www.clarkhill.com SMALL BUSINESS GUIDE: ~ Access to Capital~ Q&A: How To Maintain Or Manage Capital Once It Is Secured When small business owners are surveyed, “access to capital” almost always ranks at or near the top of one of the greatest challenges facing small businesses. Navigating the options for funding in a post-recession economy is increasingly difficult. Even more important for an entrepreneur is determining how to maintain or manage capital once it is secured. For guidance on accessing and managing funds, we turned to two West Michigan experts, attorneys Sandra Hamilton and Jeff Van Winkle. Both Members of Clark Hill’s Grand Rapids office, Hamilton has more than 25 years of experience working with financial institutions as part of the firm’s litigation and bankruptcy practice groups. Van Winkle has spent most of his legal career representing businesses and entrepreneurs, and is a past president of the National Small Business Association. Q: How has the recent increase in banking regulations affected small business? Hamilton: Financial institutions are challenged to comply with the numerous regulations that not only regulate the lending of money but also the monitoring of those loans after they are made. Regulations have put increased restrictions on banks that make it more difficult to quickly lend to small businesses. What used to take three or four days, now takes weeks. Van Winkle: Borrowing arrangements are much less flexible for businesses and, as indicated, take longer. That means that small business owners need to plan accordingly, which includes a clear strategy on how to maintain financial solvency while awaiting funds. Q: Does this represent “the new normal”? Hamilton: Banks want to lend. However, the memory of The Great Recession is still too fresh, so it is imperative they follow new lending guidelines closely so they make good lending decisions. Banks, particularly smaller banks, need to lend to build their customer base and capital base, but it can be a real challenge given the level of regulatory burden and competition from other lenders. Clark Hill attorneys Jeff Van Winkle and Sandra Hamilton offer tips for managing capital in a post-recession economy. (continued on page 2)
Transcript
www.clarkhill.com
SMALL BUSINESS GUIDE:~ Access to Capital~
Q&A: How To Maintain Or Manage Capital Once It Is Secured
When small business owners are surveyed, “access to capital” almost always ranks at or near the top of one of the greatest challenges facing small businesses. Navigating the options for funding in a post-recession economy is increasingly difficult. Even more important for an entrepreneur is determining how to maintain or manage capital once it is secured.
For guidance on accessing and managing funds, we turned to two West Michigan experts, attorneys Sandra Hamilton and Jeff Van Winkle. Both Members of Clark Hill’s Grand Rapids office, Hamilton has more than 25 years of experience working with financial institutions as part of the firm’s litigation and bankruptcy practice groups. Van Winkle has spent most of his legal career representing businesses and entrepreneurs, and is a past president of the National Small Business Association.
Q: How has the recent increase in banking regulations affected small business?
Hamilton: Financial institutions are challenged to comply with the numerous regulations that not only regulate the lending of money but also the monitoring of those loans after they are made. Regulations have put increased restrictions on banks that make it more difficult to quickly lend
to small businesses. What used to take three or four days, now takes weeks.
Van Winkle: Borrowing arrangements are much less flexible for businesses and, as indicated, take longer. That means that small business owners need to plan accordingly, which includes a clear strategy on how to maintain financial solvency while awaiting funds.
Q: Does this represent “the new normal”?
Hamilton: Banks want to lend. However, the memory of The Great Recession is still too fresh, so it is imperative they follow new lending guidelines closely so they make good lending decisions. Banks, particularly smaller banks, need to lend to build their customer base and capital base, but it can be a real challenge given the level of regulatory burden and competition from other lenders.
Clark Hill attorneys Jeff Van Winkle and Sandra Hamilton offer tips for managing capital in a post-recession economy.
(continued on page 2)
CLARK HILL | Small Business Guide 2
One trend that has emerged is an increase in commercial lending activity from credit unions. As credit unions are not governed by the same set of regulations as banks, they have greater flexibility to offer commercial loans. Ten years ago, it would have been rare to find a credit union granting small business loans. The lack of regulations on credit unions makes it more difficult for local community banks to compete. There has also been considerable consolidation of credit unions through mergers, which has expanded their geographic reach.
Van Winkle: Going forward, there will be a new level of regulatory compliance for most loans. The current landscape has opened up opportunity for less traditional products that require fewer compliance factors. For example, online lenders are developing a “non-bank” model to deliver money more quickly to a borrower and are sometimes using different criteria.
Q: How have banking relationships changed?
Van Winkle: Many entrepreneurs now view their relationships with banks as transactional, especially as loan officers are more transient. As a result, many business owners are less loyal to a particular bank. Also, borrowers are more focused on the treasury services that a bank offers, which contribute to the efficiency of running a business. Entrepreneurs now closely research factors like online transaction capabilities, fees, and ancillary services.
Hamilton: There are no handshake deals anymore. There can’t be. Every aspect of the relationship is heavily documented and closely monitored. It is more difficult to build customer trust because the days of dealing with one local banker throughout a transaction are mostly gone - even more so as
fewer banks invest in brick and mortar branches.
Q: Beyond regulatory issues, what are the additional barriers for small businesses in accessing capital?
Van Winkle: Small business owners need to clearly and effectively articulate how funds will be used. It is imperative to provide a detailed explanation of why they need funds. Be specific, yet flexible.
Hamilton: Having some form of collateral is imperative. Banks are
requiring a higher level of proof of collateral to lend against. It could be equipment, real estate or accounts receivable, but borrowers have to demonstrate they have some stable collateral base to receive funds.
