Obtaining Business Capital

In This Difficult Economic Climate

 Introduction

A business in the US that has sought business financing in the last 24 months has, at best, experienced considerable difficulty getting a loan.  At worst, it could not identify a single bank willing to provide the much-needed financing.  If a business didn’t or doesn’t already have a lending relationship with a bank, it could be nearly impossible to obtain business financing.  That is the unfortunate fact that not only small businesses are facing, but all businesses in the United States no matter what size.

Regardless of the factors that contributed to the current economic crisis in the US, the fact is that it is more difficult than ever to get a business loan approved today.  Traditional banks are financing only the most financially strong companies.  When a bank is reviewing a loan request, how does it define a strong business?  A strong business is defined by a bank as one with:  

1.     positive cash flow based on both current and historic revenues

2.     significant equity (assets minus liabilities)

3.     enough collateral to fully secure the loan request

4.     owner credit scores greater than 700.

Analysis

Where does that leave businesses that do not fall within the “strong company” parameters -- like start-ups, existing businesses with cash flow problems, businesses whose owners have marginal credit, and businesses required to find another lender because it no longer fits its bank’s current credit culture, among a million other reasons?

It leaves them searching for alternative sources of financing.  Businesses have had to adapt to current economic times, or close their operations altogether.  As a result, it has become vital for business owners to know all their options.  Further, they should recognize and learn about alternative financing options when traditional banks are not, or are no longer, an option for a business loan.

 (i)     Asset-based loans – lines of credit secured by A/R, inventory, or equipment, or any varying combination of these business assets.  Specific advance rates are employed to advance funds against these assets.  For instance, A/R advances range from 75% to 80% of eligible A/R (up to 90% for gov’t contractors), inventory advances up to 50%, and equipment advances from 20% to 40% depending on age and condition of equipment.

 (ii)     Factoring (aka Accounts Receivable Financing) – the practice of selling your accounts receivable (invoices) at a discount to another company. You get the money from the company to which you sold your accounts receivable, and they then become responsible for collecting on the invoices.

 (iii)     Merchant Cash Advance – selling future credit card sales in exchange for a current cash advance.  This option provides quick funding (usually within days), but is expensive with rates from 9% to 39%, and origination fees ranging from 2 to 5 percentage points.  It should be considered a short-term solution for businesses whose owners have marginal credit, little or no collateral, and significant monthly credit card sales.

 (iv)     Hard Money Financing (aka asset-based lending or private funding) -- financing option common in real estate and construction projects characterized by short terms, big down payments, high-interest rates, and relaxed underwriting standards.  This option is employed primarily by real estate investors with marginal credit and a need for a quick transaction closing on blighted properties that are to be rehabbed.  Interest rates range from 11% to 18%, down payments of 40% to 50%, and origination costs ranging from 4 to 8 percentage points.

Conclusion

It is rare indeed these days if a business does not, at some point, require some type of financing.  Being educated in all financing options available to businesses is the best way for business owners to be prepared should the day arrive when business financing is needed.

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Lending Solutions LLC ("BLS") has relationships with traditional banks both locally and nationally, as well as with alternative funding providers.   www.BusinessLendingSolutionsLLC.com