Focus, Banking & Finance, and Small Business & Startups

Would-be entrepreneurs face tough questions

But SCORE can help them prepare for SBA-backed loan applications.

September 11, 2015
| By Pete Daly |
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Troy Butler
Troy Butler, a vice president at First Community Bank, sees family businesses with sales of less than $20 million annually as an “underserved” market. Photo by Michael Buck

It has been said about 80 percent of new business start-ups fail in the first two years. But many of those struggling entrepreneurs, according to Rick Walker, don’t realize they can get free business consultation from SCORE — and it just might make a difference.

Walker is the chair of SCORE Grand Rapids, part of the nationwide network of 11,000-plus volunteers with valuable business experience.

SCORE has been around for more than 50 years and was originally called Service Corps of Retired Executives, a nonprofit association dedicated to helping small businesses get off the ground, or grow and achieve their goals through education and mentorship.

SCORE is supported by the U.S. Small Business Administration and delivers these services to the public at no charge or at very low cost.

SCORE Grand Rapids held an SBA Lending Workshop in August at the Holiday Inn Grand Rapids Airport at no cost to attendees. More than a dozen interested entrepreneurs took advantage of it to learn about the components of a sound business loan proposal, with a valuable perspective from a banker as well as details from an SBA representative on the SBA’s guaranty loan programs.

The SBA does not actually loan money; the loans are from conventional banks but are guaranteed by the SBA, which may be just enough to persuade a bank to make a loan that might otherwise be deemed too risky.

The SBA backing does not mean the borrower will get a lower interest rate, either. And SBA-backed loans are “absolutely not” designed for people who have poor credit or none at all.

“You still have to have good credit,” said Brian Picarazzi, senior area manager of the SBA in Grand Rapids.

Troy Butler, a vice president at First Community Bank in Grand Rapids, was a presenter at the August event along with Picarazzi. Butler is one of four commercial lenders for First Community in the region; his focus is on small and medium-sized privately owned family businesses that have sales of up to $20 million a year.

“It is an under-served segment of the market,” said Butler, adding that probably 15 to 20 or more of First Community Bank’s business loans each year are SBA-backed 7(a) or 504 loans.

In general, many small businesses — especially first-time entrepreneurs — are frustrated by their inability to get in the bank door to talk about a conventional business loan.

Butler said SBA-backed loans cover a wide variety of business types but cannot be used for investments in real estate. They can be for start-ups but more often are used by established small businesses — a small manufacturing company, perhaps, or a restaurant — that wants to expand its business, implement a new business strategy, or replace equipment.

When Butler makes his presentation to people interested in learning about SBA-backed loans, he usually goes over the basics: the five Cs of commercial lending.

The first two Cs are cash flow and collateral. Those are crucial elements that must already be in place in order for a bank to decide if the business is going to be able to repay the loan.

“That is the most important thing — I want the business to be able to support the debt” it will be taking on, said Butler.

Capital is the third C. Bankers want to know what capital the borrower has access to and is planning to put up front. No bank wants to be the sole source of capital to be invested by a small business or an entrepreneur attempting to launch a new business.

The fourth C is conditions: What are the conditions that support the borrower’s belief the business is really going to go? Those would include both local and national economic conditions, plus other factors that include a ready market for the goods and services, and other circumstances that support the likelihood the borrower’s business will succeed.

The fifth C is character: the character of the would-be borrower.

“We determine that through looking at credit reports,” said Butler, adding much can be learned about an individual’s character on the Internet.

Butler has added a sixth C: common sense — “what my gut’s telling me.”

Banks considering loan applications must try to poke holes in the applicant’s business plan to weed out the applicants with little chance of business success. Butler said if he determines someone is not ready for a loan, he will refer them to sources of help, such as SCORE or the Michigan Small Business Development Center, which has offices around the state.

Picarazzi noted there are still other sources of help: GROW, in Grand Rapids, which helps both women and men with a new business idea, and Cornerstone Alliance in Benton Harbor.

GROW, added Picarazzi, has a micro-loan program designed for business owners who simply are not “bankable” when it comes to borrowing, but a small loan with consulting help from GROW might be just enough to help the business grow to the point where a bank will consider it for an SBA-backed loan.

Walker said SCORE Grand Rapids, which has about 42 active volunteers at the present time, has about 1,300 client meetings a year. About 55 percent of those are entrepreneurs who want to start a new business, while the rest are existing businesses that are eager to hear professional opinions on how they can strengthen and grow their business.

SCORE also has about 22 or 23 strategic partners — successful businesses that are believers in small business and want to help entrepreneurs get started. Those partners range from law firms and marketing companies to web developers and many other types of businesses in specialized areas from which newbies can learn.

Just like commercial loan officers, SCORE volunteers know they have to ask the entrepreneur difficult questions up front.

“People get excited about a wonderful idea they have, and that’s the only thing on their mind,” said Walker. They are often individuals who are sure the world is going to beat a path to their door, “and they allow that to override any detailed planning” in advance, he said.

If they do manage to get in front of a commercial loan officer, said Walker, some will not even have prepared a detailed business plan, or have considered their low credit rating, or they have no money of their own to invest in the business and no collateral such as property.

Unfortunately, he said, SCORE volunteers often uncover those situations when asking the tough questions at the start. But then the SCORE person begins to coach the individual on how he or she may not be ready to launch a business but can start taking steps to fill in the gaps, fix the weaknesses, and possibly be ready for a real meeting with a loan officer in a year or two.

First Community Bank, which was founded in Harbor Springs more than 100 years ago and is still headquartered there, is privately owned by the Clarke family and managed by them. In the 1990s the Clarke family started another bank in Grand Rapids, Select Bank, which they merged with First Community in 2012.

Butler noted that, being a family-owned and -operated business, First Community is in a better position than many larger banks to relate to small, family-owned businesses.

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