Tuesday, June 10, 2014

Small Business Financing from the Other Perspective - Lenders

Your perspective changes depending on where you look from.
What do I mean by "small business financing from the other perspective"? This blog is dedicated to helping small business owners understand financing options and how to access those options as a vehicle to grow and strengthen your business. So "the other perspective" refers to those who would provide you or your business with financing. I think it's important to have a good grasp of what motivates those who may be interested in lending or investing in your business. With this knowledge you can target appropriately or, if rejected, adjust who you go after and what you provide them with, without taking the rejection personal.

Lenders and investors are very different, therefore I will discuss them separately. Look at past and future articles for more specifics regarding particular financing sources (i.e., differences between banks, commercial lenders, accounts receivable financing firms, merchant lenders, and more on the lending side and differences between angel investors, venture capitalists, strategic investors, private equity investors on the investing side).

Key for Lenders

What's key to seeking financing from lenders of all types are the following:
  1. Cash flow to support the pay back of the loan;
  2. Collateral for the lender to take if your company defaults; or
  3. Combination of the two.
In general, for lenders, the more cash your company generates and the longer the history of generating this cash, the lower the need for collateral. Think about it. If you were lending out $100,000 to a company for four years, what would make you feel reasonably comfortable that you would get your money back? A company that generated cash flow of $5,000 per month and so could easily cover the $2,500 monthly payment (I'm keeping it simple here!)? Or a company that had no idea what's its cash flow was? What about a company that barely generates $2,600 per month in cash but that provides you a two-page summary of how the funds you've loaned them will help them increase that cash flow to $6,000 per month over three years? Be honest.

What would make you comfortable lending?

Thoughts on Cash Flow

There are options for you, no matter your situation but you must be very clear on what you need, what you need the money for, and what financial position your company is in. Many small business owners confuse cash flow with net income. They are NOT the same. You can provide an income statement that shows that your company makes $5,000 in net income per month. But, if you created a cash flow statement, which the majority of small business owners do not, you would see that the cash flow may be negative.

This is why lenders typically ask for your aging - account receivables aging and account payables aging. They analyze how long it takes your customers to pay you and how long it takes you to pay your vendors and suppliers and compare it to your income statement to determine if your company has strong, positive cash flow or is really struggling. If you were lending to a company, wouldn’t you want to understand how that company would repay you? And wouldn’t you want to be sure that those were not empty promises but actually backed by cold, hard facts?

Thoughts on Collateral

Perhaps your company has high quality collateral, or needs funds to buy or lease high quality collateral. This is where asset-based lenders like equipment lenders or accounts receivable lenders come in. These companies often specialize in particular industries and understand that cash flow may be tight yet they believe in the quality of the collateral. This is not blind faith, mind you, but a receptiveness based on years of experience lending in certain industries against certain assets. Again, put yourself in the lenders' shoes.

Let's say someone in the construction industry approached you to purchase dump trucks and hydraulic lifts and you had significant knowledge of the construction industry. This knowledge includes the types of companies - financial strength, customer list, bonding capacity, etc. - that successfully repaid their equipment loans. Wouldn't you feel more comfortable lending to that company, as long as it met certain thresholds? Now what if a distribution company approached you to buy those same hydraulic lifts? How comfortable would you now feel?

Take This Perspective

If you do this analysis yourself (or, more likely, hire someone to do it), you can identify and find a lender that's a good fit for your situation. This process of putting yourself in the lender’s shoes will also help you identify areas for improvement so you can eventually expand your financing options.

In the next article I'll discuss investors.


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Thursday, June 5, 2014

3 Resources for New Small Business Owners

One of the issues that I often encounter is that small business owners are not aware of the plethora of resources that exist or, if they have some inkling that these resources are out there, are not sure where to look. So today's post is dedicated to providing you with information about and links to some of those resources.

