|Your perspective changes depending on where you look from.|
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:
- Cash flow to support the pay back of the loan;
- Collateral for the lender to take if your company defaults; or
- Combination of the two.
|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.