January - Madison Magazine

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GMCCFEATURE OBTAINING A SMALL BUSINESS LOAN by Judy Dahl If you’re contemplating starting a small business, or if you’re a small business owner looking to expand, you’ll likely need financing assistance. And particularly for new business owners, this can be challenging to obtain. But, say area financial-service providers, it can be done— and the right preparation is key. Early-stage, high-growth companies needing substantial capital can sometimes attract funding from angel investors or venture capitalists (visit www.wisconsin angelnetwork.com for more information), and it’s wise to look for grants (see www.grants.gov). Entrepreneurs’ own resources—sometimes including credit cards—and family and friends fund other start-ups or expansions. Many business owners seek loans, and from a lender’s perspective, says Dana Hoffmann, vice president of business services, Great Wisconsin Credit Union, “Financing a small business start-up is one of the most difficult loans to make. There’s no track record and you’re going mostly on the assumptions in the business plan.” Tom Dott, senior vice president, business banking, Associated Bank, recommends business owners use area educational resources to get started. “Leverage the courses available through the UW Small Business Development Center (SBDC) on how to write a business plan and other topics,” he advises. “Take advantage of those before even thinking about getting a loan. It helps you understand, when you do come to a bank, what to expect and what to come prepared with.” A solid business plan A solid business plan is the first thing lenders look for. “Having a well-developed business plan, with a good understanding of your income sources and expenses is essential,” says Jim Bradley, president, Home Savings Bank, which offers primarily real-estate lending. “A good business plan includes a description of the business and how it will work, your experience in the industry, how you’ll stand out in the market and compete, how you’ll promote the business, and a minimum of three years income and expense projections,” adds Dott. “We like to see sensitivity testing with the projections, some ‘what-if scenarios.’ If you’re projecting $1 million in revenue and $500,000 in expenses, what happens if you only have $75,000 in revenue and higher expenses How does that factor into your ability to make loan payments” Darwin Lynde, senior vice president of business banking, Park Bank, agrees. “To a banker’s mind, loan-worthiness is simply a measure of the borrower’s ability to repay a loan. We look at whether the business’ current or projected cash flow is sufficient to repay the proposed note, and if cash flow fails to provide the necessary funds, what collateral could be used to cover the payments, either through its sale or refinancing Answers to these questions are typically spelled out in a business plan for new businesses.” A healthy personal credit record Hoffman notes, “The business owner must also have a good personal credit history. It’s a good indicator of how they’ll handle business credit.” “I don’t think people realize that’s one of the first things we look at if the business plan is solid. That’s the next step,” adds Dott. A strong relationship Building a relationship with your financial institution can speed up the financing process. “It’s never too early to start,” says Bradley. “The more your banker knows you and your business, the better they can counsel you on the best product or service for your unique situation.” Lynde adds, “If you find yourself ‘chasing’ your banker it’s a bad sign. Your banker should know what your plans are because he or she regularly checks in with your business and actively provides solutions to the challenges you face.” ◆ SBA loan guarantees make it easier The Small Business Administration (SBA) decreases lenders’ risks, making it easier for small businesses to obtain loans. The organization provides lenders with guarantees for portions of qualified loans. Borrowers apply for loans at participating lending institutions, which then apply online for an SBA guarantee. “We make it very easy for lenders, which is driving our volumes incredibly high,” says Eric Ness, district director, SBA Wisconsin. “In 1998 we guaranteed 853 loans; for fiscal year 2005 it’s 2,194 loans totaling nearly $496 million in Wisconsin.” Visit www.sba.gov/wi/ for more information. PAGE 08 JANUARY 2006
COVERSTORYCONTINUED – SUCCESSION PLANNING Avoid a power vacuum Ann Kinkade, director, Family Business Center, and faculty associate, UW School of Business, adds, “If there’s a crisis, having a succession plan helps avoid a power vacuum. In a family business, it helps prevent family conflict. The more [business leaders] can demonstrate that they’re prioritizing succession planning, the more it reassures customers, employees and vendors—it gives external people trust in the business.” Kinkade says ownership-succession and management-succession planning are the two primary aspects of the process. “The first refers to the legal transfer of company ownership. Management succession is more all-inclusive; it includes transferring the corporate culture and values to the next leaders.” Not all business leaders take the time to do succession planning. “They all know they should, and they’re more likely to deal with the ownership transfer than with management succession,” says Kinkade. “Many business owners are so busy with day-to-day operations that they don’t find the time to plan,” agrees Googins. “It’s really important to remember that your business is something you’ve built, and if you want to take care of the people important to you, you must do the planning.” Take your time and involve the right people “Start early; it takes a lot of time,” advises Kinkade. “Involve all affected parties—in a family business that includes shareholders and even family members not involved in daily operations.” Begin by identifying your values as a company. “This varies from business to business; you might determine that you want to remain local, that you value your employees as your No. 1 asset, or that customers are No. 1,” says Kinkade. “Identify what’s important to you as a company, and for a family business, as a family.” Googins adds, “Know that you’ll need to involve multiple people: a financial planner, an attorney, an insurance person, an accountant. Figure out who you’re most comfortable with and start with them.” “Then define the evolving role for the person exiting as a leader,” says Kinkade. Include plans for the leader’s retirement income, and set a specific exit and ownership transfer date. You’ll also need to plan how to identify a successor—what skill sets, experience, education, and knowledge of the business he or she must have. “Ideally you’ll name a specific successor in advance, and implement a professional development plan for them,” says Kinkade. You may also wish to identify backup successors, and successors for key management staff as well as the business leader. “I’ve had a succession plan in place for five years,” says Googins. “We set up a separate company that one of my employees is buying into as an owner. We’ve agreed on how to value the business, and if anything happens to me, she can buy the rest of my company from my two sons. We have insurance so she’ll have the funds available, our attorney is in the loop, and with our accountant, we’ve drawn up papers so this employee and my sons would be treated fairly. Communicate and update When your plan is complete, communicate it. “Let your staff, customers and business partners know what you come up with,” says Kinkade. And you’ll want to revisit your succession plan often. “Stop and look at each area on a yearly basis,” recommends Googins. “In reality you won’t need to make changes every year, but you should meet each year and review it. Over five or ten years’ time, you probably will make changes.” ◆ JANUARY 2006 PAGE 09
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January - Madison Magazine

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