How to finance facility improvements

by Jan K. Allen

SBJ Contributing Writer

According to area bankers, most established businesses have been through the lending process enough to know how to proceed with financing facility improvements and expansion. But many younger and less experienced firms may need a little guidance.

The most important thing a business owner needs when approaching his or her banker with improvement plans is a detailed cost estimate of the project, said Jo Hicks, vice president in commercial loans at Commerce Bank.

The company may need to assemble financial information if consulting a banker they haven't dealt with before, but in dealing with the financial institution where they've already established credit, an update or interim statement is usually all that is needed, Hicks said.

In general, bankers require at least a three-year financial history on a business, the last three years' tax statements and the owner's personal financial information to establish credit. Most businesses have this information on file with their primary lender.

Bankers strongly advise company owners to put together a long-term business plan, along with financial statements, to take some of the guesswork out of operating expenses and growth expectations. Of course, unexpected growth may change the plan, but if increased activity warrants facility improvements, bankers are nearly always receptive to the idea, Hicks said.

Capital improvements, more often than not, require financing spread over an extended period, making a term loan necessary, according to Hicks.

New businesses must have a capital investment, but existing businesses with good track records may not be required to put up any cash for improvements, Hicks said.

Usually, a business owner will have an idea of how much he can pay monthly. If a longer term is needed, the banker may suggest SBA participation in the financing. An SBA loan offers a longer term without a balloon payment.

Many growth needs are anticipatory with an established business, and improvement loans should be handled based on individual needs, said Eldon Erwin, senior vice president of commercial- growth lending at NationsBank.

Recent interim statements are usually all that's required of the customer, Erwin said. Many times businesses can take care of improvements through their line of credit and let cash flow take care of the payments.

Erwin said he works closely with his customers to get them to think about their growth plans and be prepared for future needs.

"We try to structure credit properly and structure it to meet the needs of the individual company," he said. "We sometimes recommend interim financing, followed by a term loan once improvements are completed."

Though a business may look to reworking the plan if the growth rate exceeds expectations, the existence of a business plan increases the chance of success 100-fold, Erwin stated.

Erwin and Hicks agreed that borrowers are more astute than they've ever been before, and Hicks said she believes part of the reason for this is the support and assistance available in this area.

If a business needs assistance putting an expansion plan together, there is no shortage of entities to come to their aid, she said.

SBA Branch Manager James Combs said that if a business comes to him for help, he explains the government programs available, then sends them to a lender. If they have a weak area, he may refer them to a Senior Corps of Retired Executives (SCORE) representative or send them to the Small Business Development Center at Southwest Missouri State University.

Over the last five years in this area, according to Combs, more attention has been given to preparation for businesses.

Among the aids to businesses, SCORE, SBDC and the special programs offered at the Springfield Area Chamber of Commerce have been a great help.

If a business is already up and running and has been successful, it will have less trouble acquiring money for improvements. If it has had to struggle or experienced a downturn, assisting agencies may aid them in a study to find weaknesses, Combs said.

The established customer may pick up the phone and ask his or her banker what is needed to start the loan process. Most of them seem to know already, Hicks said. And the more prepared they are, the quicker the loan can be processed, she added.

Also, she said, term financing is usually the best was to go in paying for long-term improvements. "Help the assets pay for themselves as they earn money," Hicks said.

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