Posts Tagged ‘loans’
No Such Thing As Easy Money
October 1st, 2010
“When Looking For Business Financing, There Is No Such Thing As An Easy Deal, A Simple Process, Or a Certain Approach To Getting Money”
Ok, so perhaps this is a slight exaggeration as I probably can recall a few business financing deals I’ve worked on over the years that went fairly smoothly, got closed on time, and provided the business owner with what they were looking for without any grief.
I can also easily count these situations on one hand and have some fingers left over.
The process for securing capital, especially since the most recent recession is gotten harder to achieve in most cases, most of the time. Its not that everything can’t fall into place with a funding process, its just not likely to happen and you need to plan for some challenges, costs, and time.
The basic adage is to prepare for the worst and be pleasantly surprised when everything comes together without a hitch.
This may seem like very pessimistic, the glass is half full kind of thinking and it is. But in all my years of working in this business, there is virtually no such thing as an easy deal. Easy deals or easy flowing money falls into the 1% probability category slightly ahead of your odds for winning the lottery.
The take away message here is not that is all gloom and doom and that you’re not going to get the capital you require.
No, that’s definitely not what I’m saying.
What I continuously tell business owners is to get committed to the process as early on as possible and then stay invested in it as long as required and provide the resources and time necessary to increase the probability of a positive result.
In many cases, the business financing process is grossly over simplified and under estimated by entrepreneurs who would rather stick needles in their eyes than have to develop a detailed financial knowledge about any financing request they need to make. Money is a necessary evil that shouldn’t be that hard to come by, or so the thought process goes.
Unfortunately, this thought process eventually leads to failure in many cases in that money that gets secured tends to come from the path of least resistance which is typically not the most ideal form of funding available which can start the business into a death spiral it may never recover from as it continually takes on poorly suited forms of capital that will only reduce the probability of profitable results.
And when I say you need to commit to the “process”, the process is whatever is required and however long it takes to get the right match of money and opportunity.
If you say you don’t have the time for what’s required, then start the process earlier, get farther ahead of when capital is required, avoid being backed into a corner and forced to take what you can get.
Finding easy money that fits your requirements when you need it is always possible. But is it probable?
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingBusiness Loans Come In Many Forms
October 24th, 2009
What Are The Different Types And Forms of Business Loans?
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.
Business FinancingHow Important Is Personal Credit To Business Financing?
October 23rd, 2009
What Type Of Impact Does Business Credit And Personal Credit Have On Business Financing Decisions?
First of all, business financing decisions for debt capital tend to limit credit assessments to business credit if there are no personal guarantees required by business owners, shareholders, or third parties. However, this is not an absolute rule, and in many cases, personal credit still creeps into the decision making process.
Why?
Because personal credit is a form of character assessment, reflecting how an individual carries through on the commitments he or she makes.
There may be ample financial support for debt financing, but a poor personal credit track record of a major owner of a business can still lead to an application decline.
In cases where the security offered by a business and any required covenants are not sufficient to secure the lender, then personal credit becomes even more of a major factor in credit decisions.
The third scenario when personal credit comes into play with business financing is when the business itself has very little or no established credit. This can be very common with businesses under 3 years in existence and also in older businesses that work with smaller suppliers than don’t report their results to credit reporting agencies.
While I can follow the logic of utilizing personal credit reports when assessing business financing requests, the practice is far from reliable due to inaccuracies in personal credit reports. Remember that the personal credit reporting agencies do verify the information placed in your credit report, so any errors can potentially impact a business financing credit decision for a business loan you may apply for.
This is yet another reason to regularly check you credit report for errors and take the time to make it as accurate as possible.
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 Financing