Quote- Show me the money! – Jerry Maguire
For years, entrepreneurs have known that you need time, people and money to make a business successful… and getting enough of each is always a challenge. It is impossible to control time and the right person may be difficult to find, but one should be able to find financing – at least most of the time. Putting aside the recent financial crisis (when good deals still got done) let’s look at some of the factors that can increase your chances of having a financing source show you the money.
Start with timing. An old client of mine used to say you should borrow money when you don’t need it. The concept here was not an exercise in futility but the belief that the time to establish a relationship with a banker or finance source is not when you are running around with the fear you will run out of money. Making your case is much more effective when not burdened with that sword of Damocles. As we say at Withum, it “Puts you in a position of strength.” This would be ideal but as we know, we can’t always control timing.
Next, you have to understand why you need a loan and how much you need. Loans for expansion of your business, like increased accounts receivable and inventory, play well with banks and financing sources. Borrowings where cash goes outside the business with no assets in return, like repaying another loan or redeeming a shareholder, are much more difficult. In fact, in cases like this, you may have to seek more permanent type financing. The size and loan purpose will start to dictate where you should look for financing.
Given the loan’s purpose, an important step is to match the lending source with your type of business. A solid performing business can seek a cash-flow loan which might contain some minor covenants while a lesser performing company may need to rely more on its collateral and seek an asset based loan. Understanding the type of lending a financing source likes is also important. There are even banks that specialize in dealing with technology companies. Leases and factoring should also be considered in the right circumstances. (There will be a future blog to shed more light here.) A good professional advisor can provide some additional guidance here.
Having a solid business plan helps – especially if you are talking to a new lender. It helps relay your story and allows your source to more quickly assess your business. Put forth your best and don’t forget to address the obvious issues (like a significant decrease in sales the prior year.) Note: if you click the tab Entrepreneur PowerPlaybook on this blog, then the Rookies, then StartUp Package, you can find recommended Business Plan Components.
Basic projections, which show payback of your borrowing and which are consistent with your financing source, are the next step. You can’t ask for a cash-flow loan that your cash-flow won’t cover or an asset based loan where your collateral does not support your requested loan balance.
Like everything else, with a little planning and knowledge you will increase your chances of success with your financing sources. Good luck!