Column: A look at small-business funding

by Nicholas Marra

Running a small business requires a lot of time and money. Although securing capital as an entrepreneur may have been daunting after the financial downturn, things are looking up. Gross domestic product expanded to 3.7 percent annual pace in the second quarter, meaning the U.S. economy grew faster than expected.

From the perspective of a banker, the current willingness to lend probably outweighs demand. Small businesses have demonstrated a sense of confidence and buoyancy in recent years, moving forward with a focus on innovation and growth. As entrepreneurs look for capital and financing opportunities, there are things small-business owners can do to increase the likelihood of securing funding:

”¢ Articulation is key. Small-business owners should know their business and be able to articulate it. You”™d be surprised how many entrepreneurs seeking capital are unable to properly explain their business plans. Before going to the bank, be able to illustrate for what the funds will be used and the ability to pay them back.

”¢ Demonstrate cash flow. Business financial statements are often structured to reduce taxable income. Although this may work for accountants, it may paint a worse picture of a small-business”™s cash flow. Most lenders like to see a debt service coverage ratio of around 1.5 or greater and a loan-to-value of 80 percent or less.

”¢ Responsible history. A history of growth and good management is valuable. Aside from looking at cash flow, bankers will want to see how well a small-business owner has handled difficult situations. Were they aggressive in managing expenses? Did they take steps to diversify their revenue sources? The bank is always looking for ways to say yes, and such actions may mitigate negative trends.

When seeking capital, it”™s important for small-business owners to choose the form of financing best matching the company”™s specific needs. Forms of lending can include lines of credit, term loans or Small Business Administration loans.

Term loans make the most sense for small businesses that require financing for a long period of time. Term loans can be tailored to match the life of things like equipment, property or vehicles.

Alternately, if a small-business owner needs funding for short-term items needed often during the business cycle, a line of credit would be more appropriate. This can include items like purchasing inventory or covering payroll until receivables are collected.

The bank may recommend guaranteed SBA financing if it sees weaknesses in a company”™s credit or growth history. Most businesses that qualify for an SBA loan also qualify for conventional financing, but an SBA loan is typically advantageous in two aspects: a lower down payment and longer amortization. SBA interest rates are capped by the government. These caps make the SBA loan programs very borrower-friendly to businesses.

Fairfield and Westchester counties have many similarities due to their close proximity to one another. The difference for small businesses comes down primarily to the cost of real estate. For businesses looking to purchase their own space, the mortgage process in Fairfield County is faster and much less expensive since there is no mortgage recording tax in Connecticut. While the cost of doing business might be higher in Westchester County, it is offset by the stability of the market thanks to the closeness of New York City.

In 2014, Webster”™s loans across all SBA programs added up to $53 million, averaging individually in the amount of $450,000.

Economic forecasts for 2016 are positive due to an increased pace of activity in the housing sector, the strong dollar and continued low oil prices. Looking ahead to 2016, Webster sees this optimism transcending to small businesses and is very confident in its ability to fund entrepreneurs in the year ahead.

Nicholas Marra is a senior vice president and regional manager at Waterbury-based Webster Bank for its New York/New Jersey market. He works in the company”™s White Plains business-banking division, where he manages small-business banking relationships. The company maintains 26 banking centers and 47 ATMs in Fairfield County and eight banking centers and 10 ATMs in Westchester County.