First of all, what is our working definition of a business loan.  For the purposes of this post, I will define it as a debt instrument with a stated rate of interest and defined period of repayment.

Any business loan is further defined by the purpose of its use, the security involved, and the timing of the related cash flow stream tagged for repayment of the principal and interest.

When the purpose is for working capital, business loans or debt instruments will come in forms that are short term in nature and are predominantly secured by short term assets like accounts receivable, inventory, and potentially equipment.

Working capital instruments for low leverage balance sheets and strong credit profiles will include lines of credit and term loans of 5 years of less.  Lines of credit will rise and fall with the cash requirements of the business, while term loans will have a fixed repayment term, drawing money out of cash flow for structured principal repayment.

For higher leveraged balance sheets and/or weaker credit, working capital can be provided through asset based business loans, inventory financing, accounts receivable factoring, and purchase order financing.

While all of the above are technically asset based loans, lets discuss each one separately.  The standard asset based loan provides working capital funds as a percentage of the liquidation value of accounts receivable, inventory, and equipment value, similar to a line of credit.  Unlike a line of credit, the leverage tends to be higher and is more closely managed by the lender through the lender collecting all the customer proceeds due to business and then continually adjusting the loan outstanding according to the current security value.  With a line of credit, there are balance sheet ratios that need to be maintained and reported on a monthly basis, but the cash is collected and managed by the business as long as the business owners and manager stay within the stated covenants.

Accounts receivable factoring is extended as a business loan on the strength of the customer that owes the receivable and provides the lender with rights against the receivable that’s outstanding.  There are many different forms of factoring and the rates can vary tremendously.

Inventory financing provides a business loan for the purchase of inventory and uses the inventory for security.  Some inventory financing models have the lender control the inventory in third party warehouses to protect their interest in the inventory while other inventory financing models will allow the inventory to remain on the business owner’s premise if the facilities and control systems can provide the lender with sufficient comfort.

Purchase order financing provides business loans based on an advance against the value of a customer purchase order.  The credit rating of the customer, the nature of the order, and the time period required to complete the transaction will determine the amount of purchase order financing.  For instance, most purchase orders are provided on the purchase of commodity goods that have an active market and can be readily liquidated by the lender to get their advanced funds back if required.  Inventory financing is also primarily provided on commodity type goods for the same reasons.  Both inventory financing and purchase order financing command higher rates of interest than traditional forms of working capital related business loans

Other forms of short term debt can be subordinate debt financing where a business loan is provided against assets that already have debt registered against them, but with sufficient security value available to secure additional capital in a second security position.  Because of the second position, the cost of these funds will be higher than the first position debt.

For intermediate term lending on the acquisition of assets with a useful life of 2 to 10 years, business loans come in the form of term loans or demand loans for equipment.  A demand loan can demand repayment at any time while a term loan cannot.  Equipment can also be financed through leasing which is different from a business loan in that the lease company retains the ownership of the assets acquired and/or provided as security while in the case of a business loan, the assets are owned by the business with security registered to the lender.

Longer term business loans for longer term life assets such as buildings and real estate are typically financed by commercial mortgage instruments.

There are still other forms of business loans such as convertible debentures and mezzanine financing that are more elaborate in nature and tend to be utilized when loan amounts are in the millions of dollars and more complex business enterprises are involved.

There are so many variations around all these forms of business loans, that each would require a separate discussion.

The point here is to remember that if the business has something of value than can be readily sold or liquidated in the market place for a predictable amount, then there is potentially a form of business loan available to that particular business.

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The primary brainwashing we all receive is that your banker is your friend and that if you need a loan, come in and see him and he’ll help you out.

Right?

Its a fantastic marketing strategy driven by billions of dollars in advertising whereby we all have the major banks in our cities, regions, and countries branded into our brains.

The offshoot is that the major banks draw everyone into their marketing funnel and they keep the ones they want, which for business financing would roughly be 10% or less of those that apply.

Why so low?

Because major banks are low risk lenders that are looking for the low risk customers only.

They just don’t tell us that.

Now there are hundreds of thousands of lenders in the world outside of major banks and they do much the same thing, albeit on a smaller scale.

But the message is pretty much the same … Come and see us and we’ll help you out.  Or, if we see lots of people, we’ll be able to pick out the ones we’re looking for.

Basically, the general population is treated pretty much like cattle when it comes to business or personal financing… we’re driven in one direction and then redirected  in another.

Why?

There are a number of reasons.

First, in general, our society has a very low finance I.Q. due primarily to the fact that there is virtually no basic finance related education, so lenders would rather say they can help everyone than risk sending out a confusing message of what they really want in what I would call meaningful detail.

Second, a lender portfolio can be quite complex to manage and ever changing as the overall market place changes which causes their target to change.  So no lender wants to say this is what they’re looking for today, and then potentially need to change it tomorrow.  Its better to keep things vague.  So instead, they just keep rolling out the same “come on in, we can help anyone” message.

Third, Lenders are opportunists just like the rest of the world.  During the latest sub prime market fiasco, Major Banks cut back and in many cases stopped lending money, crippling the money supply.  They used the crisis to put pressure on the government to give them payouts and concessions to strengthen their balance sheets, otherwise the lack of available capital would further worsen the recession.

Asset based lenders did the same thing.  Because “A” Banks or Big Bank were pulling out of the market, more expensive asset based lenders were getting better qualify deals.  The smart ones were making a fortune taking on lower risk deals without lowering their fees.  But this also left a funding gap in the “B” and “C” Markets as its becomes a domino effect from the top down.

So keeping it vague, has always been the way to go.  And as a result, it can drive you around the bend trying to figure out exactly who can help you at any given point in time… who is currently relevant to your specific financing requirements.

So, what can you do to find the right source at the right time?

1.   Be realistic in the sense that no matter how much a lender may flip flop on their client selection, major banks, for example, are always going to be low risk lenders that are more focused on balance sheets will low leverage than anything else.  If you don’t fit that basic description, don’t apply.  Each category of lender has a basic profile that they won’t stray too far from, no matter what they tell you.

2.  Consider utilizing the services of a financing consultant/specialist (not just a broker … big difference).  This is someone who has their ear to the ground and is staying on top of the twists and turns in the market.

3.  Instead of blindly applying to lenders according to the way we’ve been brainwashed,  start qualifying them yourself.   Remember that you’re the customer and you’re time is worth something too.  So instead of patiently going along with some of their long and drawn out application and interview processes, start by asking them questions related to what you’re trying to do and focus your time one the ones that give you the straightest, most direct, and most committed answers.

Its still going to be a bit of a crap shoot, but still better than just showing up and expecting anyone to be able helpful, despite that they tell you in their latest commercial.

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