There are plenty of places to get your growing business funded in Maine. Banks, Credit Unions, FAME, and alternative lending sources abound.
Rich: My guest today was named District Director for the U.S. Small Business Administration’s district office on April 25th, 2021. After having worked for nine years as a lender relations specialist and deputy district director. She also has experienced working in a variety of roles at community and national banks and is a graduate of the University of Maine with a degree in secondary education.
Today, we’re going to be talking about what you need to know about funding sources so you can grow your business here in Maine, with Diane Sturgeon. Diane, welcome to the show.
Diane: Thank you so much, Rich. It’s a pleasure to be here.
Rich: So looking back on your long and illustrious career, what was your very first job?
Diane: My very first job, other than dog sitting as a child, was working at McDonald’s in Old Town, wearing the old headset, working the drive-thru.
Rich: Was that back in the day when they still had hats for their people?
Diane: Oh, we had the visors, yeah. I had a visor back then and lovely, lovely uniform. All polyester. It was beautiful.
Rich: I’m sure that breathes nicely. Okay. Well, let’s go into other types of businesses. For growing Maine businesses, who is making what types of loans these days?
Diane: So the beautiful thing here is everybody is funding loans. People were concerned that through the pandemic, nobody’s going to be making loans to new businesses, nobody’s going to be able to make loans to existing businesses. Because of the resources that are out there, I’m seeing traditional lenders make loans, I’m seeing the alternative lenders make loans. It’s happening across the board and we’re seeing quite a bit of volume for just regular financing. There’s an array of resources here. So if your bank or credit union can’t make the loan for you, I always tell the lenders, don’t say ‘no’, say ‘no, but’, and make a referral to one of the alternative lenders. Because we have SBA micro lenders in this state, and we also have great organizations like CEI, or Mainstream, or Community Concepts, who have a variety of funding sources and can make loans. So there’s money out there to be had for sure.
Rich: Right now obviously we’re on the tail end of COVID, knock on wood. There’s been a lot of PPP loans. Are there still PPP loans or is that pretty much done at this point and now we’re looking for post COVID loans, like the kind of loans we were seeing before the pandemic?
Diane: So as of today, the end of April – while we’re talking about this – there are still triple P loans. The funding we expect to run out sometime in the very beginning of May, most likely. It’s open until the end of May, May 31st. But if congressional appropriations run out before that, that program will probably not see any more funding.
We’re opening up the Restaurant Revitalization Fund as of Monday, I don’t have my calendar right in front of me. But on Monday we’ll open the Restaurant Revitalization Fund. We’re opening on Friday the 30th for businesses to register in the portal, and then we’ll start taking the applications on Monday. That’s another direct funding source through the SBA. So it’s not a loan, we’re not calling it a grant because we don’t have to follow the same rules the way the legislation was written for a grant. But that’s direct funding from the SBA. That’s not expected to have to be paid back as long as it’s used appropriately. But it’s a little more targeted towards specifically businesses that are in the food services industry for onsite dining or beverage services. And that’s kind of where we’re seeing things, COVID-wise shift, that Congress seems more focused on more targeted assistance right now, like Shuttered Venue Operators Grant or the Restaurant Revitalization Fund.
Rich: Which makes a lot of sense, because one of the things we’ve noticed is the pandemic hit certain businesses really hard and other seemingly not at all. In fact, we have a couple of clients that actually benefited from the pandemic. Because they’re basically an e-commerce or shipping, we have a seed company, we’ve got a yarn company. Everybody picked up a hobby during COVID, so the idea that it’s becoming more targeted now that we know more is definitely probably a step in the right direction and makes a whole lot of sense.
This may be a very basic question, Diane, but what are some of the biggest drivers traditionally of why businesses look for loans or look for additional funding support?
Diane: So we’ll see a lot of businesses. It’s funny in this state, and one of the conversations I have with small businesses a lot is with pride they say, “Well, I haven’t taken out any loans”, and that’s great, but how much fallback do you have. If a light bulb blows, do you have the money to replace that light bulb? If something breaks, do you have any working capital set aside? So we have a conversation with a lot of small businesses about don’t be afraid of debt. Be cautious and be aware of how it’s going to impact your business. Make sure you’re not overborrowing and that you’ll be able to pay that loan back. But don’t make yourself so cash poor that if something happens, like COVID – hopefully, not quite so dramatic – but even something small happens, that you don’t have cash to fall back on, and that you’re then in an emergency situation where you’re looking for working capital funding.
