The Great Recession is now in the rearview mirror, and companies – especially today – often seek loans or other financing to expand their businesses via new equipment, real estate or other pursuits. Against this backdrop, a host of banks and additional lenders can help realize these aspirations with a variety of products and services.
Of note, many banks not only offer loans, but may also engage in so-called “relationship banking” in which, yes, standard loans are made, but products ranging from merchant services solutions and remote deposit capture, to sophisticated online banking and international trade-related tools, may also be offered.
Overall Lending Climate / Lending Requirements
Echoing other bankers’ general sentiments, Paul Van Ostenbridge, president and CEO of Atlantic Stewardship Bank, says, “I do feel that there still is some hesitancy on the business owners’ part to expand [following the Great Recession]. They still want to make sure that they have their sea legs under them and that they are ready to move forward. But, if they are ready, I feel that the banks are ready. There’s plenty of capital, and it’s a good time for them.”
Rahbar Ameri, vice president and SBA director at Kearny Bank, generally concurs, “A lot of [companies] are just sort of coming back now. Some businesses survived, so now they see the progression, and they are looking for the financing they need to either hire employees, or to re-capitalize their businesses with updated equipment. Overall, the lending climate is getting better. Although it is at a slow pace, it is heading in the right direction.”
It almost goes without saying that banks typically evaluate small businesses that are seeking loans based on their business plans, management teams, personal credit histories of the business owners, and other “traditional” factors.
Perhaps surprisingly, some bankers report that business owners may arrive at banks having not fully prepared for the loan application process. These owners might have had their accountants prepare financial statements with which they are not personally fully familiar, or the owners do not comprehend loan procedures and/or processes.
Ameri adds, “If somebody is not comfortable, I say, ‘Look, you should bring on somebody [with experience], and maybe give them a minority ownership, whether it is 5 percent or 10 percent, because not only is it going to help the bank feel comfortable, but there’s also going to be some experience present, to help you make the business succeed.’ If you don’t have experience in an industry you are starting out in, and just hiring somebody, that’s an uncomfortable situation.”
In the same vein, again, it is not as if banks have one type of “standard loan” – a range of loans and products can help businesses achieve their goals, including, for example, loans made by a bank with the assistance of the US Small Business Administration (SBA). In these cases, banks may lend more readily, since the business owners and/or the SBA can help “guarantee” the loans (if the loans default, the banks’ exposure is decreased).
Overall, at Santander, Michael Lyons, regional director of business banking in metro New York, which includes the five boroughs, Long Island, and Northern New Jersey, says, “The [general lending] requirements [today] may be a little bit different [than in the past], but I would say that what we do is assess the needs of the individual and come up with solutions, knowing that every single client, even in the same industry, is very, very different.”
UCEDC (United Counties Economic Development Corporation) is a state-wide lender and a non-profit economic development corporation that can assist businesses in all of New Jersey’s 21 counties.
Ellen McHenry, senior director of financial programs at the UCEDC, says, “Our organization is considered a non-bank lender, which means we are not a depository institution. We’re a partner with the banks, and we provide alternative financing if the small business is either too young – meaning it is less than two years in business – or it may not have the collateral the community bank is looking for. Or, [if it needs a loan] for a smaller dollar amount, [we can do that].
“Yes, the community banks are there for small businesses, but their internal guidelines or lending requirements [might say] that somebody has to have strictly two years of operational history, or they must have one-to-one collateral coverage. Unfortunately, the banks will say they can’t assist, until: Either you have two years of financial statements, or you beef up your balance sheets.
“Businesses come to us when they are brand new, or they may be 13 or 17 months in business. They may have been told from the bank: ‘You have wonderful cash flow, but I need to see you actually two years in business. When you get that, we would be happy to help you.’ The small business owner says, ‘Oh, my God. What do I do?’ And then they go online, they find out about the SBA, or they may find us (UCEDC) just by the fact that they are Googling ‘small business loans.’”
Of note, some business owners believe that since they have formed an LLC, their personal assets are shielded from all business dealings, but, in some cases, this is actually not the case.
