Need a Commercial Loan? Are You Ready for One?

In order to be considered for a loan for your business there are several things that you can do to prepare yourself and your business to be a prime candidate for a loan.

Get to know your business banker.  Bankers are more likely to advocate for and extend a loan to business owners they know.  Develop a relationship with your banker and take some time to work on the relationship.  Once you have selected a bank or even a credit union for your business, introduce yourself to the branch manager and other key personnel.  Visit the branch periodically to keep in touch.  Even invite the banker to your place of business so that he can see your operation and become familiar with the way you do business.

Since 2008 lending has remained tight.  Banks have developed and tightened their lending criteria.  However, they will pursue business with the right candidates, those with good credit and a history of strong earnings.

What do they review?  They will look at your personal credit history in addition to your business’s financial statements.  So it is important for you to keep it clean.  Check your credit reports for any discrepancies in both your business and personal credit and report them in writing to the appropriate provider.  Be prepared to explain any items on the report.  Credit reports often contain errors that you can correct before applying for a loan.  Sometimes credit reports are out of date, lacking more current information that might make your business look better.  If a credit report notes a problem that has since been rectified, be sure to include an explanation when you apply for a loan.

Often a banking institution will want to see your updated business plan and other relevant information.  Before you make that loan application, get your paperwork in order – two or three years of financial statements, personal and business tax returns and other relevant information.

The business plan should include what you have accomplished since you created the business and what you plan to do in the next five years.  So take the initial business plan you created to start your business, and revise it to include your projected revenue goals and how you plan on getting there.  The plan should reflect growth, contraction or other changes to you business.

In considering your loan application, the lender will determine your capacity to repay the loan in addition to the economy, your competition and other factors that may impact your business.  They will look at your financial statements and cash flow.  Be realistic about how much money you want to borrow and be approved for.  So, if the company has annual revenues of $100,000 and you want to borrow $1,000,000, you may have to reconsider and adjust your expectations.

If you do not qualify for a traditional loan your may be able to get approved for a Small Business Administration loan.  Because the federal government guarantees a major portion of the loan, lenders may be more willing to extend an SBA loan to you if you are just shy of meeting the criteria for a traditional loan. Lenders want to make sure that they will be paid back, so if you don’t have sufficient business assets to post as collateral, you might have to put up your home or other personal assets. 

Is Outside Investment Worth It? Dealing with Angels

One of the mistakes entrepreneurs make, and there can be many, are that they establish a business for the wrong reasons.  One of those reasons is greed. 

The entrepreneur will start a business with an investment of his personal savings or money provided by mom and dad, friends and family.  Sourcing of money may stop there and the result is that not enough money was raised to viably keep the business going.  The entrepreneur bootstraps and scrimps in order to keep his head above water.  Why didn’t he raise enough money in the first place to properly run his business?

An entrepreneur may feel that he wants to keep the business all to himself, and doesn’t want any investors involved because his share of the profits or control of the business will be minimized.  He wants to keep the equity all to himself with 100% control.  I have heard this a lot from entrepreneurs that they do not want to have an investor, loose control of his business and possibly work for someone else.

But let’s think about this.  With the entrepreneur’s limited amount of money he is not able to grow the business with any reasonable speed; he is bogged down by the balancing act of getting in revenues and paying bills.  He cannot possibly think about growing his business or introducing new products.

With an investment by an angel investor the entrepreneur will be able to grow the business, introduce new products to new customers, and have a mentor within reach to help guide the business to new highs. Angels are the ones who invest in start up businesses. And they are the ones to pursue if you are a pure startup. 

Since an angel investor is interested in how his investment is doing, he will periodically sit down with the entrepreneur for a progress report and offer suggestions for improvement.  The terms of the investment will require preferred stock issued to the investor paying an annual interest rate for the use of his money.

The typical investment period for the angel investor is five years, and he may invest up to $1 million.  Angels frequently like to invest with other angels.  After the investment period he will exit the business by either having the entrepreneur return his principal or seeking other investors in the enterprise.

So you see, having an investor is not a bad thing.  He can help your business grow, act as a networking source, introduce you to potential customers, new suppliers, and strategic partners they know well from their own business dealings, and help you take the business to the next level where many beautiful things can happen.  Without his help the entrepreneur may not be able to achieve this growth.

