| There's no question that the financial crisis and | | | | receivables to the finance company at a discount of |
| ensuing credit crunch have made it more difficult than | | | | usually between 2-5%. So if you sold a $10,000 |
| ever to secure small business financing and raise | | | | receivable to a factor, for example, you might |
| capital. This is especially true for fast-growth | | | | receive between $9,500-$9,800. The benefit is that |
| companies, which tend to consume more resources | | | | you would receive this cash right away, instead of |
| in order to feed their growth. If they aren't careful, | | | | waiting 30, 60 or 90 days (or longer). Factoring |
| they can literally grow themselves right out of | | | | companies also perform credit checks on customers |
| business. | | | | and analyze credit reports to uncover bad risks and |
| Amidst all the gloom and doom, however, it's | | | | set appropriate credit limits. |
| important to keep one thing in mind: There are still | | | | With A/R financing, you would borrow money from |
| options available for small business financing. It's | | | | the finance company and use your accounts |
| simply a matter of knowing where to look and how | | | | receivable as collateral. Companies that want to |
| to prepare. | | | | borrow in this way should be able to demonstrate |
| Where to Look | | | | strong financial reporting capabilities and a diverse |
| There are three main sources you can turn to for | | | | customer base without a high concentration of sales |
| small business financing: | | | | to any one customer. |
| Commercial Banks - These are the first source most | | | | How to Prepare |
| owners think of when they think about small business | | | | Regardless of which type of small business financing |
| financing. Banks loan money that must be repaid with | | | | you decide to pursue, your preparation before you |
| interest and usually secured by collateral pledged by | | | | approach a potential lender or investor will be critical |
| the business in case it can't repay the loan. | | | | to your success. Banks, in particular, are taking a |
| On the positive side, debt is relatively inexpensive, | | | | much more critical look at small business loan |
| especially in today's low-interest-rate environment. | | | | applications than many did in the past. They are |
| Community banks are often a good place to start | | | | requesting more background from potential |
| your search for small business financing today, since | | | | borrowers in the way of tax returns (both business |
| they are generally in better financial condition than big | | | | and personal), financial statements and business plans. |
| banks. If you do visit a big bank, be sure to talk to | | | | Lenders are focusing on what are sometimes |
| someone in the area of the bank that focuses on | | | | referred to as the five Cs of credit:o Character: Does |
| small business financing and lending. | | | | the company have a strong reputation in its |
| Keep in mind that it takes more diligence and | | | | community and industry?o Capital: Lenders usually like |
| transparency on the part of small businesses in order | | | | to see that owners have invested some of their |
| to maintain a lending relationship in today's credit | | | | personal money in the business, or that they have |
| environment. Most banks have expanded their | | | | some of their own "skin in the game."o Capacity: |
| reporting and recordkeeping requirements | | | | Financial ratios help lenders determine how much debt |
| considerably and are looking more closely at collateral | | | | a company should be able to take on without |
| to make sure businesses are capable of repaying the | | | | stressing the finances.o Collateral: This is a secondary |
| amount of money requested. | | | | source of repayment in case a borrower defaults on |
| Venture Capital Companies - Unlike banks, which loan | | | | the loan. Most lenders prefer collateral that is |
| money and are paid interest, venture capital | | | | relatively easy to convert to cash, especially |
| companies are investors who receive shares of | | | | equipment and real estate.o Conditions: Conditions in |
| ownership in the companies they invest in. This type | | | | the borrower's industry and the overall economy in |
| of small business financing is known as equity | | | | general will play a big factor in a lender's decisions. |
| financing. Private equity firms and angel investors are | | | | Before you meet with any type of lender or |
| specialized types of venture capital companies. | | | | investor, be prepared to explain to them specifically |
| While equity financing does not have to be repaid like | | | | why you believe you need financing or capital, as well |
| a bank loan, it can end up costing much more in the | | | | as how much capital you need and when and how |
| long run. Why? Because each share of ownership you | | | | you will pay it back (if a loan) or what kind of return |
| give to a venture capital company in exchange for | | | | on investment a venture capital company can expect. |
| small business financing is an ownership share with an | | | | Also be prepared to discuss specifically what the |
| unknown future value that's no longer yours. Also, | | | | money will be used for and what kind of collateral |
| venture capital companies sometimes place restrictive | | | | you are prepared to pledge to support the loan, as |
| terms and conditions on financing, and they expect a | | | | well as your sources of repayment and what |
| very high rate of return on their investments. | | | | measures you will take to ensure repayment if your |
| Commercial Finance Companies - These non-traditional | | | | finances get tight. |
| money lenders provide a specialized type of small | | | | You should also ensure that your financial statements |
| business financing known as asset-based lending (or | | | | and records are current and that your internal control |
| ABL). There are two primary types of ABL: factoring | | | | systems are adequate for handling the level of |
| and accounts receivable (A/R) financing. | | | | accounting and bookkeeping lenders and investors |
| With factoring, companies sell their outstanding | | | | expect. |