverage, their business plan, etc., their only alternative may be to seek outside capital investors,” explains Kathie Stone, Susquehanna Bank’s regional president for the central New Jersey region, which serves Burlington and Camden counties. The bank offers customized financing solutions to meet the needs of various types and sizes of businesses, including working capital lines of credit and term loans, letters of credit, government-sponsored loans, commercial mortgages and real estate loans, construction and development loans, asset-based loans, and others.

Though the term “angel” originated on Broadway—it was once used to describe wealthy individuals who provided money for theatrical productions—today these capital investors exist to provide funding to startup businesses in all industries. Angel investors may also form networks or collaborate with organizations to pool available resources.

The New Jersey Technology Council (NJTC) and New Jersey Economic Development Authority (EDA) collaborated to launch the Jumpstart New Jersey Angel Network in 2002 to provide that much-needed source of capital for early-stage technology enterprises in the Mid-Atlantic region. “People who invest as angels are individuals who have made a lot of money themselves and want to give back to the community,” explains Maxine Ballen, founder, president and CEO of the NJTC. The Jumpstart NJ Angel Network offers investments that average from $500,000 up to $1 million, she says, and the private, member-led group includes successful entrepreneurs, business executives, and venture capitalists from all across the region.

Much like bank lending, businesses seeking connections with potential angel investors should make the effort to develop a personal relationship for the best opportunity to access the funding they need. Most angel investors are looking to connect with firms within industries they know well, so they may wish to assume the role of an advisory board member or maintain some other leadership position. “What ends up driving an angel’s decision to invest is their own comfort level … you typically don’t see them investing in a company or a product or service in which they aren’t personally knowledgeable, unless they’re dealing with a family member,” Ballen asserts. “They feel good about investing in something that’s near and dear to their heart.”

In most cases, investor capital may require the same requirements of a bank, and business owners should be prepared to offer some ownership or managing control of the company. “Capital investors may be willing to invest in the future viability of certain companies within certain industries in order to ultimately receive a long-term return on their capital investment,” Stone explains.

Many of these investors are looking to invest locally, and the good news is that there are an increasing amount of both federal and state incentives for these investors, including tax credits. “They want to invest in something that they can reach out and touch, and all while doing something positive for their local community,” Ballen adds.

For entrepreneurs who are prepared to be creative in their pursuit of financing, crowdfunding websites are available to help them raise the funds they need to make their business dreams come true. Earlier this year, President Barack Obama signed the Jumpstart Our Business Startups Act in an effort to create jobs by relaxing the rules for early-stage companies to raise money via crowdfunding avenues. Though it’s a method of fundraising that’s often used to collect money to aid disaster relief efforts or support charities, some companies are finding success in raising capital by selling small shares of equity to a range of investors.

Scheyer notes that in addition to establishing a relationship with a potential lender, whether it’s a bank or angel investor, entrepreneurs should also be on a first-name basis with a CPA or other legal professional who can serve as a valuable source in guiding businesses toward the right type of financing.

“Business owners should first consult with their CPA and legal counsel as to what type and structure of financing or capital they need to support the sustainability and expansion of their business,” Stone says. “These advisors can assist them in being prepared to officially apply to a lending institution for financing, as well as inform them of the various legal and tax requirements of doing so.”

Establishing a relationship
Entrepreneurs also have to be aware that no matter which avenues they’re pursuing to obtain financing, they may have to stand behind their business with their own personal assets before requesting a loan from a financial institution or investor. “There are lots of people who are trying to start a business, and one challenge we’re facing is that many of them don’t want to have to invest any of their own money into the venture,” she says. “In this economy, a lot of lenders are looking for people who can put something of their own into the pie, but many entrepreneurs want to come in and borrow $100,000 and not have anything to contribute … and unfortunately, it just doesn’t work like that today.”

Above all, business owners should be looking to do more than sign paperwork with their lender; the most successful business owners are those who take the time to establish solid relationships with their financial institutions, which are available to do more than just provide capital to startups and those looking to expand their business.

“It’s important to select the financial institution that’s right for your company, with relationship managers or lenders who take the time to get to know your business and industry and want to develop an enduring relationship—not just process the transactional loan request,” Stone says.

“Once you establish that relationship, the financial institution is more likely to help you in times of need,” Fisher concludes. “You want to find an institution that cares about you and will support you through the good times and the bad.”

Choosing the Right Bank

Once a business owner decides to establish that relationship with a financial institution, the question then becomes which bank to choose. While many banks offer a similar catalogue of services for business owners, there are some factors entrepreneurs may want to consider before taking the plunge with a particular institution, including convenience, location, rates, fees and services.

Partnering with a community bank may give the added advantage of connecting business owners with professionals who maintain a thorough knowledge of the communities in which they work. “Community banks customize products and services structured by relationship managers who live and are active in the communities they service,” Stone says.

Business owners should also consider the kind of access they’ll require to their lending institution, with community banks often consisting of an intimate staff of bankers and commercial banks having the ability to offer resources from a larger chain of professionals. “At larger banks, you may meet with a local banker, but he or she may need to present your request to someone not familiar with the borrower and the area,” Sulpizio explains.

As a general rule of thumb, larger banks tend to be the way to go when it comes to high-volume consumer loan products, such as credit card lending, Hanrahan says. They may also be the first choice of larger companies in need of an increased level of capital. “In contrast,” he explains, “smaller community banks are the best fit for a small- to medium-size business that needs a flexible, tailored approach to its financing needs.”

Click here to go to our Estate & Financial Planning special section.

Published (and copyrighted) in South Jersey Biz, Volume 2, Issue 10 (October, 2012).
For more info on South Jersey Biz, click here.
To subscribe to South Jersey Biz, click here.
To advertise in South Jersey Biz, click here.