Small Business

Small-Biz Talks: Discussing Small Business Loans with a Local NYC Lender

Excelsior Growth Fund is an organization that helps small businesses with financing and other services throughout New York, New Jersey, and Pennsylvania. We sat down with Paola Garcia, a small business advisor, to discuss the small business lending process and what small businesses can do to make sure they're paired with the right financing.

While many business owners understand how important small business financing can be for growth, many see the underwriting and application process as a black-box. We sat down with Paola Garcia, a small business advisor at Excelsior Growth Fund (EGF), to get a more detailed look into small business financing from the perspective of a lender.

We had the chance to speak with Paola Garcia, an advisor at EGF. She has unique experience in both loan underwriting and advising small businesses on other matters. She stresses that EGF is more than just a typical lender, it's really an organization that can help small businesses end to end. On top of offering its own loans and advising clients, EGF also works with organizations like the SBA.

Paola was able to share tips on what lenders like to see and what they keep an eye out for.

This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.

I've seen online that EGF is a CDFI. What does that mean, exactly?

CDFI stands for Community Development Financial Institution. CDFI’s are private financial institutions whose mission and goal is to provide financial education and access to responsible & affordable loans to underserved and disadvantaged communities.

Have there ever been instances where a business undertook debt financing, but equity financing would have been a better option?

We certainly have cases where debt financing is not the best option for the type of project involved or for the nature of the business. For example, new tech companies like new application or software companies face unique challenges and risks associated with the industry. It is hard for a conventional lender to finance these companies because there is no historical information on their performance due to the fact that these are new in nature. The challenge with this is that we don’t have the proper metrics to project how successful they will be. And as such, these are not a good match for our loan programs and instead are better paired with angel investors or venture capitalists.

So if a small business does decide that debt financing is right for them, does EGF help them decide which financing tool is right for their business?

We do. EGF works with a variety of national, state and city-level loan programs and works with borrowers individually to determine which loan option will work best. The two most common forms of funding are lines of credit and term loans, although EGF only offers term loans.

The first step for a business in applying for financing is to determine what their real need is. At EGF, we educate clients on how each loan product should be used. Lines of credit are best for short-term needs, like financing finance accounts receivable. A term loan is generally best fora longer-term a long-term need. A few examples include equipment that will be used for many years, for start-up expenses, permanent working capital needs or to acquire real estate and etc. Most businesses obtain lines of credit because they're easier to obtain; however, more often than not, they're using them incorrectly.

What if business owners don't have a detailed business plan written out? I'd imagine that's common.

Absolutely, most small business owners do not have a business plan. However, regardless of any lender’s business plan requirements, every business should have an updated one at all times and it should evolve as the business grows. A well-written and thought out business plan will help the entrepreneur to identify strengths and weaknesses, develop sound financial projections, set future goals and create the right strategies to grow. It is important that the business plan and projections are realistic to the business and industry standards.

In addition to this, having this knowledge handy will enable the entrepreneur to speak confidently to any lender and/or investor when seeking out financing. Financing is critical for any business of any size to grow. It really doesn't matter if the business is a start-up or an established business; they need to have a strong understanding of their finances and the projects to be funded. That's always the first step. It's discouraging for lenders when a small business owner doesn't know how much financing they need or if they can't clearly communicate the financial need. This shows a lack of preparation.

So if an applicant can't clearly communicate the purpose of the loan, that's an immediate red flag?

Yes. We definitely need to understand how they're using the funding. We have different loan products, and every loan product has its own eligibility criteria. A lack of loan purpose is an indication of poor organization and poor understanding of the business operations. As a lender, our responsibility is to guide clients make the correct lending decisions. There have been instances where a business didn’t really need financing but a change of strategy and/or pricing model.

In general, especially if they're looking for larger loan amounts—let's say $100,000 and up—the lender will definitely require understanding the financing need.

Spinning off of that, there are a lot of lenders who would say a best practice is to actually apply for a loan before you really need it. That seems a bit counterintuitive, especially for term loans, since you end up paying fees on a loan that you don't immediately need. Is applying for a loan when you absolutely need it too late?

That's a great question and it all depends on how organized the business owner is with bookeeping. Most of the times when we get loan inquiries, clients are in a rush and they need the funding right away. At that point, it might be too late and not feasible to fulfill that need right away because the borrower needs to provide financial information that they may not have ready.

When lenders say a best practice is to actually apply for a loan before it is needed, what this is referring to is preparation. It is important to be organized with the business financials, e.g. doing the books on a daily basis, filing tax returns on time, pulling reports to monitor the business performance on a daily or weekly basis. The worst time to apply for a loan is when the business is failing and reporting losses. Businesses should avoid getting to this low point to apply for a loan as it is an indication of poor management and execution.

Being organized and ready with all of the financials will ensure a successful loan decision. Unfortunately, most small-business owners don't follow this advice.

How do you coach small businesses to track the ROI of these loans on a regular basis?

When clients receive financing from EGF, they are welcome to join our Business Advisory Services. We assess the business financial performance and identify weaknesses and/or opportunities of growth. We then create an action plan with specific steps to take that focus on formalizing business practices and striving toward concrete deliverables that will result in significant expansion and growth for the business.

Beyond common metrics—like annual revenue, personal credit score, age of business—are there other things a business should highlight in their application for loans to allow them to get the best rates?

Besides the common metrics (gross revenue, profitability, personal credit scores), business owners should highlight any other additional income they have and if available, offer to pledge personal assets or collateral to offset any weaknesses, if any, in the application. By volunteering this, they are decreasing the risk the lender is taking, which can result in a better rate.

How helpful would it be for an applicant to have a relationship with the lender before applying for a loan, and how can they initiate that relationship?

Before approaching any lender, it's important to understand what the lender looks for in their loan applications. One way to accomplish this is by building a relationship with the lender before applying. Loan officers will go the extra mile to provide the criteria needed and all relevant information for a successful loan decision. If you follow their advice and start preparing in advance, you will have a better chance of getting the loan application approved.

When a business does have an active loan, what are some best practices to make sure they avoid any unnecessary fees and best leverage the loan to maximize the ROI from it?

In the event that the business is not able to pay on time, it is critical to call the lender and to keep an open communication as some lenders might be able to reduce the interest rate, or provide a payment plan that better suits the business cyclical seasons. Also, by expressing any challenges to the lender, they might be able to offer business consultations for a period of time on how to improve the business operations overall.

Is there a best time/stage for when a small business should reach out to organizations like EGF for help?

I would say that most organizations, including EGF, can help businesses at any stage. The sooner the better as this will provide enough time for the client to get ready when submitting a strong application. EGF provides educational and informational workshops for both start-up and more established companies that will increase the likelihood of a successful loan decision.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.