Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, October 22, 1995 TAG: 9510230074
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: JEFF STURGEON STAFF WRITER
DATELINE: LENGTH: Long
"We didn't know at what moment this thing was going to go down," recalls Stout, who has operated Ideal Cleaners for 31/2 years.
But that picture has grown much brighter. A shiny, high-capacity machine with blinking colored lights arrived in June - just eight days before his old clunker quit - and a second new unit is due any day.
A federal program of loan guarantees made his purchases possible, although Stout won't say how much he borrowed. A loan guarantee is a pledge by another party - in this case, the Small Business Administration - to repay most of the loan if the business doesn't. Banks often want loans to small or fledgling businesses guaranteed by a backer of last resort in case of failure.
At a time when many small businesses find it difficult or impossible to borrow money, such borrowing techniques are one way a company can get where it wants to go.
One organization that has become proficient in mixing the right formula to satisfy cautious lenders is the Blue Ridge Small Business Development Center, an arm of the Roanoke Regional Chamber of Commerce. It is the outfit that helped Stout borrow the money that saved his business.
After initially being turned down by lenders, the cleaners approached the center's financing specialist, Douglas W. Murray Jr., who "worked it out," Stout said. "He was a banker. He got to know my business internally. He put [a loan proposal] together to reflect, in banker's terminology, what bankers are used to seeing."
Since January, the center has coached about 25 companies in the Roanoke Valley that have borrowed $4.9 million from various lenders. Of the borrowers helped this year, retailers and restaurants are by far the biggest group, getting 53 percent of the money. Hospitality and tourism businesses received 26 percent, and manufacturers received 15 percent.
The total represents a big increase from 1994, when the center helped 12 companies borrow $636,000. The growth is thanks to new and improved loan programs, cooperation from lenders, and the center's expanded staff. The center doesn't lend money; it provides expertise about how to get it from other lenders.
Guarantees were needed in about half the cases, provided either by the SBA directly or through the Virginia Asset Financing Corp. in Sterling, Va.
The three organizations - the local small-business center, SBA and Virginia Asset - have made a powerful team for many Roanoke-area small operations.
"There's never been a better time for small businesses to borrow money,'' at least during the 20 years that he has been out of college and working in management, says John Jennings, the center's director. "The economy is healthy, it's at the right growth rate, you've got these loan programs out there, and banks are on board with them."
The services provided to the businesses would cost untold sums if purchased privately, but they were free, because the center's $153,000 budget comes from state and federal government, the chamber, and the city of Roanoke. Local corporations underwrite some seminar costs. The center is open to all businesses, chamber member or not, regardless of size.
|n n| For a small-business adviser to sound so upbeat might surprise his peers around the state.
When Gov. George Allen in December 1994 assessed the state of the economy in a major report, "Opportunity Virginia," he concluded that businesses can't always find start-up loans and the additional money they often need to get established. He said small and emerging companies were feeling the pinch worst and that the situation could get bad enough to slow the economy.
SBA officials trace part of the worry over the availability of business capital to borrowers themselves. "It is the inexperience of small business owners in financial matters that prompts many small business loan request to be turned down," states SBA teaching materials available through on-line services.
"You must know exactly how much money you need, why you need it and how you can pay it back. You must be able to convince your lender that you are a good credit risk. Requesting a loan when you are not properly prepared makes a statement to your lender. That statement is: High Risk," the SBA says.
But even when borrowers make a good presentation, "there is still a problem out there," despite an easing of bank-lending restrictions this year, says Rob Blackmore, director of small-business and financial services for the state Economic Development Department in Richmond. The Roanoke small-business center's aggressiveness is in part responsible for its success, Blackmore says.
Jennings says the center, based in the chamber's downtown Roanoke office building, can do the most for companies with fewer than 50 employees, companies that need specialized help because they raise red flags for lenders. They are constrained by a lack of capital for buying equipment and inventory or hiring new employees - expenses the loans can cover. But they are often small, new, untested companies, own little collateral to pledge for a loan and lack knowledge of lending procedures.
On top of that, it takes a skilled financial analyst to present a company's strengths on paper, no matter how great they are. Murray creates documents for borrowers to give lenders. He has used contacts at banks to place the documents before someone who could act on them.
One owner of a small business who tried borrowing on his own said he may have failed to present a good case, because he didn't speak the banker's language and the banker didn't speak his.
Terry Stevens, owner of Plus Comics in Roanoke, needed money to expand his inventory of comic books and Star Trek and other science-fiction reading material, costumes and collectibles when his business was a year old.
"Nobody knows much about the comics industry," Stevens said. "The hardest is justifying the sales [projections]. They just couldn't see the sales coming out of it. ... Considering you sell one here, one here, a dollar here. It just doesn't seen to add up."
An accountant recommended Stevens take his need to put more more comic books on his shelves to Murray at the center. Murray crunched Stevens' numbers to project how large a loan payment the business could afford on a monthly basis over three years. He calls it modeling, a process followed by the "financial engineering" of a proposal to give the lender, he said.
"Everything can be translated mathematically, everything in life - a snowflake to whatever," Murray says. "It's bridging a gap [between borrower and banker] that's very technical."
Then there's the challenge of threading the deal through the needle eye of the bank's own in-house policies - such as knowing ahead of time what collateral to offer and how to prove the competence of top managers.
