Small business gets credit for job creation

If you’re a Massachusetts-based small business owner, you already know the drill. It’s expensive to do business here and create jobs here. It’s getting harder to find skilled workers. And you don’t have the access to capital that larger companies have.

But while it’s a truism that small businesses create 66 percent of the new jobs in the U.S., their failure rate is correspondingly high. Several veteran commercial lenders in the Central Massachusetts region give strikingly similar responses on what it takes to position a small business to tap into the capital that’s available, and to grow.

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Most small-business lending programs aren’t for startups. The job creation programs launched by Citizens Bank and Sovereign Bank last year have a minimum loan amount of $250,000. But four-figure SBA-backed loans are available through SBA-designated lending banks, and micro-loans, available through entities such as Accion USA (see Small Business Resources, page 23) often constitute a better fit. But whether the amount sought is $5,000 or $5 million, bankers want to see some sort of track record before lending out any amount of money. So anyone considering a startup should begin with the thought of establishing such a record.

How to get ready for prime time

Commercial lenders are willing and able to help neophytes, even if they’re too new to have a business history. James Curran, senior vice president and regional executive of Sovereign Bank Massachusetts, says he regularly meets with prospective startups to discuss their business ideas. He refers them to CPAs and attorneys – not just one professional, but several – and recommends that the business owner interview all of the candidates to get the right fit. Curran also refers prospective startups to the Small Business Development Center at Clark University in Worcester to get advice on writing a business plan. It’s part of a marketing strategy by Sovereign to make sure customers get the information they need, whether it’s from within the bank or from an outside source.

Bank of America’s Edwin Shea Jr., newly appointed market president for Greater Worcester region, says essentially the same thing. Bank of America, the leading SBA lender in the nation in part because of its size, has products and services for budding business people long before they’re loan-ready. "Historically, commercial banks have not offered financing products for a startup venture, but don’t think commercial banks are not new-business friendly," he says in an e-mail. Credit cards, when managed appropriately, are a good source of initial financing because they allow entrepreneurs to draw only what they need, he says. However, he warns against making uneducated guesses about the level of financing a business may need. "Document what you need, and remember that asking for too little can be detrimental. Projections that are too optimistic can get you in trouble."

For a small businesses that has been in operation for a while, Mark Crandall, executive vice president of TD Banknorth Massachusetts, says that besides tax returns, he wants to see a financial strategy. Business owners with plans for aggressive growth must consider how they’ll finance it in light of the increased demands on their working capital. They must consider whether they expect to finance mostly through debt, or whether they’ll have an equity partner, and whether they’ll be putting all the profits back into the business to help finance the growth. Additionally, he says, projections should be made long-term, not just a year out.

Brian Bullock, senior vice president and commercial lender for Lowell-based Enterprise Bank, says an accountant can be helpful in making long-term projections. A CPA who is familiar with a particular industry can guide a business through the process because they’ve seen it before. While CPAs are expected to respect client confidentiality, they can give guidance as to whether a company’s cash flow, net earnings, or cost of goods sold are in line with others in its industry.

William Greene, senior vice president of commercial lending at Flagship Bank, says most of the bank’s business customers are well beyond the startup stage. But, he says, established businesses face their own set of challenges, such as deciding whether to lease or buy equipment and/or real estate. Buying isn’t always the answer and can come back to haunt a business that’s growing out of space it’s got its money tied up in, or needs an equipment upgrade it can’t finance, he says. Greene also insists on realistic projections: Whether the business has enough capital; what are its fallback positions in case a new product launch is delayed; and what’s the competition. The state’s environment of constant innovation, which can make a product or service obsolete overnight, creates business failures as well as successes. "The animal spirits of the marketplace are alive and well," Greene warns.

Christina P. O’Neill can be reached at coneill@wbjournal.com

SIDEBAR: Loan programs target job growth

Last year, two of the region’s leading SBA lenders launched multimillion-dollar loan funds to help small businesses create jobs in their home states of Massachusetts, Connecticut, Rhode Island, as well as the Mid-Atlantic region.

Bank: Citizens Bank

Name of fund: Citizens Job Bank

Size of fund: $100 million covering three states. Similar initiatives have been launched in the Mid-Atlantic States.

What it offers: Fixed-interest loans of 3.50 percent to companies that promise to create a minimum one full-time job for every $40,000 borrowed.

Minimum and maximum loan amounts: Minimum $240,000; maximum is $10 million.

Conditions: The jobs must be created within three years after the funds are borrowed.

Central Mass. recipients: Oxford-based Fabrico Inc. borrowed $2 million last October to create 50 new jobs at its new Oxford plant, which will be twice the size of the current one.

Total loans closed to date: As of October 2005, Citizens had lent a total of nearly $16 million to Massachusetts businesses to create up to 400 new jobs. Updated figures were not available at press time.

Bank: Sovereign Bank Massachusetts

Name of fund: Massachusetts Job Growth Program

Size of fund: $200 million

What it offers: Flexible repayment terms and amortization options, including extended terms for real estate and interest-only payment options for one year. No pre-payment penalties. The Job Growth Initiative prioritizes job growth by reducing the financing rate as more jobs are added.

Minimum and maximum loan amounts: $250,000 to $2.5 million

Central Mass. recipients: Xinetics Corp., based in Devens, which develops and manufactures precision optical products and systems for the U.S. government and commercial customers. It borrowed $2.5 million and will add up to 40 new jobs. Waiteco Machine, also based in Devens, borrowed $2 million and will add seven to 10 jobs.

Total loans closed to date: As of Dec. 31, 2005, Sovereign had lent a total of $23 million to about 25 businesses to create up to 370 new jobs.

C.P.O.

SIDEBAR: SBA budget for 2007 goes to legislature

The U.S. Small Business Administration’s fiscal 2007 budget, now before Congress, asks for $628 million, which would provide $28 billion in loan and venture capital authority for its financing programs. Among its requisitions:

• Small Business Development Centers, $87.1 million, down about $743,000 from this year.

• Women’s Business Centers, $11.9 million, down $461,000 from this year’s funding.

• Service Corps of Retired Executives, $5 million, up $14,000 from this year.

• National Women’s Business Council, $743 million, up $2 million from this year.

• Veteran’s Outreach, $743 million, up $2 million from this year.

• Drug Free Workplace Program, $990,000, up $3,000 from this year.

• 7(a) loan guarantee program, $17.5 billion in lending authority, up $500 million from this year

• 504 Certified Development Company program, $7.5 billion in lending authority, level with this year.

The SBA budget proposes a fee on loans of more than $1 million to offset administrative costs. The majority of borrowers won’t be affected.

C.P.O.

SIDEBAR:

Enhancing your chances: What makes a good borrower?

The bankers with whom we spoke weighed in almost unanimously on three issues. One: A good business borrower is also a good manager of personal financial affairs. Two: Capable business owners surround themselves with good professionals, such as lawyers and CPA’s. Three: The quality of someone’s references count.

Good personal credit scores reflect a history of financial responsibility and are a predictor of how an applicant will manage a business, they say. So does a checking account history. Too-frequent overdrafts show an inability to manage money. Loan candidates who have worked out and resolved past financial problems are evaluated on a case-by-case basis.

The larger the loan, the more important professional, outside legal and CPA help becomes. That circle widens out to include investors and direct advisors, and their areas of expertise.

"References are important for any small business," says Mark Crandall of TD Banknorth Massachusetts.

"If you’ve got decent support around you as a business owner, I’m going to be more likely to finance you than if you don’t."

C.P.O.