Waterfront Business Financing in Difficult Economic Times

Based on the successes of the marina and recreational boating industries of the last two years, business owners developed plans to move forward with expansion and refurbishment.

While the third quarter of 2021 was already showing upticks of interest rates and supply chain issues, our economy showed more good than bad. Due to some unexpected factors and others that were predictable, inflation is now a powerful force, with sensitive fuel and food categories leading the way. Supply chain problems, such as the baby formula shortage, continue to stick out.
Business decisions now are as difficult as they ever have been. In recent weeks, a marina deal went away because of lender monthly rate adjustments and rampant inflation. For the potential borrower, interest rate and final cost risks were too uncertain to bear.

As of May 6, the Federal Reserve Board raised interest rates by a half point. Then, in June, the Fed did what everyone expected, raised interest rates an additional 75 basis points. The stock market immediately fell to ‘bear status.’ Experts say that inflation cannot be controlled until interest rates exceed the rate of inflation. If that is the case, there will be some very high interest rates before inflation abates. Will that trigger a recession? We’ve already had one quarter of negative growth, so we only need one more. Recent events suggest a recession to be more likely.

In Perspective
In an environment of rising interest rates, few banks will offer fixed rate loans and, further, the adjustment period will become shorter and shorter. A recent bank offer on 7(a) included monthly adjustments.

One of the few fixed rate options for business fixed asset financing is an SBA 504 loan. For 504 loans, the SBA portion is generally 30% of the total. Last December at The Docks Expo, the rate on this portion of a 504 Loan was in the 3 to3.5% range for 20 years fixed. Today 504 funds fixed for 20 years are at 4.62%.

Looking back in history, remember that, in the late 70s houses were financing at 13% and up to 17%. Commercial rates were similar, but projects still got done and entrepreneurs still made money. Projects were refinanced as rates fell and they will be for ventures financed now.

If you have done thorough planning for your project, measure the sensitivity of your model to rising rates. If your expansion, remodeling, or purchase is profitable at 7% interest on funds, will it still be profitable at 10% or 12%? Interest is only one factor in the return on investment.

Perhaps the greater concern impacting the decision to proceed with a project is the inflated cost of construction and shortage of goods rather than interest rates. But as you worry about rising interest rates or the possibility of recession and inflation, don’t let a good project be derailed.

To get you through these challenges and move you ahead, we recommend the following:

Cut excess financing needs. Be sure every expense is justifiable. Lower the total project scope if reasonable.

If there are three sources of cash flow in your new project or expansion, evaluate the contribution of each. Are all three flows necessary to give the project adequate debt coverage? If not, maybe the investment related to one cash flow can be postponed to phase two or more stable times. Preview phase two in your current loan request.

Related to the previous point, is your loan project an expansion or modernization of your existing business’s competitive strengths or a diversification away from your perceived competitive advantages? Diversification may be better for the business in the long run, but your banker may see it as more risky than an expansion/modernization of the base business.

For these uncertain times, your loan application to any lender or investor needs to be well organized, complete, well-thought-out, and documented with supporting information. Lenders are risk averse, and we are moving into more difficult borrowing times. However, the best deals both in business opportunity and complete presentation will still get funded. No matter these times, financing will go on. Businesses will expand. If you work hard to justify your project, successful financing can be yours.

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Financing, Structuring, and Strategies: Best practices for successful borrowing

• Never let a lender find out something about you that you haven’t already told them. An example could be a minor misdemeanor from your high school days that you thought was off your record. Another might be the charge from a debt you had forgotten about. If you failed to mention things like this, a lender might wonder what else are you hiding. Trust suffers, especially with an inexperienced lender or someone new to you.
• No matter how much they appear to like you, never assume that the bank you have been with for 25 years will be willing to do your loan. Lenders are finicky. They can change their loan parameters in the middle of considering your loan. Ask beforehand if your banker can do the type of loan you want to do. Search for institutions who specialize in marina and waterfront businesses. Make multiple copies of your assembled documents in case you meet some new lenders in this process.
• Financing will take longer than it should. Many borrowers wait too long to start, jeopardizing completion in what may be considered a timely manner. Structure changes, a formal easement must be negotiated, and miscellaneous obstacles can arise triggered by both the borrower and lender.
• Give the lender as much information as possible at the start of the process. Seek advice on the information to supply. If it is an existing business, gather three years of balance sheets and income statements, business and personal tax returns, a one-page summary of why you are borrowing the money, and a personal financial statement. If you are asked for additional information, provide it quickly. It makes you look organized and prepared.
• If you have been aggressive in your tax management tactics, you might let up a bit. Especially if you are planning financing in the following fiscal year, a year end with somewhat improved results can be a benefit. Don’t make the difference so large as to threaten the accounting principle of consistency.
• Finance short-term assets with short-term debt and vice versa. It’s not unusual to find a reasonably strong and growing company hamstrung by overly aggressive repayment schedules that have been dictated by a CPA or other adviser who thinks rapid repayment trumps manageable debt service.
• Growing businesses consume cash, so it is important to use appropriate amortization schedules and pay down debt out of excess profits if desired.
  Commit to keeping your facility as shipshape as possible. In financing where fixed assets are involved, you will likely be approved for 80% of the appraised value. As stated in #5, if you see refinancing coming on the not-too-distant horizon, get that painting done, signage updated, and decorative aspects perked up.
• Evaluate using a loan broker or someone to help submit your loan request. They have expertise you don’t. Determine what work they propose to do and what they will charge. Often their fees will be paid by the lender. Your bank is not going to tell you which type of loan is best for you, they will tell you which loan is best for them.
• Be frank with the broker or intermediary. As in #1, if we know there is a problem we can work toward a solution. A lender wants to know all the strong points of your financing opportunity, but its even more important to share anything that might be a problem.
• Low interest rates have ended, but for how long? We all must deal with rising interest rates for now. How long will rates be high? Is it possible some other benefits may offset the higher interest rates? If the rate rise tamps down economic activity, perhaps the time span of high rates may be shorter. But don’t wait for 2.75% fixed rates to come around again.
• Fixed rates are very elusive these days. Until rates plateau or head down, the bankers will protect themselves with aggressive variable rate terms. Don’t be surprised. Measure your rate sensitivity.
• Information must tie. Not all borrowing applications require a business plan. Be sure your cash flow projection matches the narrative. If the business plan describes a splendid grand opening celebration, but the cash flow shows $750 budgeted, then it is impossible to trust either the cash flow or the business plan

Sgt Joe Friday of Dragnet Theorem: Do you remember the black and white version of Dragnet from the late 50s? Jack Webb (Sgt Friday) had a no-nonsense persona. Investigating a crime, the inevitable next-door neighbor would be asked to detail her view of the crime. Sgt Friday always said…..”Just the facts, please ma’am.” Just the facts works well on most lenders. They are constantly oversold by every borrowing applicant coming in the door. A logical, documented, and supported presentation devoid of hyperbole gives you an important advantage.