Borrow inexpensive money? Expect hard questions, too.
By September 28, 2020 Business loans
As of August of 2020, businesses could borrow money through a popular Small Business Administration loan program for a lower interest rate than their owners would have paid for a 30-year mortgage on their personal home — an absolutely stunning turn of events.
Before business owners rush out to load up on borrowed money, they need to prepare themselves for some hard questions from their banker.
There’s no question that borrowing rates are at historically low levels. In August of this year, the SBA was quoting a rate of 2.27 percent on 25-year loans to business owners who wanted to purchase an office building or factory building for their company. The rate on a 30-year residential mortgage, by comparison, was slightly more, in the high two percent to three percent range. These rates present a rare opportunity for business owners to lock in highly affordable terms on the purchase of a business property.
The same conditions that have brought interest rates so low — widespread economic disruptions caused by the COVID-19 pandemic — also will bring some hard questioning from the commercial banker who is asked to review the loan. SBA 504 loans for owner-occupied real estate, as an example, involve SBA money for 40 percent of the purchase cost, a bank loan for 50 percent, and a 10 percent down payment from the purchaser.
Commercial lenders know that times have changed dramatically. They want to know how a business owner plans to adapt to new conditions. Nearly all business owners are likely to face questions about steps they’ve taken to bring their costs in line with their pandemic-pinched revenues. Have they reduced staff? Cut costs in other ways? How is the business strengthening its balance sheet in case there’s another round of widespread closures?
Owners of each business face specific questions, too. How will a restaurant, for instance, operate profitably if it’s required by COVID mandates to operate at half capacity? How has the owner of a retail store shifted to meet the expectations of consumers who worry about shopping in an era of social distancing? How will the owner of an office building address potential vacancies that result from work-from-home initiatives? How will the owner of a small shopping center recover from the rent reductions it offered struggling shopkeepers?
Without doubt, these are uncomfortable questions. They’re all the more uncomfortable because none of us knows with any certainty what lies ahead. One thing we can know with some certainty, however, is that any business that isn’t changing and isn’t thinking about a different future for itself is unlikely to be open very much longer.
Obviously, bankers have a financial stake in the successful future of a business; banks need their loans to be repaid to remain viable themselves. But even more important, good community bankers truly consider themselves one of the four key advisors for their business borrowers. They want their business clients to succeed. In fact, a lender who isn’t engaged in straightforward and difficult conversations with business borrowers simply may not care enough about the client’s success.
Faced with hard questions — not just those raised by the banker, but those that business owners need to answer for themselves — it’s more important than ever for owners to build a solid team of advisors.
A team of outside advisors undoubtedly will include the accountant for the business. The company’s attorney will provide important counsel. A community-focused banker, one that’s focused on a relationship with the business, is another key player. The financial planner or stockbroker who works with the company and its ownership also is likely to have a seat at the table.
A good team is composed of professionals who ask hard questions, the sorts of questions that force a business to sharpen its approach to bring a greater certainty of success. Business owners probably have worked with each of these professionals in the past, but the relationships may have languished when times were good. Now is the time to refresh the relationships, to let members of the team know how the business is doing these days and to talk over the company’s strategic direction.
The pandemic has brought unparalleled challenges to business owners. But it’s beginning to present unparalleled opportunities as well to savvy, nimble business owners. Those opportunities are likely to demand quick action — the sort of action that’s possible if the team of business advisors is ready to move on a moment’s notice.
There are no easy answers in these times, but hard questions from lenders and business advisors can help business owners create strategies that succeed in any time.
*Rates, fees and borrower information in this article were current at the time of publication and are provided for illustrative and educational purposes. Contact your Plumas Bank loan officer for today’s rates, fees and lending information. Member FDIC. Equal Housing Lender.