Stevens borrowed $25,000 over six years from a banker who turned out to be a Star Trek fan.
|n n| At one time, the center had much less to offer people such as Stevens.
But the center in 1994 began a drive to change. In August, director Jennings hired Murray, until then a commercial underwriting and credit analyst at First Union National Bank of Virginia. That brought the center's staff to two full-time counselors.
It turned out to be a good year for the center's initiative. The SBA decided it really only needed a one-page application from a borrower and bank wishing a guarantee, as long as the loan amount did not exceed $50,000.
Before that, bankers and applicants had to file 15 to 20 documents - a burden that discouraged many. The new process greatly simplifies the process, and guarantee requests have risen so much the SBA is taking steps to avoid overextending itself.
In addition, borrowers can take as long as 10 years to repay loans guaranteed under the LowDoc program - so-named for its "low documentation" - which can be as high as $100,000. Borrowers must meet banks' normal lending guidelines and have average annual sales of less than $5 million and employ fewer than 100 people.
Interest rates are capped at 2.25 percentage points over prime rate for loans up to seven years and capped at 2.75 percentage points over prime for longer maturities. Currently the prevailing prime rate is 8.75 percent.
By the beginning of this year, Jennings had set up seminars to inform bankers about the programs, telling them they were looking at a potential source of new business.
A LowDoc guarantee can be approved in three days.
One who can vouch for the ease of the program is Mike Williams, who was living in Hershey, Pa., when he arranged LowDoc-style financing for $30,000 to launch a private school in Roanoke offering basic instruction for children 5 to 17 and adults. Williams, who will open Sylvan Learning Center in November, communicated with the Blue Ridge Small Business Development Center by fax and phone, never meeting Murray until after his deal was signed.
"We don't need to spend a lot of one-on-one time," Murray says.
A second significant piece of good news for borrowers was that a certified development company, Virginia Asset, began serving the Roanoke area. Its programs enhance access to funding for larger loans up to $750,000 for land, buildings and equipment in cities and $1 million in rural areas.
A certified development company is a mechanism for extending the reach of a government economic development program outside a government agency's jurisdiction. Virginia Asset originated in Fairfax County.
The development company's role is simple: It lends 40 percent of the amount a borrower needs, leaving 50 percent for a bank to extend and 10 percent for the borrower to raise elsewhere. Banks have become much more willing to lend money under such circumstances, because they stand a greater chance of recovering it if the business doesn't repay. Without the corporation, a borrower must convince his lender to effectively assume 90 percent of the risk.
Moreover, the 10 percent down payment is well below the usual requirement of at least 25 percent, meaning borrowers need less cash of their own.
Roanoke area companies can now get this type of loan, thanks in part to federal officials. In August 1994, the SBA convinced Virginia Asset to include this area in its territory after other companies providing the service allowed the program to fall dormant.
Those in banking call this the 504 program, after the section number of an entry in federal regulations that created the program during the 1980s.
Virginia Asset lends its share of the money at below prime rate. It gets the money it loans by selling bonds and makes money by charging fees. Bondholders have the SBA's promise they will be paid back.
Clearly, the government is taking higher risks that private lenders wouldn't or couldn't afford to touch. Virginia Asset said eight of 351 borrowers under its 504 program did not repay since the program's inception in 1982, for a default rate of 2.3 percent. The share of all commercial loans that must be written off as a loss for non-payment is 1.36 percent nationally, according to the American Bankers Association.
Donna Fleenor, the corporation's loan officer for this area, calls Roanoke "a real center of activity for me."
All of the area's leading banks have teamed with Virginia Asset to make 504-style business loans, she said, including Central Fidelity, Crestar, NationsBank, Signet, First Virginia and First Union.
To enliven the sometimes dull world of business financing, the corporation last week drew the name of one of the participating bank loan officers to win a cruise or $3,500. "I'm going to take the money," winner Marilyn Jarvis at NationsBank in Roanoke said. "My husband and I bought a horse."
There has been talk in Washington of cutting the SBA's budget, but the 504 program will continue to be funded in its present form during the federal fiscal year that runs until Sept. 30, 1996, Fleenor said.
It's true that the mere mention of SBA financing raises eyebrows in some circles. Just ask Stout, the dry-cleaning man.
At first blush, "I kind of reeled," says Stout, who had associated such a federal program with miles of red tape. But it turned out to be what he needed and a boon to his success.
"If I'd given up when the first bank said 'no,' or the second bank said 'no,' my business would be half the size it is now," says Stout, who operates four drop-off points in addition to his main plant. Also, he has business clients outside the area for whom he offers pickup and delivery service.
That sort of talk is music to Murray's ears, and it is not the first time he has heard it. All 37 businesses that borrowed money with the center's help in the past 22 months had been turned down at least once by lenders or had become convinced they were ineligible for a loan.
Murray and Jennings are sometimes haunted by thoughts of the discouraged would-be borrowers they know are out there, who never seek out the assistance of the center after a lender turns them down.
"What is the economic impact of all those no's?'' Murray asks.
Jennings offers this answer: "There were deals that did not happen. There were businesses that did not grow as fast. There were businesses that were not started because they could not get the capital they needed."
by CNB