There’s no question that this financial crisis and ensuing market meltdown made it tougher than in the past to secure business financing and raise capital. This is especially true for fast-growth companies, which usually consume more resources to feed their growth. If they aren’t careful, they can grow themselves straight out of business.
Amidst every one of the gloom and doom, however, it is critical to keep another thing planned: There are still options available for small business financing. It’s simply a few knowing where to look and the ways to prepare.
Where to Look
There are three main sources it is possible to turn to for small company financing:
Commercial Banks –
These are the first source most owners consider once they think of small enterprise financing. The bank’s loan money that must definitely be repaid with interest and often secured by collateral pledged with the business in the event it can’t repay the loan.
On the positive side, debt is comparatively cheap, especially in today’s low-interest-rate environment. Community banks will often be an excellent starting point for your pursuit of small company financing today, being that they are generally in better finances than big banks. If you do go to a big bank, be sure you talk to someone in the region of the bank that concentrates on business financing and lending.
Keep in mind that it requires more diligence and transparency for smaller businesses as a way to maintain a lending relationship in our credit environment. Most banks have expanded their reporting and recordkeeping requirements considerably and therefore are looking more closely at collateral to make sure businesses are effective at repaying how much cash requested.
Venture Capital Companies –
Unlike banks, which loan money and they are paid interest, growth capital companies are investors who receive shares of ownership inside the companies they purchase. This kind of small company financing is called equity financing. Private equity firms and angel investors are specialized forms of venture capital companies.
While equity financing doesn’t need to be repaid as being a mortgage, it may end up costing considerably more inside the long run. Why? Because each share of ownership you allow to your growth capital company in return for business financing is ownership give a mysterious future value that’s don’t yours. Also, investment capital companies sometimes place restrictive conditions and terms on financing, plus they expect an extremely high rate of return on the investments.
Commercial Finance Companies –
These non-traditional money lenders provide a specialized sort of small company financing generally known as asset-based lending (or ABL). There are two primary types of ABL: factoring and accounts receivable (A/R) financing.
With factoring, companies sell their outstanding receivables on the finance company for a cheap price of usually between 2-5%. So if you sold a $10,000 receivable with a factor, for example, you could receive between $9,500-$9,800. The benefit is basically that you would receive this cash straight away, as an alternative to waiting 30, 60 or 90 days (or longer). Factoring companies also perform credit rating checks on customers and analyze credit history to discover bad risks and set appropriate credit limits.
With A/R financing, you would take credit from your finance company and rehearse your accounts receivable as collateral. Companies that want to borrow in this manner can demonstrate strong financial reporting capabilities along with a diverse subscriber base with no high concentration of sales to the one customer.
How to Prepare
Regardless of which sort of small company financing you determine to pursue, your preparation before you decide to approach a prospective lender or investor will likely be essential to your ability to succeed. Banks, especially, consider a much more critical have look at small enterprise applications than many did inside the past. They are requesting more background from potential borrowers in the way of tax statements (both business and private), financial statements and business plans.
Lenders are emphasizing exactly what are sometimes known as the five Cs of credit:
Does the business have a very strong reputation in the community and industry?
Lenders usually enjoy visiting that owners have invested a selection of their money inside the business, or they have a few of their own “skin in the game.”
Financial ratios help lenders determine how much debt a firm can undertake without stressing the finances.
This is a secondary method to obtain repayment in the event a borrower defaults on the loan. Most lenders prefer collateral that is certainly easy to convert to cash, especially equipment and real estate.
Conditions in the borrower’s industry and the financial system generally speaking will play a big take into account a lender’s decisions.
Before you talk to any type of lender or investor, be prepared to show them specifically why you believe you will need financing or capital, along with how much capital you need so when and just how you will pay it back (in case of a loan) or what sort of return on investment a growth capital company can expect. Also anticipate discussing specifically what the money will likely be used for and what kind of collateral you happen to be ready to pledge to support the credit, in addition to your sources of repayment and what measures you will choose to use to ensure repayment if your finances get tight.
You also need to keep your financial statements and records are current and that your internal control systems are adequate for handling how much accounting and bookkeeping lenders and investors expect.