SCORE website screen capture
SCORE's website.
SCORE - I have written about the Service Corps of Retired Executives, otherwise known as SCORE, before. SCORE is staffed by volunteers, primarily comprised of individuals who have retired from small business or corporate America who now want to continue helping others by providing advice inside and outside their area of expertise. You could get a SCORE retiree with a background in marketing, logistics, sales, finance, or accounting, for example. Admittedly, all SCORE offices are not created equally. Some offices have a number of volunteers with general business experience and/or entrepreneurial experience. Others are solely staffed by those with expertise in one area who are great if that is the area you need help in, but not helpful if it is not.

As with all of these resources, you get the most from your consultations if you have already thought about the questions you have - and written them down - before meeting with an executive.

Go to http://www.score.org/ for general information. You can type in your zip code to find the SCORE office closest to you.
SBA website screen capture.
The SBA's main website.
 SBA - The U.S. Small Business Administration, better known as the SBA, provides a significant number of classes, webinars, speakers, and other resources at its regional locations. I have both presented at and attended presentations at the SBA regional office in Atlanta. I will be conducting two crowdfunding webinars for the SBA's Southeast region (Atlanta) - one  in July and one in August. (The SBA's Southeast region is handling all the marketing and sign-up, so check their sites for information. Once the information is live, I'll provide a link.)

The SBA also has resources available at its general, nationwide site online but, in my estimation, this pales to what you can gain access to by focusing on what the SBA offers in your region. Actually, let me restate that. For general and specific information about a broad array of subjects, from SBA loans to SBICs (small business investment companies), the main SBA website has no competitors. But when you need marketing, finance, legal, and other information that will help you in your business and you are not sure what you need and when, that is when the regional office offerings trump the main site. 

The SBA's regional website for Region X.
The SBA's main website is http://www.sba.gov (surprise!). The 10 regions within the SBA and their regional websites are as follows:
  1. Region I: New England, http://www.sba.gov/about-offices-content/3/3070
  2. Region II: Atlantic, http://www.sba.gov/about-offices-content/3/3071;
  3. Region III: Mid-Atlantic, http://www.sba.gov/about-offices-content/3/3072;
  4. Region IV: Southeast, http://www.sba.gov/about-offices-content/3/3073;
  5. Region V: Great Lakes, http://www.sba.gov/about-offices-content/3/3074
  6. Region VI: South Central, http://www.sba.gov/about-offices-content/3/3075
  7. Region VII: Great Plains, http://www.sba.gov/about-offices-content/3/3076;
  8. Region VIII: Rocky Mountains, http://www.sba.gov/about-offices-content/3/3077;
  9. Region IX: Pacific, http://www.sba.gov/about-offices-content/3/3078; and 
  10. Region X: Pacific Northwest, http://www.sba.gov/about-offices-content/3/3079.

"chamber of commerce" web search screen capture
"Chamber of commerce" Google search results in my area.
Local chamber of commerce - You may live in a major metropolitan area. If so, you may have a chamber of commerce that serves the metro area in addition to chambers that serve the surrounding counties. For example, the Atlanta area has the Greater Atlanta Metro Chamber of Commerce and, if you live in Gwinnett county, there's the Gwinnett Chamber of Commerce. The same applies to DeKalb County and others. There's also local chambers for many of the cities and towns in the area.

Chambers offer training, networking events, committees to deepen your interaction and connections, business opportunities, and much more. Check out your local chamber(s) to determine which one is a great fit for you. All of the larger ones have an online presence, and all have brochures you can come by and pick up. Some allow you to attend a session or event for free as an introduction to what they offer. Larger small businesses often benefit more from the metro area chambers.

To find local chambers, just do a Google search on "chamber of commerce". In the screen capture above, you can see chambers of commerce in the area around Tallmadge, Ohio, which is where I was when I did this search!

Are you utilizing all of your local resources to their fullest potential?As a small business owner, the connections you  make through these organizations – and the free or low-cost seminars that will educate you about issues that may until now have been foreign – are essential to your success.
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