By Ted Sheppe
Millions of people can say they have achieved the “American
dream” of being their own boss. However, being a small business owner brings
its own set of unique challenges. One is figuring out when it’s time to
graduate from your first Small Business Administration 7(a) loan to
conventional financing.
SBA loans, as the 7(a) loans are often known, can be a
critical first step for small business owners looking to get started. These
funds are often used to buy office space and/or equipment, hire new staff or
make other strategic business moves. At Axiom Bank, we’re big fans of SBA loans.
We recently achieved the highest and most favorable designation as an SBA
Preferred Lender.
However, there will come a time when a company can move on
with SBA. While SBA loans are designed
to be easier to get than conventional financing, they’re usually not the most
cost-effective long-term solution. Over time, the lower interest rates on a
conventional loan can yield significant savings. It may mean the difference
between paying 8 percent and 5 percent each year.
A community bank can be a valuable partner in reassessing
your funding goals. At Maitland-based Axiom Bank, we specialize in helping our
customers navigate growth with resources tailored to their needs.
If you’ve had an SBA loan for at least three years, you may
want to consider refinancing. Here are some signs you might be ready:
Your financial trends are positive. When your customer base,
revenue, profits and cash flow are trending up over a sustained period, it
signals stability in your business — which may mean you’re ready for the next
stage of financing. On the other hand, if your financial indicators are choppy,
flat or trending down, you will likely need to delay that conversation until
they become steadier.
Your debt-to-worth ratio is modest. If you have equity in the
business, are profitable and retaining earnings, and if your current financing agreement
is leveraged properly, you may be able to revisit the terms of your loan. In
this scenario, you likely have some wiggle room to add debt, provided you have
cash flow to repay it. The common guideline is to stay below a 3:1
debt-to-worth ratio.
Your spending plans are moderating. The early or transitional
stages of a business typically bring a heightened need for capital to cover
expenses such as new equipment and employees. However, many businesses can
moderate their capital expenditures starting in years three to six. If your spending,
debt and equity are sufficiently balanced, you may be able to qualify for a
conventional loan, which gives you the freedom to add capital as needed.
Your bank isn’t paying enough attention to you. Does your
banker have an outdated perspective on your business? Ideally, he or she should
meet with you quarterly to discuss your projections and long-term goals. Regular
conversations are critical to understanding your company’s lifecycle and crafting
a financing package that fits the next two to three years.
Make no mistake: short-sighted banking relationships can
hinder the growth of your business. One of our clients in the healthcare
industry had a stellar growth profile and contracts with major drugstores, but
his former bank couldn’t see past his humble beginnings, so he went elsewhere.
Bankers should work in your best interest, and that might
mean suggesting you reconfigure your financing arrangements. If your banker
isn’t regularly adding value to your business, it may be time to revisit the
relationship.
As an SBA Preferred Lender, we frequently recommend SBA
loans as a viable first step, while recognizing that many businesses will
eventually outgrow them. Often, a bank with Preferred Lender status can easily
convert SBA loans into conventional loans.
If your business is getting traction and generating solid
financial indicators, it may be time to graduate from an SBA loan. With steady
cash flow and an improving balance sheet, conventional financing can come
sooner than you may think. In turn, that can spell out a more profitable future.
Ted Sheppe is the Executive
Vice President for commercial banking at Axiom Bank, N.A., a Maitland-based
bank that specializes in commercial loans for small and medium-sized businesses.
Ted has spent much of his career helping small business owners with their
lending needs. He can be reached at tsheppe@axiombanking.com or 321-249-7847.