Equipment purchases are huge. We’re seeing a lot of business acquisitions right now, so there’s a lot of financing going on where people are trying to either sell to a partner, buyout, or employees are trying to buy businesses, or even unrelated parties are trying to buy businesses. Because we have a lot of people going through that transition in this state and real estate right now is hot.
The SBA 504 program numbers are through the roof. In part because rates are so extremely low right now that small businesses are taking advantage of that, and they’re going to go from leasing to actually being a building owner.
Rich: So one interesting thing that I heard you say is that, maybe out of a sense of pride, a lot of small business owners or growing business owners are proud of the fact that they’ve never taken out a loan. But it actually could be strangling your growth. You may not have the working capital either if something bad happens or if an opportunity presents itself, that now suddenly you don’t have money in the bank that you can immediately go. Because obviously, rarely do you get a loan the very same day. You don’t get the money in the bank tonight, you know, that same day. So making sure that you have enough liquidity is really key to your growth as well. Correct?
Diane: Absolutely. Any lender is going to look at your balance sheet and say how much liquidity is there? Does this business have cash fall back and can they pay their bills? So if you get yourself into a situation where you need funding and you’ve never had a loan, you felt you never need a loan because you could buy things with cash, when you do go to that bank, it’s going to take that much longer to find financing. Or they’ll look at your balance sheet and not feel comfortable giving you that financing because you don’t have the cash to pay it back.
And it’s one of those things that businesses really feel like they’re getting kicked in the teeth because they’re thinking I did the right thing all along, I didn’t borrow money, I’ve been open, I’ve done everything with cash. Why am I being punished for that? But it’s not punishment. It’s just the fact that part of being a good business owner is making sure that you’ve got balance to how your business is structured.
Rich: So if we’re a business that has never borrowed money, and all of a sudden we’re like, wait, if this is a stranglehold to growth, maybe I need to deal with this, maybe I need to prepare for this. Is getting a line of credit a step in the right direction, or is that a completely different direction? What can I do, short of taking out a loan I don’t need, to prepare myself for maybe down the road where I do need a loan?
Diane: So take a look at what’s causing you not to have cash in the bank. Is it the fact that you’re buying inventory out of cash, and then you’ve got to wait for that inventory to sell to refund that money? Maybe that does mean a line of credit is the right thing for you. A lot of businesses automatically come into the bank and they say, “I need a line of credit because I only want to make interest payments”. Well, you need a line of credit because you need short-term financing. You’ve got to make sure you’re going to use it appropriately.
It’s just like having a credit card. All of us in college got our first credit card thought, woohoo, I can spend all this money. But the hard part of that is you’ve got to make sure you pay that off in full every month, or you’re going to have that hanging over your head and never get it paid down and pay that crazy interest rate that Citibank was charging back in the day.
So for a small business with a line of credit, they need to look at do I have inventory that cycles? Will I be able to clear this line or am I going to be able to revolve this debt? And is that my need? It’s potentially a great idea to get that line of credit, start using that to fund your inventory, and pay it down each month. But then you’ll also have be able to start setting some cash aside. Use somebody else’s money to your benefit when you can.
Rich: This might be a little off topic, but is there a right amount of liquidity or money in the bank, in terms of maybe months of operation, that it’s best practice to have?
Diane: I can’t tell you off the top of my head. I’m not sure. I bet one of our business advisors could probably tell you that there is a calculation there to say, you should have this much. But we looked at for as far as cashflow is concerned, or as far as debt service is concerned, we expect you to have enough income, or when I was underwriting loans, I expected you to have enough income to cover 1.2 times your debt service coverage. So you could cover all of your bills plus 0.2 of that number for a buffer there to cover expenses. I don’t know if there’s, I’m sure there is a calculation, but it’s not what I know off the top of my head of how much should you have.
