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United Sees Up-Tick In SBA Loans
Some of the smaller manufacturing companies — which typically have a fairly long manufacturing cycle — are becoming less and less attractive applicants to some of the larger banks under the traditional financing formulas, said Paul Kramer, executive vice president of United Bank’s commercial loan department.
“If you’re going to finance a small manufacturing business, one of the elements is that you end up with an operating line of credit,” he said.
Many companies will have three different types of loans: A longer-term loan on their real estate, traditionally 15 years; perhaps a five-year loan on equipment; and a loan on their operating lines of credit, which is usually a year or less.
Typically, banks will finance approximately 50 percent of a company’s work-in-process inventory and up to 75 percent of the company’s accounts receivable, as long as they’re not older than 90 days, he explained.
But he said that recent changes in the automotive industry have taken many small firms outside those traditional parameters.
“When they build a die for one of the Big Three, from the time they start the project to the time the automaker pays for the project could be nine months to a year,” he said.
”What happens in that scenario is that they run out of cash, and the traditional bank formula won’t allow them enough money.”
For instance, a company is contracted to build a $1 million die, but the bank only lends that firm $500,000 to do it.
“If it takes a year from the time they build that die to the time they get paid, and their profit margin is typically running at 10 percent, they’re under water big time from a cash flow standpoint,” Kramer said.
And it so happens, he said, that due to their own competitive pressures, the Big Three have begun demanding longer payment terms than the normal 90-day accounts receivable.
The automaker, he said, might inform the small manufacturer that instead of 90 days, it wants a 120- or 150-day payment term.
What happens then is that the small company’s 90-day accounts receivable goes beyond 90 days and the bank won’t give them further credit.
When a company can’t meet the requirements of its line of credit, the bank might downgrade its credit rating and eventually ask the company to go find another bank, he explained.
“Through the SBA loan, we can pump permanent capital into that business and actually put on a seven- to 10-year repayment program instead of a 90-day type of a revolver,” Kramer said.
He recalled that 10 to 15 years ago there was a big rash of banks that grew impatient with their manufacturers, and United Bank saw a rash of SBA loan business as a result.
“We’ve been in a recession here in West Michigan for a couple of years, and the margins on all these little companies are thin,” he said.
“So, anything that disrupts their world — loss of a sale, or an automaker not paying them on time — can trigger a traditional bank to tell them to find another home.”
The Big Three are much more demanding today and there’s much more foreign competition, particularly in the tool and die trades.
So the weak economy, the increase in foreign competition, a lot less latitude on the part of the Big Three, and banks tightening up standards, he said, have all colluded to force some small manufacturers into that kind of situation.
In a few cases in Michigan, he added, some of the banks that traditionally financed automotive were purchased by out-of-state banks whose marketing objectives or expertise didn’t necessarily include manufacturing.
Hence, he said, the desire to work with manufacturers diminished a bit.
“What we look for when we do pick up that customer on an SBA loan, we’re looking for someone who has contracts in place, has the machinery and equipment that is technologically capable of producing a quality product that the automakers demand, that has the labor force in place, and one that is not already at the end of their life.
“In those situations where we’ve got a company that just needs a little help in giving them some permanent financing or alternative financing, that SBA product really kind of fits the bill.”
Some of the larger banks don’t have a commitment to SBA lending, Kramer added.
Furthermore, he added, some banks don’t want to fiddle with an SBA loan program because it’s a little more labor-intensive and rule-intensive.
Kramer said he believes United’s SBA loan activity is increasing because the bank has developed referral networks over the years.
Oftentimes, small manufacturers will turn to their CPAs in frustration, he said, and the CPAs know who the players are in the SBA loan market.
“That’s typically how our phone rings. The SBA activity we generated over the years is kind of what helped us grow in this marketplace.
“We can’t do every deal that comes to our doorstep, but we’re going to give it a pretty good shake. Since we do plan to be here for a long time in the future, it makes sense for us.”United Bank’s SBA lenders have an average of 18 years experience, and United is designated as an SBA Preferred Lender, which gives its lender the ability to make a lot of the loan decisions at the bank level, Kramer pointed out.