Why Cash is King

You have all heard the expression  “Cash is King”. Did you ever think that it applies to the way you manage your business?  Well read this!

As you manage your business from day-to-day you need liquidity, that is cash.  Cash is required to pay your bills from suppliers to your utilities bills and even your employees.  So, where is this steady flow of cash coming from?  Your customers!

Your accounts receivable levels are important to watch.  Bills are usually collected on a 45 day basis.  Some customers may even pay sooner than that.  Those customers are gold.

You should indicate clearly on your invoices what the terms of payment are.  These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due.  You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days.  This customer is costing you money!  You are actually financing this customer to the tune of 36% a year.  That is an incredible financing charge.  Did you ever realize that you were becoming a bank by not collecting on these invoices?  Therefore, it is critical to your cash flow to collect the amounts due you promptly.  Hence, the time value of money:  A dollar today is worth more than a dollar tomorrow.

A good tool to use that can be provided by your bookkeeper is the Aged Accounts Receivable Report.  This report will indicate how long your invoices are outstanding and which ones to watch closely for delinquency.  Your current ratio will be improved with monitoring.

Follow-up calls to customers are important to remind them that the invoice is due.  These calls will also reveal to you whether the order is received in good order and if the customer is happy with the shipment.  Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.

If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away.  Making an installment plan with him is beneficial to you and to him.  You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.

Now do you understand why “Cash is King”?

A Lesson in Factoring

Do you have a lot of money your clients owe you in the form of accounts receivable? Do these invoices take time, like 60 days, to get paid?  Are you in need of cash to finance your next production line?  You are not a good credit and are not able to get a bank loan.  What can you do?

Factoring may be the answer.  Factoring means that you sell your accounts receivable to a factor or third party?. at a discount to provide funding.  It is a short term solution to your working capital problem.

Here is how it works.  You sell your invoices to a factor at a discount and these invoices act as collateral.  You would typically receive 80% of the invoice value upfront.  You will receive the balance remaining less a factor fee once your client pays the factor.  The fee can be paid in any number of ways, but it usually nets out to be about three to five percent of the invoice value.  Factoring is not a loan and does not show up on your balance sheet.  It is the sale of an asset; therefore, you have no liability here. 

To qualify for this factoring, your invoices have to be free and clear of any liens.  This means that no other company has a claim on payments when they come in.  Your customers must also be creditworthy.  Why? -  Because the factor will rely on their good credit and ability to pay the invoice quickly rather than on your credit history.

Learn how the factor deals with your clients during the collection process.  Does he send out dunning notices with an indication that the factor is to be sent the payment?  If the client does not pay your invoice, the factor may ask you to pay back the money he paid you on the invoice plus a fee - - something that is called recourse factoring.

If you decide that you want to seek out a factor, do your comparison shopping by looking at factor fees and the amount of the discount on your total invoices, a deposit or application fee, the advance rate and monthly minimums should also be considered.  Factors will not work with start-ups; you need to have a large amount of accounts receivable for the factor to work with you.  You can find factors in the telephone directory or in industry trade publications. Your banker may be able to refer you to a factor, but decide on a factor that knows your industry, can customize a service package for you, and has the financial resources you need.

Funding your Business

Have you often wondered what the difference is between an Angel inventor and a Venture Capitalist?  There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets.  The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million.  They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money.  After 5 to 7 years they would expect to be paid back and exit.

Venture Capitals are on a higher plane than Angels and can be private equity funds.  They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million.  Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITD and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask?  Think about the program Shark Tank seen on ABC-TV on Friday nights.  You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies.  He asks, “How am I going to increase my investment?”  “What are your goals for the business?”  “I don’t like your valuation!” “What are your margins?”  “What are your sales and in what timeframe?” 

What is making him salivate or not over the company’s products?  These attractions are not unlike what the Venture Capitalist looks for.  Take a look at the following:

1.        Unique or proprietary products or services.  A patent owned by you is a plus.

2.       Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.

3.       Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.

4.       Realistic valuation based on your sales and profits

5.       Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it.  Think of this.  If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise.  Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth.  So it is worth it, but make sure that you benefit from the relationship as much as the investor would.  It is a two way street.