Q: What trends are you seeing in regards to alternatives to traditional lending?
Van Winkle: The most common alternative to banks for the smallest businesses is still family and friends investing money in the earliest stages of a company. But crowdfunding continues to be a source of intrigue for entrepreneurs. An explosion of state laws permitting crowdfunding in the past two years has expanded the opportunities substantially. Michigan’s
crowdfunding law has permitted a number of companies to raise money and has predominately helped smaller, local community businesses. Federal crowdfunding laws went into effect
in May 2016. So, we will likely see new crowdfunding campaigns in the coming months. It is not likely that crowdfunding will serve as a primary source for businesses to raise capital, however, it may be a fit for some businesses to fulfill a portion of a financing need.
Anytime a business owner is considering bringing on additional investors, as in the case of crowdfunding, angel funding or any kind of equity investment, he or she should think carefully. Having two or three core investors versus 25, which could be the case with a crowdfunding situation, creates a much different business dynamic. Business owners should ask themselves, “Am I willing to be transparent?”, “Am I willing to disclose all aspects of my business to these additional investors?”, “Am I willing to listen to what my investors advise and still be an effective leader?”
Q: What challenges did you hear about directly from small business owners as past president of the National Small Business Association?
Van Winkle: Complaints about the tax code continue to be a significant issue. This is coupled with frustration with increased compliance requirements.
Jeff Van Winkle, Clark Hill PLC
“One trend that has emerged is an increase in commercial lending activity from credit unions. As credit unions are not governed by the same set of regulations as banks, they have greater flexibility to offer commercial loans.”
“An explosion of state laws permitting crowdfunding in the past two years has expanded the opportunities substantially.”
(continued on page 3)
CLARK HILL | Small Business Guide 3
There is also concern about the growing complexity of financing exports.
Q: What challenges are banks experiencing?
Hamilton: Competition among banks continues to be fierce. With newer lending sources flooding the market, it is increasingly difficult for our smaller community banks to maintain and grow market share. Time is money. Banks are trying to determine how to get money to customers faster and more efficiently, and are feverishly trying to implement the technology to support it. Overall, lending has become more complex. Small Business Administration (SBA) loans, which are attractive to banks because the government guarantees a percentage of the loan and are beneficial for communities because they foster small business development, can be challenging to execute due to the exhaustive reporting requirements. So, SBA loans sometime result in the inverse of the intended effect.
Van Winkle: Competition is not always a good thing. The multitude of sources for financing can often make it more confusing for small business owners to find the right lending source for their respective needs.
Q: What should small business ownersseekingfinancingknow about the current lending environment?
Van Winkle: The best thing a business owner can do is build his or her own cash reserve. Many small businesses have successfully worked to do that.
When cash flow is strong, businesses may be able to fund their own growth. Entrepreneurs have to accept that they may not always be able to borrow money from an external source to develop their company. Pure start-up businesses will clearly need initial cash infusions from external sources but a growing mid-sized business needs to understand the importance of building and developing its own cash.
Q: Are there some businesses that are better suited as investors or borrowers?
Van Winkle: Business owners need to think strategically about what it means to bring additional investors into a business, particularly investors who may have a divergent business philosophy or vision for the company. There is also a time commitment
in building communication and managing relationships with investors. Most often, investors expect a higher return on investment than a commercial lender, so there may be financial implications for the business.
It is important for entrepreneurs to consider the different qualities of the capital they are trying to obtain and carefully evaluate how it may impact their business.
Hamilton: Documentation is crucial. Often, individuals claim to have made investments in a business but there is no documentation or clear agreements to dictate expectations, which may create legal challenges.
While access to capital remains a priority and critical concern for small business owners, both Hamilton and Van Winkle agree that there is a sense of optimism about the small business economy and overall opportunities. There are more options than ever before for small businesses to obtain
funds. These experts say a solid business plan and strong belief in the product or service they are offering will serve an entrepreneur well in accessing the myriad of funding opportunities in the marketplace.
Sandra Hamilton, Clark Hill PLC
There are more options than ever before for small businesses to obtain funds. These experts say a solid business plan and strong belief in the product or service they are offering will serve an entrepreneur well in accessing the myriad of funding opportunities in the marketplace.
(continued on page 4)
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Sandra Hamilton is a member of Clark Hill’s litigation and bankruptcy practice groups. Sandra focuses her practice in the areas of commercial litigation, bankruptcy, collections and creditors’ rights law. In her practice, she represents banks and other financial institutions, secured parties, businesses and municipalities in all aspects of bankruptcy, collection litigation and out of court enforcement and resolution. In her extensive creditors’ rights practice she regularly counsels clients on commercial loan workouts, loan restructuring, rights and remedies in bankruptcy, Uniform Commercial Code, consumer bankruptcy and collections, and foreclosure issues. Sandra also has developed a specialty in the area of Small Business Administration loan collections and guaranty claim recovery, including counseling clients on loan documentation compliance, collection and guaranty recovery guidelines. She is a frequent speaker on bankruptcy, collection and creditors’ rights laws. Contact her at [email protected] or 616.608.1141.
Jeff Van Winkle represents businesses and entrepreneurs actively seeking to create or provide exceptional services or products. In today’s business and legal marketplace, he coordinates and leads exceptional attorneys and other professionals to provide the resources his clients require. Jeff directly provides general counsel services, securities law compliance counseling, legal guidance for multinational business activities and transactional legal services to clients throughout the Midwest. He is the immediate past president of the National Small Business Association. Contact him at [email protected] or 616.608.1113.
