After many years of recovery, finally the Colorado Springs economic picture is brightening. Businesses are feeling more confident and are growing.
As of January, Colorado Springs was just 2 percent below the national recovery of jobs lost since the last recession.
That strengthening of our business community is additionally evident as business loan applications are increasing daily. In fact, last year, the bank increased its U.S. Small Business Administration lending by 30 percent compared to the prior year.
In addition to the oil and gas exploration industry and support industries that serve pad sites, industries like food production and military and aerospace support are strong, despite fears of sequestration.
This new, bulging wallet may drive some business owners to consider moving into new offices, buying furniture or hosting that lost holiday party. We are encouraging business owners to consider reinvestment in their companies in ways that deleverage or build new revenue streams in ancillary niche markets over renovating the conference room.
Using the military as an example, a new technology might be one way to get one’s business foot in the door of the defense industry. Enterprise IT systems that used to cost $1 billion now can be built for $10 million to $20 million and reused. For local companies like Intelligence Software Solutions (ISS), revenue growth over the past 10 years has been impressive, thanks to its ability to enter this market. As we know, the government has been collecting information, but companies with solutions to managing and making strategic use of it, as ISS does, is a large area of need.
The key is to determine how to optimize a product for use in the defense or aerospace industries. While trends won’t determine whether a company can get a certain contract, it helps to know where government budgets are being cut. Cost efficiency and off-the-shelf flexibility can help sell a company’s product when the government is looking to save money.
Another consideration is reinvesting profit back into the company. All too often, companies choose to invest extra profit into more real estate, perhaps using that profit toward the down payment. Instead of purchasing more real estate, companies could take a percentage of that profit and reinvest it. Businesses would receive a higher return over time if they reinvest 15 percent of their profit. That would mean more cash flow for research and development or to launch in a new market.
If a business owner decides to look for a loan, there are a few things to know about the approval process in today’s post-Dodd-Frank world. No matter how well prepared owners are, they should expect the approval processes to take longer, for business and personal loans.
Banks are mandated to assess loan applications more stringently than in the past, with tighter debt-to-income restrictions. Small business owners who may pay themselves with draws, might consider taking more revenue through a W2, as that is what banks will look at when reviewing a loan.
So maybe now a business owner might say, “My industry is solid. My credit is strong. Now what?” We urge business owners to surround themselves with partners who know the business and the industry they are considering getting into, such as the defense or aerospace industries. Starting in a specific industry, take the time to research partners who know the industry — the insurance company, CPA, legal team and banker. Government contracts use distinct terminology and special, but secure, receivables.
We urge all of our clients to become students of the economy, and especially financing. There are many ways to finance a business based on needs that don’t involve a traditional SBA loan.
One option to develop working capital quickly and manage cash flow is factoring. It allows the business owner to sell receivables in the form of invoice to a factor, often a financial organization or specialized company, which makes an advance of 70-85 percent of the purchase price of the receivable amount. This can help small businesses get receivables paid quickly rather than waiting the typical 30 or 60 days for payment. The factor collects the full amount from the customer and pays the balance amount due to the business owner after deducting a commission and other charges.
By knowing the breadth of financing options available to a small business, companies can plan knowing there are options available for investments when the time is right. As markets continue upward, the more solvent a small business is, the more likely it will be able to quickly move on opportunities in this exciting economic upturn.
Aileen Berrios is senior vice president, Commercial Banking Group, for Vectra Bank Colorado.