Rich: So what are some of the biggest myths that business owners believe when it comes to funding sources that you’d like to just debunk right now?
Diane: I always hear it, “Nobody will fund a startup”. I used to laugh. There was a SCORE mentor who when he was with the Augusta SCORE chapter, he would work out of our office and he would stand in my office doorway and he’d say, “Diane, nobody does financing for startups.” I’d say, “Ed, yes, they do. I used to do startup loans all the time. But I did them with an SBA guarantee, or I used the Finance Authority of Maine insurance product.” I don’t do them without anything. But people will make those loans. The startups can get financing.
People use us or they use Finance Authority of Maine to mitigate the risk associated with either a startup or I don’t have enough collateral so how am I going to get a loan. That’s where we come in. If you’re short on collateral, lenders will use an SBA guarantee to support your loan and make up for that collateral shortfall. So then nobody’s lending and nobody’s lending to X business.
I haven’t found any industry that absolutely cannot find financing, except perhaps the one that’s hard right now in this state, is anybody involved with the marijuana industry. Just because from the federal government’s perspective, that’s still not a legal business. So it does hamstring some of us. The local lenders and definitely the SBA can’t be involved in it.
Rich: So you’ve talked a little bit about alternative funding sources, and you’re talking a little bit about some of these second tier funding sources. So let’s say that I suddenly realized that either because of something bad that’s happened or an opportunity that presents itself, that I need to go after my first loan, and I just don’t have the money in the bank or the collateral really to cover that. So walk me through what that process might be like for somebody who’s not going to be able to get that loan from the bank or the credit union of their choice.
Diane: Sure. So I always tell someone, don’t assume the no, don’t automatically assume you’re not going to get a loan. So talk to your traditional lender first. Your commercial lender, the bank where you have a relationship, even if it’s a consumer relationship where you have a car loan or a home loan, or you just have a deposit relationship. Whoever holds your deposits.
And if they say ‘no’, then the alternative lenders. In this state, like I mentioned a few of them, CEI, Community Concepts, Mainstream Finance. There’s a Northern Maine Development Commission up in Northern Maine, Androscoggin Valley County Council of Governments, AVCOG is a microlender for SBA. They can make loans. The five micro lenders who are Mainstream Finance, CEI, AVCOG, Community Concepts, and NMDC, can make SBA micro loans. Those are loans up to $50,000 for all traditional commercial uses of proceeds, except for buying real estate itself. And it’s those micro loans that I believe they can go up to seven or eight year term at this point.
They also come with some technical assistance. So the lender will work with you to try to figure out, how should you restructure a balance sheet? How should you make things work? What could you do differently as well as how should you use this money, and how are you going to pay this money back? So they’ll work with you on some of that, both pre and post loan.
Then for larger borrowing, we have Community Advantage Lenders and State Eastern Maine Development, or can make loans up to $250,000. And it’s a traditional 7(a) guaranteed loan, It’s just through a non-traditional lender. So it can be used for working capital, equipment purchase, real estate purchase, all of those things. So that’s an option as well. And then we have Finance Authority of Maine that does some direct lending as well.
There are a host of options in this state for funding, but it’s hard for small businesses to even know. It’s overwhelming in this state. We have so many resources. So I would always recommend that you talk to one of our business advisors, either through SCORE, Small Business Development Center, Women’s Business Center, or the Veteran’s Business Outreach Center, they’re going to help you put together your financing package and figure out what’s the best use of proceeds, how should you ask for that loan to be structured, and who should you talk to get that financing. And they’ll help you work through all of that. So when you do go to the lender, be it an alternative lender or a traditional lender, you’re walking through the door with an organized package that tells that person, this is how much money I need to borrow, this is how I plan to pay you back, this is what I have to offer for collateral. And it sets you up so that you look like you’re worthy of the credit.
Rich: Diane would you recommend that we go first to a CEI or FAME, or do we go first to our bank or credit union? And if they say no, then we say, wait a second…what’s the best approach would you recommend?
