When opportunity comes knocking on your business door, you want to answer as quickly as possible and try to take advantage of it, right?

I mean, you’ve done your diligence and have decided that you have an opportunity to go after.  There’s just one problem…you need a business loan or some other form of business financing to make it happen.

No problem.  You just go down to your bank and get a business loan, right?

That may very well be how it goes down.  But before you even go ask, here are a few things to keep in mind.

The process of securing money is 9 times out of 10 time consuming, even when you go through well established relationships.   And any inquiry to a new lender will likely take longer than to an existing lender, all things being equal.

Plus, the nature of business financing decision related to business loans can be influenced by the lenders portfolio at a given point of time, their policies, staffing, the weather, and who knows what else.

The point here is that its hardly ever easy and fast to get your hands on business financing of any type.  Yes, it happens, but its not what you can expect on average.

So time is money when you’re trying to take advantage of an opportunity that may very well have a shelf life.

The second point to remember is that the first business loan terms you secure might not be the best that you could secure at a given point in time.  This really can be a profit killing brain buster.

Many times business owners and managers will not accept a business loan believing they can do better, which they very well could, but end up putting off the opportunity for 6 months or more searching for the best business financing deal.

Ugh!

What would you rather do, make an extra $100,000 a year or save yourself $5,000 in interest costs?

I personally hate the term no brainer as something can always go wrong with anything whether you have a brain or not, but this is as close to one as you’re going to get.

Of course you don’t want to accept anything with crazy terms that are going to back you into a corner or cause other problems.  I’m talking about simple stuff like interest cost, which can add up to large dollars, but don’t impact your ability to get going and take advantage of your opportunity.

It may seem ridiculous that you can’t always secure business loan terms you should qualify for in the time period you want, but that’s the way the commercial money system can work.

Bottom line, if you can get reasonably close to your expected terms for a business loan and get making money faster, you will likely be miles a head of the game versus holding off making money as you search for cheaper and/or better term money.

At the end of the day, when you’re sitting on some beach, enjoying the benefits of the money you’ve been able to make by moving fast on opportunities that presented themselves, are you really going to look back on things and think, boy I paid $20,000 too much on interest on that deal that made me over $1,000,000 10 years ago?

I don’t think so.

Technorati Tags: Business Financing, business loan, commercial, financing, lenders

Typically, a need for business financing is triggered by some event or string of events. So the timing of when its actually required is not always readily determinable.

Then there’s the classic line you hear from frustrated business owners or managers that the only time they can get a business loan is when they don’t need it.

Combine these first two points with my own observation that 80% of all of business financing requests are unplanned events, and you have a lot of business owners and managers scratching their heads regarding how and when to secure capital.

So here’s a couple of things to keep in mind to increase your odds.

First, because financial statements tend to play a very important role in most types of business financing applications, you need to factor in when and how they are prepared.

In terms of when, financial statements need to filed within 6 months of your year end. If you don’t file until the six month mark, then the results are already 6 months old. And, depending on the lender and how much money you’re after, most lenders will require the last recently completed financial period to be less than 6 months ago. So if your year end is in December and you’re applying for financing in July, many times the lender will require you to get an accountant prepared interim statement for the first 6 months of the current year, or put off further consideration of your financing request until the financial statements are completed for the next year end.

All that being said, one of the takeaways here is to plan as best as you can to apply for business financing in the first 6 months of the year and make sure your accountant is on pace to get them completed well before the 6 month mark. Oh and by the way, the lender will also like an interim financial statement for whatever period is not covered off from the last completed statements to the time of application, but in most cases the interim can be prepared by the business.

In terms of how the statements are prepared, financial statements are done under an accountant statement indicating how much work was preformed to verify the accuracy of the records provided by the business to the accountant. The lowest level of review is a notice to reader, then review engagement, and finally an audit.

If you’re looking for $200,000 or less in business financing, then you may get away with a notice of assessment. Better odds with a review engagement. If you’re looking for financing over $1,000,000, then an audit will eventually come into play.

The higher levels of review cost more money, but without the verification it can be tough to secure business financing, especially lower cost financing.

Bottom line, your completed financial statements are a definite asset that is important to your financing efforts and they have a freshness date that comes into play to some extent.

So when planning out your business over the next year, make sure you take the above into consideration.

To further emphasize this point, say you have a seasonal business that has a year end of December and a peak season of August. If you’re having an off year, which can happen with any business, you may need financing in December or January to carry you though to the next peak. Good luck trying to secure financing with 12 to 13 month old financial statements and an interim statement that may be bleeding red.

Especially for seasonal businesses, you have to apply for business financing after a good year so you can leverage that result. Therefore, if you want some cushion in your available capital going into a season you’re not sure of, you’d better apply for financing before hand.

Technorati Tags: Business Financing, business loan, financial statements, financing, lenders, Secure Capital

At the beginning of the conversation, I always ask the same two questions:  How much money are you looking for? what’s the purpose of the funds?

I would say that at least 75% of the time, I have to re-ask these two questions two or three times before they’re answered.  Most people think that telling me a long drawn out story of what they want to do and how they came to do it will be more important than answering these two questions.

