Expert
Jonathon Leonard
Business Banker at Gate City Bank in Bismarck
Expert
Greg Ellwein
Business Banker at Gate City Bank in Bismarck
1. Business Plan
Before meeting with a banker, the first step is to ensure you have a complete and updated business plan. A robust business plan will help your banker provide the best financial advice for your situation.
If you don’t have a business plan, there are several resources available to help you create one and assist with other business planning needs.
· North Dakota Small Business Development Center: ndsbdc.org
· North Dakota Women’s Business Center: trainingnd.com/women-owned-business
· SCORE: score.org/find-location?state=ND
2. Financials
Generally, you will need to have two to three years of tax returns, a current profit and loss statement and balance sheet for the business. In addition, you will need to bring your personal financial information, including tax returns and personal financial statement.
This will allow the banker to evaluate the financial health of the business and the owners. This information also allows the banker to run scenarios with different loan programs to show you the impact on business cash flow.
3. Personal Financial Information
As mentioned, your personal finances will be looked at as part of the business loan process. Your personal credit history and personal debt can impact your ability to borrow for the business, so it’s important to review your personal finances and ensure your credit is in order. If you foresee any credit issues, be sure to prepare explanations for the bank.
4. Loan Structure
When meeting with a banker, you will need to discuss how the loan will be structured. For example, will the building be owned by the operating business, by yourself personally or will you set up a separate entity to own and rent the building? These are examples of options that you will want to think through and discuss the benefits of one over the other with your banker.
5. Down Payment Funds
Part of the business loan process will be determining what funds you have available for a down payment. If you have this information available ahead of time, this will help decide which options will be best for obtaining your financing. There are options available for low down payment business loans, however, there may be higher fees or rates associated with these loans.
Q&A
The Bank of North Dakota is the only one of its kind in the country. They work with financial institutions around the state. How can businesses take advantage of having the Bank of North Dakota?
WalletHub recently named North Dakota one of the best places for start-up businesses, so it’s no surprise that we have a unique resource like the Bank of North Dakota. They provide another source of financing that businesses outside of North Dakota aren’t afforded. The Bank of North Dakota’s programs all work with a local lender as the initial point of contact. Whether you are a new business, expanding business or an established business with additional financing needs, there is a multitude of options provided by the Bank of North Dakota.
With the Beginning Entrepreneur Loan Program, the Bank of North Dakota provides a payment guaranty to the local bank, allowing them to finance new businesses that the local bank may not have been able to finance otherwise. For larger businesses, local banks can partner with the Bank of North Dakota to give them the ability to finance larger loans. These are just a few of the lending programs offered by the Bank of North Dakota. The lender will work with both the borrower and the Bank of North Dakota to find the program that best fits the specific financing situation.
What are usually the best options for businesses in terms of loans?
Several factors can influence the type of loan the business can obtain. If you are looking to have the smallest initial capital outlay, it is good to be familiar with the Small Business Administration 504 Loan Program. Most commercial real estate loans through a bank will either be a balloon loan or an adjustable-rate loan. A balloon loan has a rate fixed for a certain period (for example, five years) with repayment calculated over a different set period, like 20 years. At the end of the five-year period, the loan balloons, which means that it comes due. At that point, the borrower would refinance the remaining balance in the same manner as before, assuming they still have adequate financial performance. With an adjustable-rate loan, the rate adjusts over a period of time. Then, at the end of that period, the rate adjusts based on an index or factor that would have been determined when the loan was originated. To decide what option will best fit your business best, you should discuss with your business banker to review different options and their impact on your business’ cash flow.
Why is buying a building often time a good idea for businesses?
When you buy a building versus renting the property, you are building equity. You will have a hard asset that, with each payment, you are building equity for the business instead of paying rent to someone else. There is also the potential for appreciation of the property that will help build the business’ and owner’s net worth. Buying a property can also be a risk-mitigating factor; there could be struggles with the business and it could fail, but you still have the equity in that property. Another benefit is that when you own a building, your mortgage payment is fixed and so there are no concerns of rent increasing drastically. Plus, with the continued low-interest rate environment, a lot of times you can buy a property and have a mortgage payment that is less than what you would be paying for rent. When you buy a building, you will also have control of your occupancy cost. If you can reduce your overall occupancy costs by buying, you are not only building equity in an asset, you are also improving the cash flow of your business. The funds you save on your occupancy expense can then be reinvested in your business.
What are some of the other things you should consider before purchasing property?
There are multiple factors you should consider before buying a building. First, examine your lease expense and then compare it to the possible loan payment for the purchased building. If you can get into a property and pay less than your lease, it may be a good time to consider buying. You also will need to account for maintenance and other variable expenses that you will incur when owning a building. For example, if you are thinking of building a new property, special assessments are another factor to keep in mind as they can have an impact on your total real estate expense. Consider where your business is at financially; if you are rapidly growing and have large capital needs, you may not want to tie up funds in real estate since it is not a highly liquid asset. If you are looking to buy a property, determine what funds you have available for the down payment as it will help determine the different loan programs available. There are programs like the SBA 504 program that can mitigate the total amount of funds needed to buy a property.
Lastly, like everything in real estate, location is also a factor. If you are a retail business, you will want to find a location that is easily accessible and visible. For a manufacturing business, investigate zoning restrictions in the area. For all properties, look at the future growth of your business and if the building will accommodate that growth, including expansion plans.
