Posts Tagged ‘loan’
Business Loans And Business Financing… What Lenders Don’t Tell You In Their Advertising
October 2nd, 2009
Ever since you were old enough to watch TV, you’ve been exposed to massive branding campaigns by Lenders for personal loans and financing, and business loans and financing.
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.
Business FinancingWith Debt Financing, Be Careful What You Wish For
October 1st, 2009
Debt Financing Comes With An Obligation to Pay
Entrepreneurs tend to be a passionate lot, which is why many of them end up becoming successful, but this can also work against them with respect to debt financing.
The other side of the coin that comes with this passion is the blind belief that they are just one more mile away from achieving their goals, so do whatever it takes to get there.
Too much of what I see online regarding business financing is about how to manipulate the system or application process to get financing of some sort, whether it be credit cards, lines of credit, term loans, etc. Lenders feed this somewhat through the way access to debt is so causally portrayed in their marketing.
And in many cases, at least in the initial going, people can be quite successful securing significant amounts of debt based on a decent credit score and close attention to the application process.
I guess if you’re able to strategically get your hands on this type of debt financing and constructively apply it and profit from it, then good on you.
But when you take on large sums of mostly unsecured debt financing in the form of credit cards and lines of credit and personal loans, you are also putting a gun to your head to make things happen quickly. If results don’t materialize, your finances can hit the skids hard in a number of ways.
First, the debt is going to carry an interest rate, and in many cases, a high one. Almost immediate cash flow will be required to service the costs of debt.
Second, high ongoing utilization of debt will significantly reduce your credit score, making it next to impossible to borrow anything further.
Third, while some of the debt may be in the form of business credit, its likely to still have you personally liable for the balance owing. Incorporation does not protect you from this debt in many cases.
Fourth, if you are more than 30 days late on a credit card payment, you will get a severe reduction in your credit score and more than one of these can have a damaging impact that can last years.
Fifth, this type of debt financing is usually all demand written meaning that the lender can ask for their money back at any time for any reason. So even if you feel you’re on top of things, everything can do sideways in a hurry without any warning.
Sixth, if you fail to pay back the debt, your credit is shot. If you have to go as far as a consumer proposal or bankruptcy to get out of the mess, then we’re talking up to 10 years to rebuild your credit, which is impacting more and more aspects of our daily lives.
Did you know that many companies now want to check your credit before making a hiring decision. Why? Because many of them think that a good credit profile is an indication of character. Same can be true of other things you may apply for over the course of your life.
The value of good credit is growing and needs to be protected.
My point is that sometimes debt financing may be too easy to come by, or someone clever figures out how to “game” the system enough that they get access to more business financing capital than they can actually handle.
And because everyone is always in such a rush, they don’t always stop and think about the potential downside of what they’re doing.
Because business financing for small businesses, especially start ups, is hard to come by, many entrepreneurs turn to personally secured credit cards and lines of credit to fund their business ventures. Many of the same individuals also wish they had never taken this path.
For the pure type A entrepreneur, going bankrupt is a temporary set back and they will continue to roll the dice until they get the success they desire, regardless of how much of other peoples money they lose along the way.
However, for most business owners that fall into a debt financing hell they can’t get out of, the resulting fallout can be not only financially devastating for a long period of time, but emotionally devastating as well.
So, be careful what you wish for. Only take money you are confident you can pay back and make sure that whatever capital you secure has repayment terms in keeping with the road you’re going down. Yes, there is always a risk, but if you’re aware of the risk and take it into account before acquiring debt financing, then you’re practicing very responsible and sound financial management.
If things don’t work out, always make sure you can fight another day.
In the end, you’ll sleep a lot better, at least most of you will.
Business FinancingIn Business Financing, There Are Exactly 4 Uses of Debt And Equity Capital
September 30th, 2009
When seeking any type of business financing for any sized business, small or large, there are four and only four uses or applications of capital. I’m going to go over each of them and why this is important to know and understand.
First of all, why is this at all important? Identifying the exact use of capital creates greater relevance in the capital procurement process.
Ok, I’ll speak english. Locating suitable capital funds, either debt financing (business loans), equity financing(investor capital), or a combination of the two, will depend to some degree on how the funds will be applied in your business.
Lenders and investors can be very specific in deals they will seriously consider funding and one of their key criteria will be how the funds will be applied.
Certain applications of funds will completely remove certain lenders and investors from the mix. By understanding this at the outset, you can create greater relevance in your search to secure capital by screening out the sources of money that will automatically not be interested in your deal.
This doesn’t mean the deal is good or bad, its just not going to be relevant to certain sources of business financing. So you can save yourself a lot of time and aggravation focusing on relevant sources. There are of course other criteria that helps determine relevance, but for today let’s stick with use of funds.
So what are the 4 uses of debt financing and/or equity financing?
- Start Up. The start up of a new business venture.
- Acquisition. The acquisition of an existing going concern business.
- Expansion. The Expansion of the assets of an existing business for the purposes of growth.
- Debt Consolidation/Reorganization. The repackaging of existing and potentially new debt into a modified or new debt instrument or instruments. This predominately relates to businesses in some distress or downturn that need to either inject more capital into the business to cover losses or move short term debt to a longer term debt instrument to improve the balance sheet and security position of lenders.
Within each of these uses, there are even more specific sub uses such as:
- working capital to finance day to day operations
- short term capital to purchase and add value to inventory
- short term capital to finance accounts receivable
- longer term capital to acquire other tangible assets like equipment, buildings, and land.
- capital to acquire intangible assets
If you are seeking business financing for a start up venture, there are many sources of capital that don’t fund start ups. Identify them, and don’t waste your time asking them for money.
If you’re looking to acquire an existing business, don’t seek funds from someone providing trade credit related to working capital type assets only.
As I alluded to earlier, there are other twists to this as well as certain lenders and/ or investors will consider expansion funding, but have other criteria to determine if the deal is relevant to them (amount of funding, industry, debt to equity ratio of the balance sheet, debt service coverage, assets to be acquired, security ratio, etc.)
Each lender will have their own criteria set for each application of funds they will seriously consider. I say seriously consider because most lenders state at the outset they will look at virtually any deal to maximize their marketing efforts, but in reality, they all have a pretty narrow focus.
That’s why its important to understand how to accurately describe the business financing you seek and then qualify the universe of funding sources so that you’re only spending time with a relevant list.
But more in depth lender qualifying is a topic for another day. Stay tuned.
Small Business Financing Possibility Versus Probability
September 29th, 2009
Several times each week, I talk to small business owners who are seeking capital for their new or existing business and several times I have a very similar conversation with each of them that I thought I’d share today.
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.
Business FinancingHow To Secure Business Capital
September 28th, 2009
The question of how to secure capital for your business is commonly asked and pondered by most small and medium sized business owners and managers at one time or another.
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.
Business Financing