What tends to come out after a few minutes is that the individual is hunting for what I call stupid money.  You know, the kind that is prepared to write you a check on a very thin and likely non existent business plan where the lender is taking all or close to all of the financial risk.

Example.  Someone has a great idea for a tennis equipment store.  They have picked out a location and now need $300,000 for start up costs, working capital, and inventory.  They have poor credit, personal debt, zero net worth, and no capital to contribute to the venture.

Is it possible that this individual could secure small business financing of some sort? Yes.

Is it probable? No.

That’s the great thing about the money business, virtually anything is possible, and I’ve seen enough to know first hand.  After getting off the phone with me, this would be entrepreneur could go to the coffee shop, strike up a conversation with someone about his or her golf shop idea, and leave with a check in hand for the capital sought.  Is is possible?  Absolutely.  Is it likely to occur?  The odds would likely be lower than playing the lotto.

That’s why I’m always careful to not generalize about small business financing, as there is an infinite sea of money out there and strange things happen all the time.

But lets also get real.  Just because its possible, doesn’t mean your new business financing strategy is to start going to coffee shops.

For the most part (can never generalize), money has a basic intelligence.  If intelligence is not applied, the source of money will disappear very quickly based on making bad decisions.

People supply money to business ventures for a return.  If you can show them a path to the return they seek within the level of risk they’re prepared to take, then eventually, you will find a source of capital for your small business financing requirements.

And here’s my tip of the day on this subject:  You must have something to leverage and something to lose in order to have a realistic probability of getting business financing, whether it be for a new venture or existing business.

Something to leverage for low risk credit is your credit score, personal net worth, external cash flow, third party guarantee.  Something to leverage for higher levels of credit risk would also include things like asset security, established cash flow, signed purchase orders from reputable companies, patents, intellectual property, contracts, etc.  Remember also that something to leverage has to have a value to the source of money or there is no leverage.

Something to lose is at the very least the capital that you directly invest into the venture.  100% financing of anything is quite rare unless you’re taking about residential real estate and look what problems that has caused in the markets over time.  Personal guarantees and corporate guarantees would also fall in this category if there was enough net worth to make them meaningful.

As the amount of leverage and borrower risk increases, so does the probability of securing capital.

Technorati Tags: capital, commercial, finance, financing, loan, loans, small business

When you search the internet for the answer, you tend to get the same lame regurgitation of things like new businesses should look to friends, family, and fools for capital; existing businesses should look to banks; and that you need to consider debt financing versus equity financing that gets into the whole venture capital versus angel investor rhetoric.

Wow.  Really revolutionary and informative information.  Some even go so far as to say these are secrets if you can believe it.

Now I’m not implying that these various terms I just threw out don’t need to be explained or are not important.  No sir/madam.  I’m merely saying that all these terms with some amount of abbreviated explanation are thrown at you like a bucket of water in some weak attempt to answer the question.

Perhaps its because the generic answer set I’ve outlined is pretty basic and safe and even friendly.

But useful?

Instead of starting at the beginning, lets start at the end.  A bad ending.  Depending on whose stats you read, over 50% of businesses will fail, fold, go kaput in less than 5 years of existence.  Whether its 43.7% or 71.2% that fail in 5 years doesn’t really matter.  The point here is that its a lot and its alarmingly high.

So, why is it so high and what that got to do with securing capital?  Answer, it has everything to do with securing capital.

The internet for one is awash with people looking for money to finance their business ventures, either start up or existing, and most of the solutions that they come across are geared towards lending them money based on nothing to do with their business.

Business financing in large part, is not based on business.  Its based on personal credit, personal net worth, liquidatable (new word) assets, third party guarantees, government grants and guarantees, etc.   This applies not just for start ups, but for existing businesses as well.

The point (yes I do have a point) here is that if you try hard enough, you can probably find someone to give you some money for what you’re trying to accomplish that you say requires capital.

But your ability to be successful is dependent on 1) having a tested business model; 2) having a tested marketing approach and position; 3) having enough necessary experience, or access to the necessary experience for the venture, and finally 4) accurately estimating the capital required to become cash flow positive (business can generate enough cash to pay bills and generate a return on the capital you secured) including a substantial contingency plan for all the things that may go wrong along the way.

If  you don’t complete the above 4 points, my first question to you would be, how do you know how much capital you really need?  My second question would be, if you don’t secure capital sufficient to complete whatever you’re starting (your estimate was out and now you’re short), what are you going to do?

So how to secure capital for your business starts with how much capital do you need and is that much capital going to be able to generate a return based on your plan of attack.

In most business failures, if they did the exercise first (honestly and objectively at the very beginning), they wouldn’t need to secure capital because they’d find so many holes in their own logic and planning that they’d stop and revise things until they made more sense.

I’m not saying planning is perfect, because its not.  And no amount of basic planning and analysis will stop business failure.   But I’m telling you, its not going to be anywhere near 50% either.

The final point today is that when you make the effort and figure out what business approach should work (and I do say should as planning is imperfect) and clearly outline the capital you need to secure, you will not only have an easier time securing business capital (well thought out plans have a higher probability of getting funded), but you’re also more likely to meet or exceed your profit expectations (well thought out plans have a higher probability of making money).

