Meeting Small Business Funding Challenges and Opportunities Head On
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April 7, 2022
The NJCPA recently asked New Jersey bank executives their views on small business funding as the business community recuperates from the implications of the pandemic. Clearly some owners are still facing challenges, but others are finding new pathways for growth. Here are the bankers’ responses about raising capital and what discussions they believe CPAs should be having with their clients or organizations:
Amid current economic challenges, what are some issues that small businesses are facing when it comes to raising capital, and what are some ways they are achieving success?
Peter Dontas, executive vice president and market executive | Wells Fargo
Over the last two years, it was difficult for certain small businesses to raise capital for various reasons. For example, indoor businesses like gyms, restaurants and entertainment venues were greatly impacted by the pandemic due to social distancing, labor shortages and other issues that were completely out of their control. What those businesses had to do in order to achieve success and create value was find a new normal and a different way of keeping their doors open. For restaurants, that meant getting creative and pivoting to outdoor dining. For gyms, increased sanitization, mask-wearing and installing protective plastic barriers between stations became the standard. And with people reluctant to fly, local destinations like the Jersey Shore thrived because it’s drivable, outdoors and close to people’s homes.
Conversely, select small businesses like furniture distributors, in-ground pool installation companies, and wine and spirits distributors all saw tremendous success over the last 24 months. With travel restrictions, the rise of remote work and people dining out less, many upgraded their furniture, entertained at home and spent more time in their backyards. This trend is a good example of how, despite the current economic challenges, local businesses still prospered.
David Fasanella, chief lending officer | Northfield Bank
The effects of the COVID-19 pandemic combined with the recent increase in inflation and supply chain disruptions have had a significant effect on the ability of small businesses to remain profitable. This, in turn, has made it more difficult, and perhaps near impossible, for certain businesses to be approved for traditional financing. However, an often-overlooked option is to take advantage of the Small Business Administration’s (SBA) 7a Loan Program. Many business owners are not familiar with the programs the SBA has to offer, but there are many advantages to the 7a Program including lower down payments, longer terms and the ability to borrow based upon projections. These loans can also be used for start-up businesses.The proceeds can be used in a variety of ways including the purchase of real estate, project costs, construction, equipment, franchise fees, soft costs and working capital. Another misconception is that SBA 7a loans are small loans when, in fact, the SBA 7a Program allows for loans up to $5 million. Many community banks, including Northfield, have the expertise and staff to walk small businesses through the SBA underwriting process and quickly get them the funding they need.
Edward Galan, SVP, regional director | Provident Bank Commercial Lending
Inflation continues to be one of the largest challenges small businesses face. Costs are outpacing the ability of small business to pass them on to their customers and, as a result, margins have been impacted. Inflation has also led to rising interest rates. A 25 basis points (.25 percent) move in rates for a small business is impactful. It could be the difference between moving forward with new equipment financing or not.
Businesses that are leveraging their suppliers and having conversations early and often are seeing success. These companies get ahead of manufacturing and transportation conditions by collaboration. These businesses are also in constant communication with their customers and managing expectations. We have also seen that the small businesses who focused on widening their online presence continue to see success as consumers leverage online and mobile shopping on a greater basis.
Curt Lang, middle market group manager | M&T Bank
In the current economic environment, there is a lot of liquidity seeking opportunities. However, from traditional banks, this liquidity is primarily seeking relatively stable companies that were minimally affected or have rebounded from the volatile effects of the last two years. Current world events in Ukraine and the strong potential for multiple interest rate hikes this year only exacerbate uncertainty and unpredictability. Owners seeking to raise capital for operations are being impacted by slow supply chains and significant cost increases for materials and labor. This can create uncertainty around meeting production and budget projections. Businesses may try to offset these impacts by holding higher-than-normal inventory levels to ensure they have enough materials and finished goods on hand. This volatility may cause lenders to ask more questions around how the higher costs are affecting margins, cash flow and projections.
Due to much of this uncertainty, many business owners took the last two years to evaluate their strategy and overall exit plans. Depending on the industry, size and EBITDA generated from the business, there can be significant avenues for M&A funding. The volume of the capital available to companies on the market can significantly impact the multiples being offered. Many owners have decided to fuel growth and de-risk through selling partial equity or retiring earlier than previously expected.