Diane: I say go to a traditional lender first. The traditional lender can make a loan at a lower interest rate. It’ll have some more flexibility to it. Ideally. What I always say is if you can go in and you can get a traditional commercial loan, take it. Don’t go in and say, “I want an SBA guaranteed loan.” Go in and say, I want a commercial loan and here’s what I need.” And if they can give it to you that way, great. If they say, “Oh, I just can’t quite do that. You’re a little shy on collateral, or you’ve never borrowed at this level before.” And at that point say, “Well, what about an SBA guarantee?” If the answer then is still, “No, we can’t do this.” Ideally the lender will do what I always ask them to do and say “No, but you know who can help you?” And they’ll refer you to one of those alternative lenders. but once a traditional lender has said, ‘no’, that’s when you go to an alternative lender.
And one of the things I always like to make sure people understand is, just because one lender has said no doesn’t mean it’s a bad deal. It just might be a bad deal for that particular institution. Certain organizations, certain lenders have a concentration in their portfolio. They can’t have too many loans in one industry in their portfolio or their regulators come back to them and say, if something happens in that industry, you’re going to take a huge hit.
You know, you see it a lot. I worked for a bank in the mid-coast, we had a lot of lobsterman in our portfolio. We also had a lot of bed and breakfasts. So a regulator would come in and look at that and say, how much of that is your portfolio? And then they’d give us feedback of maybe you shouldn’t take on any more lobstermen or maybe you shouldn’t take on any more bed and breakfasts.
So that happens. So it just may not be the right fit for that lender. So I say shop a deal to a couple of banks, two or three banks or credit unions. If they all say no, then you start looking at that alternative lender to see if they can help you.
Rich: Well that sounds good. And when we’re talking to this traditional lender and they say, ‘no’, initially, how can I say, “But how about a SBA backed loan?” Have I already spoken to you? Or what gives me the right to say the SBA is going to back my loan?
Diane: The lender should figure that out for you. So it’s worth asking of anyone. The lender should be able to say, well, first ask them why. When they say no, they should be giving you a reason for decline. Like legally, they have to tell you why they won’t do the loan. And if it’s something that you can overcome, then hopefully you can overcome that issue. But if it’s something like not enough collateral or you haven’t borrowed enough in the past or you don’t have the credit history associated with that supports this loan. Just have a conversation with them about, well, would it help if we had an agency guarantee. And if they still say no, that’s fine.
It should definitely, you want a commercial lender to work with your business who you can have a relationship with that will have these conversations with you. And one of the things I try to make sure the lenders understand is making a referral to an alternative lender for them is a no risk proposition. It’s helping you find them the financing you need, while they still retain things like your deposit relationship, those safer business relationships.
So once that non-traditional lender helps you get up to speed and gets you to the point where you’re “ bankable”, you can go back to that person who helped you with the referral in the first place.
Rich: So our best bet is to go to our primary lender, primary bank, credit union, and ask for a regular commercial loan. If that’s a no, the next step is, if they haven’t already suggested an SBA backed loan or something similar to that. If they’re still a no, they should be suggesting alternative funding sources. Who are those alternative lenders who might be that next step in the process?
Diane: So in this state, the big ones that come to mind are CEI. And some of it depends on where you’re located, but CEI, Mainstream Finance, in the Bangor market or, or they have an office up in Dover, and another one in Rockland. Northern Maine Development Commission if you’re up in the County. Community Concepts is down in Oxford County, but they actually do lending pretty much statewide. And for us, as far as micro lenders is concerned, also ACOG.
Also, depending on how much you need to borrow, your city or town might have some money. There may be some funding sources there where they have a small pool of funds. And Finance Authority of Maine is another great resource if you get to that point that you still need alternative financing, you should take a look at their website as well.
Rich: Diane, what tips do you have for me to look as good as possible when I walk into that credit union, that bank, or even alternative funding source? How can I make myself be the best possible candidate for them?
Diane: Have an organized business plan. “Business Plan” is not a dirty word. Any small business owner who tells me, “I don’t have time to write a business plan”, then you don’t have time to be in business. If you’re not planning your business, then you’re going to get yourself in trouble. And a business plan does not have to be a 500 page tome. It can be a short plan, but it should really kind of address what your plan is, , who’s your market, where are your customers, who’s your competition, what do you need to run this business, what do you need for equipment? You know, where are you going to do this business? All of those things just sketched out and then your projected financials.
