in Mat-Su; we’re much more of a bedroom community.” First National Bank Alaska generally sets the term for equipment loans at five years, but the length of the loan ultimately depends on the specific equipment involved. “You certainly don’t want it to Mazzeo be longer than the life of the underlying asset that’s being taken as collateral,” Thorn says. The useful life of a new box van, for example, would be seven years. What determines useful life is primarily based on accounting principles, but it also depends on the actual condition of the property. “It’s up to the lender to inspect the equipment and determine its usefulness,” he says. That’s the principle that Wells Fargo applied to Premier Alaska Tours’ loan. Since the company was purchasing a variety of assets—rail cars, motor coaches and real estate—the bank employed multiple loan terms to match the useful life of the different types of property, according to Mazzeo. He explains: “Essentially, the loan amortizes or pays down over time. This assures that the loan stays inside of the value of the asset.” Alaska Growth Capital specializes in using Small Business Administration and USDA loan guaranty programs to offer longer terms than a typical commercial bank. “We can improve a borrower’s cash flow if we can ‘term’ equipment out over 10 years, versus a commercial bank that may do it over five years,” says President and Chief Executive Officer Chris McGee. “Our lending model is more closely structured to maximize the use of the loan guarantee programs versus having them as a secondary factor.” Named the SBA 2011 and 2012 Alaska Community Lender of the Year, Alaska Growth Capital often works with borrowers who need financing for equipment, working capital, acquisition and debt restructuring. Some of its clients may be in high-risk industries such as aviation, timber or tourism or located in areas without a local financial institution.
Qualifying for a Longer-Term Loan
Banks normally require three years of financial information to review a loan request, according to McCaffrey of Key28
McCaffrey
McGee
Bank. The applicant may be required to provide a business plan with a pro forma, a defined business purpose and valuation for the asset being acquired. As with most commercial loans, she says, only established businesses with a history of profitability qualify. Also, cash flow (historical and projected) generated by operations must be sufficient to service the debt. A number of considerations factor into qualifying, including: the purpose of the request, asset being financed, financial performance, ability to service the debt, management, guarantors, industry and credit history. Risk is also a major factor. “A lender carries more risk when it extends longterm financing as it increases the likelihood a borrower can experience financial distress,” McCaffrey says. “As such, the lender will require collateral—subject to acceptable loan-to-value ratios— to secure the financing of long-term debt, may require guarantors and may be subject to financial covenants.” There are risks associated with every loan, says First National Bank Senior Vice President Commercial Lending Bill Inscho. Long-term loans may necessitate more collateral, a stronger track record and other qualifying factors, but it all boils down three things: idea, capital and management. He explains: “Any business, whether it’s Starbucks or a brand new company, has to have an idea that works. You’ve got to have some money of your own to get it started and to support it. And you’ve got to have strong management. If you don’t have the management skills necessary, the chances of the business succeeding are slim.”
Positive Impact on Economy
Long-term commercial financing can have a positive on business growth as well as the state’s overall economy. It can also enhance earnings, which in turn can lead to business expansion,
acquisitions and increased shareholder returns. Having access to capital enables companies to take advantage of new opportunities, which was the case with Premier Alaska Tours. “It allowed us to capitalize on a unique opportunity transferring ownership of transportation and tourism assets to an Alaskan owned company, creating more jobs for Alaskans in Alaska,” Grunwaldt says. Long-term debt can also be a tool that can help a business manage and improve its financial performance, according to McCaffrey. But the amount of long-term debt on a company’s balance sheet is crucial, she says, and borrowers should understand that the burden of principal and interest payments could become too heavy if they borrow excessively. However, she adds, the current low-interest rate environment provides an opportunity for businesses to fi x interest rates for years to come, eliminating interest rate risk volatility.
Expert Advice
Alaska’s financial institutions offer sage advice for would-be borrowers. McGee encourages business owners to carefully consider whether a long-term loan is best for them. They should weigh whether it makes sense and how it will benefit their business. He adds, “Does it strategically fit into their long term growth plan?” Mazzeo urges businesses to develop a relationship with their banker—before they need it. “It is critical to having access to capital or lines of credit,” he says. Similarly, Thorn stresses the importance of keeping your banker fully informed. Companies should submit updated financials to their bank annually, so they can react more quickly to funding requests. Inscho encourages business owners to go visit their banker and keep them informed on how their business is going. He adds: “Let them know that you’re thinking about an investment. We can give words of advice and caution and help them make a better-informed decision.” Former Alaskan Tracy Barbour writes from Tennessee.
www.akbizmag.com • Alaska Business Monthly • March 2013