business loans overview

September 13, 2022

In this podcast, Mike Luster, Executive VP and Commercial Loan Officer at Cape Ann Savings Bank, talks with John Maher about business loans. Mike provides an overview of the different types of business loans, and he gives tips to business owners who need a loan.

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Podcast transcription

Transcription Disclosure: Below is a transcript of the conversation between John Maher and Mike Luster. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with Mike Luster, Executive VP and Commercial Loan Officer at Cape Ann Savings Bank. Today, we're doing a business loans overview. Welcome Mike.

Mike Luster: Thank you, John. Good to be here. Thanks for having me.

Why Do Businesses Need Loans?

John: Absolutely. So Mike, why might a business need a loan?

Mike: That's a great place to start John. There are several reasons. The most common reasons are to fund growth — the business might be just coming through a growth span. They might be planning a growth spurt and they might need to fund things like inventory purchases. They might have to hire a few new employees and they know that they're going to need some capital to do that.

Most commonly, I know Cape Ann Savings Bank does a lot of vehicle and equipment purchases. Cars, dump trucks, equipment could range from anything from a POS system at a restaurant to a drill press for a machine tool company or an excavator or a Bobcat for a contractor. So businesses looking to expand, they need to buy some equipment, they usually like to do a term loan for something like that.

Another reason we see a lot is succession planning. A parent that's owned a long time family business might be looking to turn it over to the children and there's got to be some sort of funding in place so the parents can retire. So they might look for a mix of cash and some type of business loan to get that done.

What else we see a lot of the time, John, is an employee that might want to buy the owner's business. We did it recently for an auto repair shop. And then just a business purchase in general, someone might be looking to open a pizza business or start a pizza shop or open a florist. They don't have all the capital to do it. So they need to do a business term loan to do that. Another reason they might need a loan is to buy real estate and that would be referred to as a commercial real estate loan. So there's several reasons but I would say growth, succession planning, real estate, any type of purpose would fall under those categories.

What Are the Types of Business Loans?

John: Okay. So what types of business loans are available? What are the different types? What are they called?

Business Line of Credit

Mike: Yeah. So a small business would typically apply for a line of credit if they're looking for a credit facility for growth. That's usually for revolving or short term purposes to provide a little funding assistance during a period of need. The word "revolving" kind of tells the story there on a line of credit. You use it like a credit card to fund the short term need and pay it back when receivables are collected. That way you can use it again in the future.

Business Term Loan

Another type of a business loan would be a business term loan. And I gave some examples earlier on that. A business term loan is more of a longer term credit with a stated payback of principal and interest. So you're paying the principal back every month and it's stretched out over a longer period of time. Like I said before, these are usually used to fund capital expenditures, equipment vehicles, a forklift.

These might be used to buy a business like I said earlier. But again, a longtime employee at an auto shop had an opportunity to buy the business from his longtime employer. And it worked out great for him. We used an SBA loan to do it and we can talk about that a little bit as well. 

SBA Business Loans

John: Do you want to talk about SBA loans for a moment?

Mike: Yes, SBA stands for Small Business Administration and it's an arm of the federal government that helps small banks fund certain types of business loans. So banks have a risk appetite for certain loans and for certain requests. The SBA was put in place to help a small bank fund a loan when they typically might not be able to do it depending on their risk appetite.

So they provide that assistance in the form of a guarantee where the bank might provide an $80,000 loan for John to buy an excavator. But you might be a new business. You might not have complete financials. So at that point, we might look to the SBA to provide a 75% or 80% guarantee. So we can help you fund that loan as your business matures. So that's why the SBA loans were put in place.

John: Okay.

Mike: That's a different type.

John: And then you have a business mortgage or as you called it before a business or a real estate loan. What would that be?

Commercial Real Estate Loans

Mike: So a business real estate loan or a commercial real estate loan, those are used to buy just like it says, real estate. A commercial real estate loan differs from a residential loan like John would use to buy his home. A commercial real estate loan is typically used to buy a residential property that is five units or greater, and it's non-owner-occupied.

It might be used to buy a mixed-use building or it might be used to buy a commercial building. A mixed-used building you typically see in downtown areas where there might be a record store and a pizza shop on the first floor and a few apartments on the second and third floor. That's typically what you refer to as a mixed-use property.

John: Okay.

Mike: And a commercial property is just how it sounds. It might be a machine shop. It might be a restaurant, anything that's non-residential.

John: Or you said that it could be a residential if it has five units or more, that's considered what you could get a real estate loan for.

Mike: Yeah, that's an industry standard. One to four families can be purchased on the residential side and financed on the residential side, especially when they're owner is occupied. Non-owner-occupied one to four families, we would do on our side on the commercial lending team because the income from the property is used to underwrite the loan, but some banks will do it on the residential side. However, you would pay a premium on the interest rate to do it that way. But an industry standard is that five or more residential units need a commercial loan.

Construction Business Loans

John: Okay. And then the final type of business loan that we wanted to talk about was a construction loan. What is that about?

Mike: Yeah. Construction loan again, is just how it sounds. When a business is looking to expand their facility, they might need to construct an addition on the building. That's very common use, but other uses are ones that a normal non-banker would know and that's speculative construction and construction to permanent.

Speculative construction would be if a property developer bought a piece of land that he wanted to subdivide into four parcels and then build four houses on that to sell to someone else. So that would be more speculative construction.

The developer buys the land, takes the construction loan and then resells the properties to someone who wants to buy the home. Construction to permanent would be that property investor who constructs a mixed-use property or a four-family building that he wants to hold onto and rent to a tenant. That's how it differs from speculative construction to construction-to-permanent.

It really boils down to the repayment of it, John. Is the repayment going to come from the sale of the property or is the repayment of the loan going to come from rental income from the tenants? Those are two different types of construction loans. In addition to that normal machine shop who is running out of space and wants to build onto the back of their building, that's a whole different kind of construction loan.

How Cape Ann Savings Bank Helps Small Businesses

John: Okay. Any final thoughts on business loans overall and how they're used?

Mike: Yes. Cape Ann Savings Bank is a community bank who's committed to small business. We look at fishing vessel loans. That's another type of commercial term loan that I didn't talk about, but it's the same type of thing. You're still buying a fishing business, but you're buying it in the form of a permit in a vessel. We're here to do business loans and help small businesses.

So any type of small business that's out there looking for a line of credit, we can help them with that. We can help them with a business term loan as well. We're also very involved in the local commercial real estate industry. If there's a commercial property that's being sold, we're typically in the game. We usually have a proposal in front of the borrower. We don't win every deal, but we do quite a bit of commercial real estate on the North Shore, it's our bread and butter.

So just wrapping up on what types of business loans are available. Small business loans could need a line of credit or a business term loan. Commercial real estate investors might need a commercial real estate loan. And property developers may need a commercial construction loan and they can come see us anytime.

Contact Cape Ann Savings Bank to Learn More

John: All right. That's really great information, Mike. Thanks again for speaking with me today.

Mike: Thank you very much, John. Happy to do it.

John: And for more information on commercial lending and business loans, visit the website at capeannsavings.bank. Cape Ann Savings Bank, Member FDIC/Member DIF/Equal Housing Lender.