And when you go to a lender, you want to be able to tell them exactly what you need to borrow. Exactly what you’re going to use the money for, how you plan to pay them back. Who’s going to guarantee the loan and what you have to offer for collateral.
So go in with a plan and something spelled out. You don’t want to just walk through the door and say, I need $50,000. And when they say, “For what?” I need to buy some equipment. No. Go in and say, I need to buy X, Y, and Z. Here’s how much it’s going to cost. Here are the samples of what I’m going to buy. Just some have your ducks in a row, so they understand. Ultimately the lender’s concerned with getting paid back. So they want to know how are you going to pay me back? So they’ve got to see their historical financials or projections, and they want to know what you’re going to use their money for and what are they going to be able to take a lean on to mitigate the risks associated with the loan?
Rich: Okay. Let’s talk a little bit about loan structure. What does that exactly mean? And what do I need to know about it?
Diane: So, loan structure is how are you going to structure the loan? How long is the loan going to be? How long is the money going to be available to you? And how long do you have to pay it back? And what’s your payment structure going to be?
So like I mentioned, everybody wants a line of credit because it’s interest only if you’re a startup business. And you need interest only. You could, in theory, get a term loan and have an interest only period on the front of it. When I used to underwrite loans for startup businesses, I’d usually give them a six to eight month period where they had all the money to use to start up, but they had that period of time where they’re only going to pay interest on that loan. And then it was going to roll into traditional principal and interest payments to pay the loan off. They didn’t need a line of credit because they weren’t going to be able to pay it off in one lump chunk or one lump sum. They needed to have the principal and interest payments.
So there are alternative structures. If you’re a seasonal business, you may want to seasonal payment structure. That’s where you have a calm conversation with your lender and where your projections are going to show, how does your cash flow come into the business. At what point do you have highs and lows in your sales and your cashflow? So maybe in the wintertime, because you’re a summer business, you’re not going to have money available to make principal and interest payments, and it would make more sense to make larger payments during your season and interest only during the winter.
So, you know, it’s not like when you get a car loan, or you get a mortgage as a personal loan that you have this very structured rule that you have to follow. Commercial lending offers some flexibility to meet the business’s needs.
Rich: Okay. Are there any funding sources you wouldn’t recommend we go after?
Diane: So I always warn against credit cards. They’re very, very tempting. They’re right in your pocket. Sounds super easy.
Rich: There are so many stories about like Elon Musk, and probably not Elon, right? Like these businesses that maxed out credit cards, but then everything worked out for me.
Diane: And I got lots of points on the back, right? No, it’s not that. Credit card debt will drive your credit score down, it will make you look scary to a bank, and you’re never going to get it paid off. And I used to be a credit card lender. I worked for credit card lender, that’s how I cut my teeth in banking. If you pay minimum monthly payments, you’re going to pay forever, and your kids will be paying after you. It’s horrible. So try to stay away from your credit cards. Credit cards should be used. If you can pay in full at the end of the month. I’m not going to lie. I have one I use all the time and run all my household bills through, and I pay it off at the end of the month. And I’m just racking up points on it. And it’s my little way of paying that lender back for having worked for it, and they’re going to pay me now. So stay away from credit cards.
And there’s the equivalent of a payday lender out there for small businesses. Payday lenders are those ones who are like’ get cash now’, but then they’re going to continually hit your bank account. Whether the money is there or not, they’re drafting your bank account for a payment, and I’ve seen those types of lenders put people out of business. It’s those online lenders who, Oh, look, it’s so easy, get a loan now. I don’t want to name any names, but you’ll see them out there saying small business lending.
Your best bet is you want a face to face relationship with someone. If there’s any way to do that, you want somebody who’s potentially going to run into you at the Hannaford and not want to put you into a situation where your business was driven out of business and you were left without any money and without any assets. When I was underwriting the loan, the worst thing I could do was put somebody into a loan that they didn’t think they could repay. I couldn’t live with myself if I were doing that. So if I said, ‘no’, there were times that that was the kindest thing I could say to somebody was to say, “No, you cannot have this credit and here’s why.” And to talk them through what they could do to get to the point where they could borrow if that made sense, but stay away from those online lenders in any way possible and stay away from those credit cards if you can.
