New methods of credit scoring, automated loan processing, possible tax cuts and rising business and consumer confidence are energizing the market for small businesses loans, and New Jersey’s 140 banks, with 3,049 branches, are primed to attract the small business borrower.
But while the US economy surged after the election – further expanding lending capacity – recent and anticipated rises in interest rates and more in-depth stress testing to mitigate lender risk could moderate the robust pipeline of small business financing activity.
If you’re an entrepreneur or seasoned small business owner considering a loan this year, what factors should you regard as you prepare to seek financing, and what differentiates one bank’s offerings from another’s?
To help guide New Jersey’s small business borrowers, New Jersey Business spoke to executives at four leading financial institutions in the state – Kearny Bank, Lakeland Bank, Peapack-Gladstone Bank and Valley National Bank.
A Starting Point
The new FICO scoring model includes important updates to credit analyses that could increase individual scores by several dozen points, thereby expanding the market for new borrowers and those seeking to refinance loan packages originating at higher rates.
As this and other developments open the market to more small businesses, Valley National Bank’s community lending team is poised to service organizations with up to $15 million in sales and small business lending needs extending to about $1 million.
“Many people in this small business segment want to try something new, demonstrate lots of drive and energy and have money saved, but they often possess limited business and financial experience, so they don’t know where to start,” states Michael Warrington, first vice president and community lending team leader at Valley National Bank of Wayne. “Our bank welcomes this group. However, I do suggest that start-up entrepreneurs with less than three years in business first contact their local non-profit economic development agencies for a bare-bones look at their strategies and whether they make sense, an in-depth review of financial records, and help in developing the business plan. The next step would be to contact a commercial banker.”
Some community agencies also offer small business lending packages. For example, the Hudson County Economic Development Corporation announced in February 2017, the launch of “The Million Dollar Challenge,” a new small business lending initiative aimed at increasing access to capital for the county’s entrepreneurs and business owners. The program brings $1 million of fairly priced capital to viable start-ups and growing small businesses that would otherwise be denied conventional lending. Loans of $5,000 to $5 million will be made available to start-up and established businesses throughout Hudson County.
Hudson and other counties in central and northern New Jersey “are big markets for our team,” declares Warrington. “We have money set aside for companies in need of lending in communities the US Census rates as lower moderate income, or LMI, based on household income. We’ve designed loan packages with more favorable pricing to make it easier for smaller companies in these LMI areas to do business. It’s been a big plus for us.”
In addition to this offering and its standard small business loan packages, which include lines of credit and term financing, Valley National Bank recently introduced a new credit card specifically for helping small businesses manage their day-to-day expenses. The card features an introductory rate of 0.00 percent APR on purchases for the first nine months, no annual fee and 1 percent unlimited cash back on all purchases made with the card.
“Small Business Express”
Kearny Bank of Fairfield offers a “Small Business Express” loan product with a maximum loan amount of $100,000 in the form of a term structure over a maximum payout of five years or a line of credit over a maximum draw period of two years. The product features an estimated 48-hour turnaround for approval and a closing within seven business days – ideal for the small business in need of quick capital.
“Availability for small businesses to obtain financing today is probably the strongest environment we have seen in several years,” claims Peter Cappello, senior vice president and director of commercial and industrial lending for Kearny Bank. “Also working in favor of small business owners is the trend towards automation, which is decreasing the subjectivity long associated with this asset class.”
Automation Speeds Turnaround, Reduces Costs
Many financial Institutions, including Kearny Bank, have developed proprietary, automated platforms for loan processing that qualify certain credit criteria in the most objective way, speed turnaround, and reduce costs for both the small business borrower and the bank, while increasing the bank’s deposit base.
“Most automated processes generally are weighted more heavily on historical payment trends both from a company perspective and individually from the guarantors,” explains Cappello. “The automated systems supporting this concept reach out behind the scenes to these third-party servicers, producing a numeric result. The benefit to the small business owner is that the past performance relative to repayment history will be the primary factor in the approval process.”