As McHenry explains, “The borrower has to be willing to pledge his or her personal assets, in order to get a small business loan, and we do require personal guarantees. Invariably, somebody will say to us, ‘Well, I am a corporation,’ ‘Or, I am an LLC.’ ‘I don’t have to pledge my personal assets.’ And we’ll say, ‘Unfortunately, you do.’ Personal guarantees mean that you will step up to the plate and re-pay us if the business is not able to do so – we have always required that.”
Startup Companies and Investors
While banks and related entities may offer loans, startup companies often seek money from investors, ranging from “friends and family,” to angel investors, and then progress to institutional or venture capital sources.
Princeton-based Edison Partners, LLC, invests in the FinTech, healthcare IT, marketing technology and Enterprise 2.0 spheres. Managing Partner Chris Sugden says, “I have been doing this for almost 15 years, so I have seen a few different cycles. I saw: the post-2000, 2001 bubble bursting; I saw the Great Recession in the 2008, 2009, 2010 time frame.
“This time, the adjustment to the public markets coming down [at the beginning of the year] hit the private markets faster. The entrepreneurs – to their credit – recognized the market had changed quickly, and that is why the fundraising pace kept up; there was not a big disconnect with entrepreneurs thinking their businesses were worth much, much more than a public company comp was worth. I think that was healthy.
“Entrepreneurs themselves have become more educated about the financing market. To me, the biggest shift, since, not just [in the last few years], but even the 2000 bubble bursting, is entrepreneurs’ awareness of the investment of the public markets in their businesses, and on the ability to get financed. The ability to go learn, and seek input, has benefitted the industry from having a big drought, from a financing perspective.”
What do startups need to attract investors? Yes, management, growth potential and underlying technologies all play a role. However, Sugden also offers that when early-stage companies are evaluated, the founders are examined for suitability. For later-stage companies, it is important for CEOs to explain their companies in a “balanced” way. Sugden elaborates, “They [should not] print out a plan indicating they are a $5-million company, and they are going to go to $100 million in two years.”
“Having a CEO who understands [this], and who tells a balanced story – and not just a hype story (of course, though, we want someone who is going to be excited about their business and ‘sells’ us a little bit) – is No. 1.
“Also, it is important for a CEO to hire people – and attract talent – from outside their tight-knit circle and sphere of influence. If they are attracting great talent, that says a lot about others thinking that they not only have a great business, but they are a great CEO they want to work for.
“The last one is: unit economics. You really need to break down: What does it cost to acquire a customer? What is a customer going to pay you? What is the gross margin and contribution margin, from that customer? Even if you haven’t sold a lot units (product) yet, you [need to be able] to articulate: ‘Here’s how we are pricing the product.’ ‘Here’s what it costs us to acquire the customer, and here’s what we are going to make from the customer.’
“If you hit those three, you are going to get people leaning in the investors’ side of the table – as opposed to listening quickly and moving on.”
In the realm of startups, a host of companies are engaged with everything ranging from the Internet of Things and biotech/pharma, to healthcare and mobile apps, for example. Regional differences exist between, say, Silicon Valley and Manhattan, compared to New Jersey. While New Jersey has an incredible array of innovation and talent, experts say much of the “deal flow” is often directed elsewhere, for startups. In part, this might be a factor of momentum, but, as Mario Casabona, founder and managing director of Casabona Ventures, LLC, simply says, “Between politics, funding and resources, that’s really what I see happening.”
He adds, that, for New Jersey, “I think it is probably a lack of [New Jersey] success stories. The more successes we have in New Jersey [the better] … that takes time. You may see the company today, but you might not see its success for another 5 to 10 years. … What I am seeing is a natural progression of, ‘Go elsewhere to start your business, but come back to New Jersey to grow it.’”
This is not to say there are not new, incredible startup success stories in the state, ranging from hundreds of biopharmaceutical companies and financial technology firms, to entities engaged with other technologies. New Jersey, in fact, has tech “meet ups” and an ecosystem of engaged academics, investors and entrepreneurs. All told, however, the state does not have the scale of Silicon Valley or a few other locales.
For businesses that need critical capital, funds are available for qualified companies either from traditional banks or with assistance from the SBA, the New Jersey Economic Development Authority (EDA), or the UCEDC, for example.
When entrepreneurs carefully conduct thorough research, properly prepare and create businesses replete with quality leadership, products and services, and coherent plans for the future, funding is typically available. Learning the correct criteria and paradigms, as detailed above, is a crucial part of the equation.