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October 4, 2012

Your Guide To Lending - It Depends On The Business

Solect Energy owners Craig Huntley, left, and Jim Dumas pose with a new solar photovoltaic system installed on the roof of one of their buildings at their company headquarters in Hopkinton. The installation was financed with a loan from MassDevelopment.
Photos/Edd Cote Doug Stephan speaks with one of his employees in his farm’s milking barn. Stephan is able to sell the milk from a retail store he built on the property with the help of an SBA loan.
Photo/Edd Cote Jim Dumas, principal of Solect Energy, stands with a solar power inverter inside a building at the company’s Hopkinton headquarters. Dumas and his co-owners were able to install the inverter as part of a solar photovoltaic system financed through a loan from MassDevelopment.

Getting a loan isn't easy for every business owner, but if you own a business in Massachusetts, you have access to lending options that, in some cases, seem tailored to fit.

And finding the right fit is really the name of the game, as evidenced by loan recipients and bankers with ties to the MetroWest region. A purely bank-issued loan may seem like the only option, but upon closer review, business owners find it's not the only avenue to explore.

Here's a look at the pros and cons of three major loan types available in the Bay State, and which could work best for you.

(1) Deep Pockets? Go Conventional

When you approach a bank looking for money to expand your business, you have a fairly good shot at securing the financing you need—provided you meet the bank's criteria for lending. And those who are most likely to meet those requirements are experienced business owners with pockets deep enough to finance a standard down payment, according to Bob Paulsen, team leader of the commercial lending department at Middlesex Savings Bank's Westborough office.

"Essentially, you have to put some skin in the game, so you have to put 25 percent down, typically," Paulsen said.

Typically, Middlesex Savings loans to companies that have been around for a while, Paulsen said, though smaller loans are issued through the bank's small business lending department.

"A lot of times it's somebody who has the deep pockets who is available to put that money down," Paulsen said.

And what of newer businesses without the kind of cash it takes to secure a conventional loan? Paulsen said he typically refers those customers to government-backed programs, which may or may not be administered by private lenders. Those generally include loans backed by the U.S. Small Business Administration (SBA) and MassDevelopment, a quasi-public state agency focused on economic development.

Banks make their money by lending. But if a customer is seen as too risky, or "unbankable," a bank has to let them go.

"It's really about the strength of the borrower in terms which way we're going to go," Paulsen said. "Maybe they'll come to us in five years when they're bankable."

(2) New Business In Town? Seek SBA Backing

Hundreds of MetroWest companies have found the financing they have needed to grow over the last four years through SBA-backed loans, according to data from the SBA. These companies tend to be newer, with less cash to put down. How does it work? A private bank issues the loan, and the SBA guarantees a certain percentage, which minimizes the risk to the lender.

"The SBA is kind of that sweetener, that 'oomph' that provides a gap from what a typical bank could underwrite," said David Floreen, senior vice president with the Massachusetts Bankers Association, a trade group that represents 180 banks across the commonwealth.

For Doug Stephan, owner of Eastleigh Farm, a dairy farm in Framingham that sells raw milk and cheese, an SBA loan was the only way he could accomplish his vision for a retail store where customers could pick up their dairy products.

Stephan, a 65-year-old Framingham native who grew up across the street from the farm, bought Eastleigh in 2006. He knew that in order to realize his vision for the farm, he'd have to build the store, which required money to install equipment for processing and storing product.

A $450,000 SBA-backed loan was issued by what is now known as MutualOne Bank of Framingham in two installments in 2007 and 2008.

"As a farmer, I didn't really qualify for the requirements [MutualOne] had," Stephan said. "I wouldn't have been able to do any of this without this loan."

The SBA made the lending process simple, according to Stephan. All he had to do was sign. As collateral, he had to put up the farm equipment and buildings to acquire the loan. He said he's paying a 4.75-percent interest rate on one installment and 6 percent on the other. The loan matures in 2016, and Stephan said he's been paying it back just fine.

"Let's keep our fingers crossed."

(3) MassDevelopment: Good For A Niche Venture

A MassDevelopment loan may be best for a highly-specialized business. That's because, as a lending institution, MassDevelopment has the expertise on a range of business niches that conventional lenders might not.

This was the case when Jim Dumas and Craig Huntley, owners of Solect Energy, founded in 2009, were seeking a loan to pay for the second phase of a solar photovoltaic installation at their Hopkinton headquarters.

They were going to take the conventional lending route, but the bank suggested they look into MassDevelopment's Green Loan Program, which is specifically aimed at green projects such as theirs.

It turned out the MassDevelopment program was perfect for them, and it was also something they could refer their commercial customers to in the future, Dumas said.

"You have to fit a profile, and if you do, then it can be a good fit," Dumas said.

According to Deborah Rosser, head of lending at MassDevelopment, the organization is willing to take on risks that banks often are not.

For example, if a company has had recent sales losses but would be viable with access to enough capital, MassDevelopment is more likely to issue a loan than a conventional lender will, so long as the project fits the agency's agenda for economic development. This includes factors like job-creation potential and development in economic target areas, according to Rosser.

"We're willing to take on that kind of risk because we feel in the long-term it's going to survive and it's going to help employment in (Massachusetts)," Rosser said.

When it comes to financing for green projects, Rosser said banks are just now beginning to understand their viability, though MassDevelopment has been working with them for a few years. Solect applied for its $235,000 loan in 2011, and it was approved this past winter. The installation was completed in spring.

Huntley said he and Dumas received a 6.25-percent interest rate — which he called market rate — on a five-year note to be written off over 10 years. Solect has a chunk of its own capital in the project, after putting down 40 percent.

The project completed part of the Solect mission, which is to own solar PV systems as well as install them, according to Dumas.

"This helped kind of execute on our business plan," Dumas said. n

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