Cappello also reports heightened emphasis on accounts receivable financing due to the increase in stress testing banks are performing on the receivables being pledged, to mitigate the risk of collectability of those receivables. “Stress testing varies among banks, but certainly one test is the concentration of receivables due from any one company,” Cappello notes. “A higher concentration could signal a potential negative impact should that company’s revenue trend downward. The stress test analyzes the downside to the borrower should these receivables become slow or uncollectible and its impact on the borrowing entity’s ability to perform in accordance with its loan terms.”
As business and consumer confidence rises during this market’s steady economic growth, Lakeland Bank of Oak Ridge sees more small businesses open to the idea of expansion, renovation and other high capital expenditure items, and is welcoming conversations about loans that can help sustain reinvestment in these businesses.
In selecting a lender, small business owners should choose a bank that clearly understands the constraints they are facing and is prepared to bring an arsenal of tools to every meeting, states Ronald Schwarz, Sr. executive vice president and chief operating officer. “The world of business banking is complex. You’ll need someone who can help you navigate as your needs change. More specifically, strongly consider a bank with a designated small business lending department designed to handle loan requests quickly and efficiently. Many banks and financial institutions offer incredibly similar products and services, but the bank that offers fast decision times; direct access to financial decision makers; and an eager, well-trained staff can make a huge difference in reducing stress and confusion for borrowers.”
When reviewing small business requests, Lakeland Bank recognizes that no two businesses are the same, so the bank works to offer a package of products that helps improve the financial health of each borrower. In doing so, Lakeland Bank primarily looks at collateral, credit, cash flow, capital and character, Schwarz reports. “We consider each element based on the size, scope and type of lending request being made. All are important when building a comprehensive financial package and plan for the small business owner.”
Banks, credit unions and other financial institutions constantly review their underwriting criteria, and Lakeland Bank is no exception, Schwarz notes: “We take a stakeholder approach to all small business loans to ensure that when we lend, the package is appropriate for all stakeholders – and we make appropriate measured adjustments when and where needed.”
Demand for Loans Under $3 Million
Andrew Glatz, senior managing director and head of Small Business Administration (SBA) lending for Peapack-Gladstone Bank of Bedminster, sees increased demand in small business loans under $3 million for either working capital, partnership buyouts, equipment procurement and/or commercial real estate purchasing.
Depending on loan needs, Peapack-Gladstone Bank provides short-term financing for working capital or accounts receivable financing as well as packages for long-term asset purchases, such as for equipment and real estate, Glatz says.
Beyond its traditional loan offerings – such as working capital lines of credit, term loans and commercial mortgages – Peapack-Gladstone Bank also offers loans available through the SBA, the New Jersey Economic Development Authority (NJEDA) or the Union County Economic Development Corp. (UCEDC). Programs offered by these organizations are dedicated to helping small businesses, and “a bank that is experienced in processing these types of loans offers big advantages to a small business,” Glatz asserts. “For example, Peapack-Gladstone Bank is well-versed in the SBA 7(a) Loan Program, designed to assist start-up and existing small businesses attain their financing needs for nearly any business purpose to assist in business growth.” SBA programs, he explains, have enabled existing small businesses to obtain financing when they might not be eligible for business loans through conventional lending channels.
“Small business clients need to trust their bankers. It’s all about creating relationships. A bank that provides personal, customized and value-added services is the differentiator,” Glatz declares. “In the bigger picture, if the Trump administration can get tax cuts approved and reduce some banking regulations, business optimism will improve in New Jersey and more local businesses will look to expand and grow, increasing demand for the small business loan.”
Success or failure whenever there is a major political change is always difficult to project, Cappello notes. “Clearly, this administration’s focus seems to be on economic growth. Our consensus is that the industry will be more successful with the new administration mostly because of its ‘user friendly’ outlook, with small business lending remaining as active as each bank’s risk appetite will demand.”