The Art and Science of Business Banking
Local financiers share tips on how and where entrepreneurs can bankroll their dream.
For the better part of a decade, New Orleans has experienced an economic renaissance that has made it a magnet for business opportunity. Financing has been readily available, but with the distribution of disaster recovery money beginning to cease and oil prices dropping by nearly half over the past year, local experts say the bullish local economy may begin to show the first signs of slowing in nearly a decade. While that could lead to entrepreneurial money becoming harder to find, local lenders say funding options remain open to those who have the right plan, but not the capital to launch or expand a business.
Ripe for New Business Growth
While the rest of the country struggled through the Great Recession, the Crescent City remained relatively immune from much of the negative economic impact. Instead, New Orleans has emerged as one of the best places for business in the United States. Forbes magazine has thrown many laurels New Orleans’ way over the past two years – ranking the city No. 1 in the country for increase in the number of college graduates between 2007-12 – a 25.4 percent increase. It also named Louisiana “America’s New Frontier For Business Opportunity.”
U.S. Census Bureau data shows New Orleans among the fastest-growing cities in America. The Kaiser Family Foundation says one in nine current New Orleans residents were not living in the area prior to Hurricane Katrina.
The new New Orleanians represent a demographic of people who are more likely to be younger and better educated, further contributing to the city’s recovery and reform.
How to Get Financed
While opportunity certainly exists on the “new frontier,” seeking business financing can still be a daunting task, especially if a potential entrepreneur is ill-prepared. Still, lending is available for those who are prepared to show they can repay their debts.
“If you show up with an idea sketched out on the back of an envelope, you’re probably not going to get approved,” says David Crumhorn, president and CEO of Heritage Bank. “A successful business plan has to be well thought out. We want to see that you’ve done your homework on the industry, market and competitors and know what you are doing so that you’ll have staying power. But we also want to know about your personal financial situation, cash reserves and how you are positioned in case your business plan doesn’t pan out as you had hoped.”
Qualifying for a business loan can be a difficult process, especially for startups that don’t have a history of doing business or an established cash flow.
“We’re in the business of predicting probability of being repaid,” says Brad Jongbloed, of Fidelity Bank. “There’s a bit of an art and science that goes into it. No two banks will look at it exactly the same way, but we’re all looking for some common things that help us predict whether or not we have a good chance of being repaid.”
In order to best position themselves for a loan, entrepreneurs must have a detailed business plan that includes a market analysis, understanding of the industry, realistic projections for business growth and evidence of positive cash flow for existing businesses or the ability for a new company to have net income as soon as possible.
“A lot of times approval comes down to the owner(s)’s skill sets, drive and knowledge of the industry that’s going to provide confidence that they can do what they’re saying they can do,” Jongbloed says.
When entrepreneurs can’t get traditional commercial financing, the Small Business Administration provides a number of financial assistance programs that have been specifically designed to meet key needs. These include debt financing, surety bonds and equity financing for starting, acquiring and expanding a small business, financing for major fixed assets, (such as land and buildings), disaster recovery, export assistance, and veteran and military community and special purpose loans.
The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to partner lending institutions. However, SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.
Commercial Lending “Going Gangbusters”
The continued return of former residents and influx of newcomers has made for an unreal real estate market. An unexpected part of the city’s recovery has involved commercial retail and housing expansion in previously economically depressed areas of the city, including Freret Street, along Claiborne Avenue in Central City, St. Claude Avenue around the refurbished St. Roch Market and on established commercial corridors, including Veterans Memorial Boulevard in Metairie and highways 190, 21 and 22 on the North Shore.
Additionally, single-family home speculation building is following growing retail areas. Uptown and Lakeview are booming, while St. Bernard is beginning to emerge as a growing speculation market.
Commercial real estate has been so good that it has drawn Jefferson Financial Credit Union into the field.
“Credit unions usually don’t do a lot of commercial lending, but it’s going gangbusters. It’s one of the best things we ever did,” says company president and CEO Mark Rosa.
Rosa says Jefferson Financial began commercial banking as a result of increased retail banking competition from “big box” national banks.
“In the last year, we’ve grown the department from one employee to four,” he says. “Last summer I may have had $2 million in commercial loans. I have $20 million now. That’s all in nine months.”
He credits the growth to his company’s ability to provide loans when larger banks decided to stop offering them in an effort to limit potential liability.
“The big banks turned off their lending unless you had an “A” credit rating,” Rosa says. “We were able to help those who had a “B” rating or below. We just had to be careful who we approved and made safe bets.”
The Unknown Oil Factor
Even though the local economy has diversified over the last 30 years, there is concern that slashed oil prices experienced through the beginning of the year could impair sectors of local economic growth.
“Oil affects everything because when it’s booming it pumps so much into so many parts of the economy, but when it slows down it has the opposite effect,” says Guy Williams, president of Gulf Coast Bank & Trust. “Companies, especially in the oil field, have been pushed to reduce costs. We’re seeing an increasing number beginning to lay off people and slow down in equipment purchases…It’s just beginning to be felt. We don’t know how long it’s going to last, but it’s certainly real. Last year all of it was booming.”
According to marketwatch.com, on April 1, light sweet crude oil traded on the New York Mercantile Stock Exchange at $50.09 a barrel, down 44.6 percent from $90.36 a year earlier.
U.S. rig counts were down a corresponding 43.5 percent from 1,818 at the beginning of April 2014, to 1,028 at the beginning of April this year, according to oil field supplier Baker Hughes.
“The good thing is that it’s not like it was in the ’80s,” Williams says. “In those days, we had a serious concentration in oil and gas and it was absolutely devastating. This time around, we’re feeling it, but it won’t be crippling.”
For more information on business financing, including a Business Loan Checklist, visit the Small Business Administration at www.sba.gov.