Rich: All right. So earlier you said just because a bank says, no, that doesn’t mean that you can’t shop it around a little bit. What happens if we get a yes, is there still a point in shopping that around might we get better rates from another bank, or should we just be grateful we got the loan?
Diane: One of the great things about the banking market in Maine from the consumer’s perspective or from the business owner’s perspective, is it’s incredibly competitive out there. We have got a lot of banks in this state and they are hungry for deals. So they’re all looking for good deals, good businesses to get in with. So you could potentially get a better interest rate, you might get more favorable terms. Some lenders might be willing to make the loan that doesn’t require a guarantee where another lender may refuse.
Why our guarantee. I used to see that all the time that there might’ve been a deal I wouldn’t do without an SBA guarantee. And there was a bank down the road who would, because their appetite for risk was a little greater than the institution I worked for. So those situations we lost deals. There were other times we scooped deals back from them.
So definitely we’re shopping around to see, you know, you’re, you’re buying something big here when you’re taking out a big loan. So make sure you’re getting the best deal you can.
Rich: All right. Are there any benefits if our business is minority owned, or woman owned, or veteran owned when it comes to securing a loan?
Diane: So the micro lenders are incented or expected to focus on businesses that may be underserved, so those minority owned businesses and whatnot. Right now with the Restaurant Revitalization Fund, there’s a 21-day priority period. And during that 21-day priority period, loans to businesses that have 51% or more ownership that’s woman owned, veteran owned, minority owned, or socially or economically disadvantaged, they’re getting priority and getting funded first. There really isn’t a special loan. I get a lot of calls from women owned businesses saying, okay, who and what do I get for being a woman owned business? And I always say, here’s the funny thing about us wanting to be treated equally, they treat us equally when we want to get funding, too.
There’s still always that push and pull where we say, well, that’s not actually true because I went in for a loan and they want my dad to go sign up for me. Which is not legal to do, so don’t let him do that. But there’s still that feeling or that sense that maybe that’s out there.
So that’s why we incent at the SBA. We incent the micro lenders and the alternative lenders to be sure that they are targeting those disadvantaged or underserved markets.
Rich: All right. We like to ask all the guests here on the show this question, and Diane I’d love to hear your take on this. What one thing would you change if you could to improve the business ecosystem here in Maine?
Diane: So my answer is not necessarily something, not a thing that we would change. It’s more like the thought out there. I hate to hear, “Oh, it’s tough to do business in Maine. Maine’s not business friendly”, and we used to hear that all the time. And I’m like, self-fulfilling prophecy guys. Stop saying that. This is a great state to do business in. People who live here support a small business. We’re all very committed to the community. We have a great banking community that really still has that community banking feel, where they want to help new businesses, they want to help small businesses, they want to help their neighbors. So that’s great. And we also have a tremendous economic development ecosystem that includes not only the traditional lenders, but the non-traditional lenders and all of our resource partners and all of our business advisors that are out there.
It’s just that there are so many resources it’s hard to keep track of sometimes. But if you are interested in either starting a business, growing your business, taking your business to the next level, there is a resource in this state that will help you out. So don’t believe that when people tell you that Maine is not a good place to do business, it is a great place to do business.
Rich: Awesome. Diane, for people who may want to connect with you or get more advice from you, where can we send them online?
Diane: So jump onto sba.gov/me, and that will take you to the Maine district office. Or you can just go to sba.gov and click the little button that says ‘local resources’ on that website. There is also a handy little tool called ‘lender match’ that I like to tell people about. It’s the equivalent of match.com for small businesses and lenders. You go in and you put some information about what you’re looking for, and there are some lenders out there that are in the market you’re in that have put what they’re looking for in a customer and we’ll send them an email and they’ll reach out to you, hopefully, to help you find that funding source. And it includes traditional banks and the alternative lenders in that database.
Rich: Wow. That’s a great resource. We’ll make sure that we link to that in the show notes. Diane, and this has been great. I appreciate you kind of walking me through how to get my first business loan. Thanks so much.
Diane: Thanks so much. Thank you for having me, it’s been wonderful.