We’ll get into a lot more on how to secure business capital as there can be a lot to it, depending on what you’re trying to do.

But the starting point is not “where do I apply?”, or “what tricky things can I do to get an application approved?”

If you that’s where you want to start, you’re looking to become another statistic.

Technorati Tags: business, debt, equity, financing, how to secure business capital, how to secure capital, how to secure capital for your business, loan, secure business capital, Secure Capital, securing business capital, small business, working capital

I left off talking about the apparent communication gap between finance tacticians and the rest of the world.

I also mentioned how when you’re in business for yourself or managing business for others, you can be very much at the mercy of your advisers when it comes to matters of finance.

Does this mean you shouldn’t utilize advisers?  No, I’m definitely not saying that.  Experts in various financing disciplines can be absolutely critical to your business success.

So, lets summarize what we know so far.

-  Business finance can be hard to understand, comprehend, and apply.
-  Its an essential part of any business venture
-  Leaving too much decision making up to your advisers can be dangerous.
- There is a long standing communication gap between finance experts and  everyone else.
-  99.9% of the world have a very limited understanding of finance, how it works, and how they can more effectively utilize it to increase their wealth.

From a business ownership/management point of view, there should be a strong motivation to correct this trend, and I think there is, but few people understand how and continue to muddle through what already doesn’t work very well.

So what’s the solution?

Like anything else in business, the owners and managers of any business need to control and direct the forces of the business to be successful.  When it comes to finance, its hardly practical to advise or expect non financial managers to develop a deep understanding of business finance in order to get greater value.

Most Entrepreneurs will have a primary focus on marketing, which they should as marketing is the #1 most important activity in a business.  But finance is #2 , and is the counter balance for marketing.  Look at any large scale business and see how they’re organized – marketing on one side, finance on the other.

So the answer is not to become expert at something you may not be good at or have an aptitude for (basically going against your wiring).

The answer lies in your approach and commitment to maintaining the necessary chi like balance between #1 and #2.

Can I have a drum roll please.

The secret to optimizing the finance component of your business is to connect all finance activities  into the three core business finance objectives that apply to any and all businesses regardless of size, structure, or country of origin and then make sure they are congruent and supportive of the overall business objectives of the organization.

Wow, that’s a mouth full.  And hardly more enlightening at this point.

But stay with me as all will be explained in the next segment.

I will reveal these three core business finance objectives in part III and further explain how they relate to the broader organizational objectives (and show you that its not even that hard to do once its been explained in a little more detail).

Technorati Tags: Business Finance, commercial, finance hard to understand, financing, is business finance hard, small business, sme, why is business FINANCE

I have.

And I’m a finance guy, or at least someone formally trained in finance, and I get the same headache.

So what’s the deal with this?  Is is really so hard to understand and does it have to be so unfun to read and digest?

In fairness to my fellow egg heads, there is a fair amount of complexity to the actual math associated with finance and finance theory. Add to that the business finance disciplines like taxation, accounting, treasury & foreign exchange and you end up with some really mind blowing stuff that 99.9% of people have no interest in whatsoever.

So why bother with it all?

Well, because its essential.   Essential to us both personally and commercially.

I mean we live and work and play in a society that is based on a capitalism model which requires money for exchange of goods and services which requires finance systems to operate.

And in the business world, every single business must have some proficiently in finance, or there won’t be much of a business, certainly not a very profitable one.

So, on the one hand, everyone needs to understand and apply finance to some degree.  But on the other hand, the technicians that understand the topic frankly suck at explaining what we need to know in relevant, applicable terms.

Thus, we have a knowledge gap which starts right in the public school system.  You can graduate from high school without being shown how to write a check, balance a bank statement, or receive any basic instruction on the responsible use of credit.

If you go to secondary school, you may or may not get exposed to a whole lot more, depending on what you take.  Even if you go into a business school, or even a business masters program, the amount of directly applicable information you may receive can be quite small.  You’ll learn a lot about finance theory and accounting practices, and taxation strategies, and you’ll be provided with lots of big company examples with lots of complex corporate examples that 99% of the people would never be exposed to in their life time.

Then, when you venture out on your own, you will follow one of three paths related to finance: 1) you will get an unrelated job and learn through trial and error how to get a mortgage, a car loan, a credit card, and a line of credit; 2) you will pick a finance related discipline and learn a great deal about that particular aspect of business finance, but still be dumb to most of the rest of the subject matter; 3) you go into business and live at the mercy of your advisers (accounts, tax specialists, bankers, brokers, lawyers) who will hopefully know what their doing for what you pay them and know how to apply their knowledge to your real world baby.

Basically, we live in a world where there is an enormous gap between the technical finance knowledge holders and the rest of us making up 99.9% of the population.

While there is no shortage of information available, most of it is just not all that useful to the average person of average intelligence who does not have any special interest in finance

If it sounds like the system is broken, it is.

So what’s the solution?

Stay tuned for more in part II

Technorati Tags: Business Finance, commerical, finance so hard to understand, financial, financing