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Obtaining Business Capital in this Difficult Economic Climate
Introduction
A business in the United States that has sought business financing in the last 24 months has, at best, experienced considerable difficulty getting a loan. At worst, it could not identify a single bank willing to provide its much-needed financing. If a business didn’t or doesn’t already have a lending relationship with a bank, it could be nearly impossible to obtain business financing. That is the unfortunate fact that not only small businesses are facing, but all businesses in the United States no matter what size.
Regardless of the factors that contributed to the current economic crisis in the US, the fact is that it’s more difficult than ever to get a business loan approved today. Traditional banks are financing only the most financially strong companies. When a bank is reviewing a loan request, how does it define a strong business? A strong business is defined by a bank as one with:
- positive cash flow based on both current and historic revenues
- significant equity (assets minus liabilities)
- enough collateral to fully secure the loan request
- owner credit scores greater than 700
Analysis
Where does that leave the businesses that do not fall within these “strong company” parameters -- like start-ups, existing businesses with cash flow problems, businesses whose owners have marginal credit, and businesses required to find another lender because it no longer fits it banks current credit culture?
It leaves them searching for alternative sources of financing. Businesses have had to adapt to current economic times, or close their operations altogether. As a result, it has become more vital than ever for business owners know all their options. Further, they should recognize and learn about alternatives financing options when traditional banks are not, or are no longer, an option for a business loan.
1. Asset-based loans: lines of credit secured with A/R, inventory, and equipment, or any combination of these business assets. Specific advances rates are employed to advance funds against these assets. For instance, A/R advances range from 75% to 80% of eligible A/R (up to 90% for gov’t contractors), inventory advances up to 50%, and equipment advances from 20% to 40% depending on age and condition of equipment.
2. Factoring (aka Accounts Receivable Financing): the practice of selling your accounts receivable (invoices) at a discount to another company. You get the money from the company to which you sold your accounts receivable, and they then become responsible for collecting on the invoices.
3. Merchant Cash Advance: selling future credit card sales in exchange for a current cash advance. This option provides quick funding (usually within days), but is an expensive with rates from 9% to 39%, and origination fees ranging from 2 to 5 percentage points. It should be considered a short-term solution for businesses whose owners have marginal credit, little or no collateral, and significant monthly credit card sales.
4. Hard Money Financing (aka asset-based lending or private funding): financing common in real estate and construction characterized by short terms, big down payments, high-interest rates, and relaxed underwriting standards. This option is employed primarily by real estate investors with marginal credit and a need for a quick transaction closing on blighted properties that are to be rehabbed. Interest rates range from 11% to 18%, down payments of 40% to 50%, and origination costs ranging from 4 to 8 percentage points.
Conclusion
It is rare indeed these days if a business does not, at some point, require some type of financing. Being educated in all financing options available to businesses is the best way for business owners to be prepared should the day arrive when business financing is needed.
"What is Hard Money Lending" by Dave Guilford found on eHow.
Business Lending Solutions LLC ("BLS") has relationships with traditional banks both locally and nationally, as well as with alternative funding providers. www.BusinessLendingSolutionsLLC.com
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5 Comments
There are other potential solutions not mentioned here. Since I am unsure of the amount of capital needed I will provide a broader list:
1. The business owners themselves.
2. Friends and family.
3. Angel investors.
4. Find a company that may be willing to invest in your firm.
5. Slow your growth rate down.
6. Vendor equipment financing.
7. Provide a net % off of your invoice. This is a modified version of selling your A/R but you keep the ownership.
8. Review your terms and determine what you can live with. You may have to let go some slow paying clients but it may be worth it.
This is not meant to be an all inclusive list. But a little creativity goeas a long way.
Jim, thank you for your added contribution. There most certainly are many alternative financing source available...and my brief listed only 4 of numerous options. I did indicate the same in my brief, but that portion of my conclusion was edited out by those on Focus.com who approved my brief before featuring it.
I find it a problem that 3 unelected agencies have so much influence.
How many Mike Lees in your phone book?
I had a siezure and / days later realized my pants and wallet were stolen,
I have about 200 addresses I never lived at at received a bill from SSA to pay back $5000 since I am In prison on a felony in another state and was overpaid benefits. Well I must have escaped or something.
And no remmbers what collateral or secured loans or do in house financing. Those 3 have too much say. What part of I'll put my retirement fund as collateral is not clear? Business plan, endorsements, product and orders on the table lose to credit rating (for me). I've filed a dozen FTC frauds and that didn't help. No one or very few do in house financing and I have no chance, even with R&D magazine endorsement. It's bad when all agree with you and no one can do a thing about it.
The presumed guilty prove otherwise is not how it was written, and again who voted for those 3?
Traditional funding is impossible for me to have an equal opportunity due to fraud. Wasn't there a 13th Amendment to prevent this mess?
As Terri and Jim stated there are many forms of financing available for business owners today and they vary greatly in cost. Some of those listed above are probably the most expensive but they do allow you to access to capital at times when your business may be struggling or new. I think established business owners need to understand that one of the biggest items that will influence their ability to obtain capital and the price they will pay is their own personal credit scores. Banks are focusing more closely on the individuals revolving debt, available lines and payment histories to determine if they should evaluate your business application further. This is especially true in the traditional leasing & banking world so you may have a decent little business but because of your personal credit scores are less than the required you are turned down.
The topic that was posted deals with obtaining capital in today's market. Money is out there but the cost for many options may be significant. The next question that a person should look at is "How can I improve my personal credit score to make me more bankable?" and to reduce my overall cost of capital.
I have a couple of ideas slightly different than Terri's but along the same theme. My client base is small to medium sized businesses. I realize the challenge they face and have stumbled upon these additional ways to use assets to obtain capital or credit. These solutions are what I use for equipment leasing.
1] A client has damaged credit, damaged financial statements or both but has assets in the form of hard collateral or real estate that has equity left. He needs $100,000 for a widget but of course, his bank has turned their back on him. I use the widget he is buying as part of the collateral required plus I secure on additional equipment or real estate, or both. Obviously there is a lot of work involved with appraisals and evaluations and the additional risk because of low credit scores and damaged balance sheets so the rate is higher.
2] A customer has obtained a large contract with either a municipality or a bond rated entity. That contract can be used as the collateral as the end user is the credit qualifier. There are several variations of this type financing. One requires some equipment and a lot of soft costs and another can be a straight contract for construction.
This might help someone in the small business community---or even the mid sized business community.
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