Kristhina Nogueiras, executive director and market manager, New Jersey | Chase Business Banking
Small businesses have a variety of challenges they are facing, including economic uncertainty, concern around inflation and shifting consumer habits due to the COVID pandemic. Despite these concerns, a 2022 JPMorgan Chase Business Leaders Outlook Survey found that 63 percent of small businesses anticipate increases in revenue and sales. These business leaders are optimistic about their growth and ability to raise capital given how the pandemic spurred them to find new ways to deliver products and solutions for their customers. Many have implemented new contactless payment options and selling on social media platforms to reach new customers and new capital opportunities.
Eric H. Waser, executive vice president, head of Peapack Private Investment Banking | Peapack-Gladstone Bank
Small business owners have fewer capital market options then larger private and public companies. The impact of COVID-19, supply chain issues, labor challenges and the looming rise in interest rates often impact smaller businesses to a greater extent than larger, well-capitalized businesses. Relevance, financial flexibility and constantly reviewing strategic alternatives are critical factors to success. Having the willingness and ability to adapt and adjust a business thesis in a nimble manner also allows small businesses, and in fact all business owners, to remain competitive. Taking advantage, whether formally or informally, of a board of advisors can provide a safe environment to evaluate business issues, as we all have a bias and blind spot to certain issues. The M&A market is extremely active, and all business owners should have a good understanding of their valuation and what the alternatives are to preserve and/or accelerate growth in shareholder value.
To help smooth the process, what discussions should CPAs be having with their clients and/or finance departments about raising capital before coming to banks?
Peter Dontas, executive vice president and market executive | Wells Fargo
CPAs need to make sure their clients are organized around three important things: their strategy and business plan, historical financials and three- to five-year projections. In addition, they need to double check that their clients understand the cash flow that they’re generating relative to being able to pay back any debt that has been incurred. In conjunction with their business plan and projections, clients should be prepared to discuss the amount of credit they will need for several years. Recognizing that every situation is fluid, it’s important to be as prepared as possible when discussing credit needs with the banks.
David Fasanella, chief lending officer | Northfield Bank
When seeking financing — traditional or SBA — CPAs should discuss the primary business purpose of the loan and how the business plans on repaying the loan. If the loan is for short-term needs, such as working capital to support accounts receivable and inventory, then a line of credit is typically most appropriate. For longer-term needs, such as equipment purchases or real estate investment, a term loan or mortgage is most appropriate. It’s important for the bank to understand the business, so a business plan including financial projections is very helpful. When preparing a business plan and projections, it is important to summarize the history of the business and other pertinent facts such as customer/supplier concentrations as well as key competitors. Also, the financial projections must be realistic, and management should be able to supply specific assumptions made in the projections as well as the reasonableness of these assumptions.
Curt Lang, middle market group manager | M&T Bank
To help smooth conversations with lenders, owners should be ready to explain how the company was impacted by the COVID environment, what steps management took to address the situation and be able to explain any anomalies in their financials. They should also have a thoughtful, well-defined budget for the future with the ability to articulate a contingency plan in the event of a prolonged or additional shock to the market.
Joseph Lomoriello, SVP, regional director | Provident Bank Commercial Lending
CPAs should be prepared to talk to their small business clients about the primary ways to raise capital outside of traditional bank debt. Their clients can raise capital by bringing in additional investors or through reinvesting their profits. Once they have demonstrated sufficient cash flow to service bank debt, they will be eligible for traditional financing. CPAs should advise their clients to pay attention to credit quality. Too often, banks will qualify a small business for credit only to disqualify them if credit searches come back with unexplainable negative items, such as delinquent payment history, history of unresolved lawsuits, judgments or tax liens. While historical operations and cash flow will be measured, small businesses should be prepared to discuss where they see their companies both today and in the future. How did the pandemic affect their business? How did they overcome challenges and, more importantly, how did their business shift?
Eric H. Waser, executive vice president, head of Peapack Private Investment Banking | Peapack-Gladstone Bank
Business owners that can demonstrate that their business is outperforming competitors have an advantage in accessing most capital markets. What are my critical performance metrics? How do they compare industry benchmarks? What percentile would I fall into if I was stack ranked versus my peers or competitors? Is my business plan current? Does it pull together the important business factors that support continued and future success? Most business owners must weigh whether they have access to capital, and if so, the cost. The capital alternatives vary widely in cost and flexibility. Successful business owners seek guidance from their advisors on 1) what the range of capital alternatives is, 2) a view on their current valuation and prognosis on valuation and 3) developing a consensus that business owners and management are well positioned to remain relevant and competitive.