In the old days, going to the bank was the only way to get outside capital for your business. These days, with the explosion of raising equity investment, many of the company’s guidelines have been revolutionized. Unfortunately, this new phenomenon is only true for companies with super “star power” because these companies can create sky-rocket return earnings.
For everyone else, sticking to fundamentals is where it’s at. Building your company incrementally, following a pre-prepared business plan, watching expenses, and increasing sales. When your company moves beyond its launch, it begins to operate like a bank. On the financial side, you will make credit decisions
involving your customers. Some must pay C.O.D., and some will extend net 30-day terms. In this sense, you are now becoming a banker for your customers.
Without getting into how inexpensive debt financing is compared to equity (try 20% annualized interest versus 20% ownership lock stock and barrel), in certain situations, the time-honored tradition of borrowing money can be the best solution for increasing growth starting a company.
Knowing what commercial finance companies look for will make you a much more attractive prospect.
1. Concentration – This means putting all your eggs in one basket. Avoid going out and making a large sale to a customer and not continuing your sales effort to find more customers. The risk of a problem developing with your main customer, or for whatever reason, they are no longer buying from you, can be detrimental to your success. Finance companies look for incoming revenue to be spread evenly over several customers.
2. Creditworthiness – Who are you lending your hard-earned assets to? What kind of due diligence do you perform on new customers? The challenge is whether to accept a lucrative sale with a company that could never get credit from any finance company type. You are telling yourself you know better than the banker about loaning money. Finance companies will respect a business owner with a thorough credit checking process and several stable creditworthy customers.
3. Bookkeeping – While some businesses send out all their accounting to outside agencies, it helps to have a qualified bookkeeper on staff. When it comes time to seek financing, producing an instant fiscal snapshot of your company will show the sophistication of your operation. Finance companies appreciate businesses that keep a close eye on their books.
4. Taxes – Pay them. Using the Internal Revenue Service as your funder becomes expensive. Whenever you work with a finance company, you will be pledging assets as collateral, thus the nature of debt financing. When you fail to make tax payments, the government places a lien against those same assets, essentially stepping into the first position. This leaves the finance company with money outstanding to your business and no collateral to back it up. This places your entire relationship in default. When closing on financing, expect to sign a form that allows the finance company to receive duplicate correspondence from the IRS. This is standard procedure to track tax problems. Owing taxes does not mean you cannot get financing. It is possible to receive a subordinated debt agreement from the I.R.S., which allows the finance company to work with you unencumbered.
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5. Bankruptcy – If you have ever entered into a bankruptcy proceeding, whether personal or business, immediately own up to it. It will come out, and being upfront about the circumstances will enhance the necessity to overlook past difficulties.
6. Applications – Finance companies ask for various information when performing due diligence. Do not be alarmed; they are not trying to steal your secrets. They need to feel comfortable with you and your company. Each company has its threshold for fact-checking. Invariably, the finance companies that do the most thorough job are the most reliable and safest to do business with. Finance companies like working with a business that takes the time to put a loan package together before asking for financing. Typically, you can start with an interim Balance and Income Statement, Interim Profit and loss Statement, Last year-end End Statements, Accounts Payables Aging Report, Accounts Receivables Aging Report, and Tax Returns.
7. Contracts – Be prepared for onerous language. Finance companies cannot sugarcoat the reality that they need to exercise their rights if something goes wrong. They have to go into the relationship, always thinking that the absolute worst-case scenario will unfold. Once a finance company finds itself being defrauded, stolen from, or payments not made without explanation, it’s too late to insert stronger language protection. The language is standardized, and walking from a deal to start shopping for less demanding legalisms won’t produce much. Remember this: a contract is just paper in a file cabinet until you default on your agreement. Stay within what you agreed, and all the tough language won’t matter. Even if you start having financial difficulties, contact your finance company immediately. You can greatly reduce the chance of default by showing that you are proactive with your situation.
8. Using the money for the right reasons – This sounds obvious, but it can be highly relevant in certain cases. You hear a lot about going to the right Venture Capital Firm to handle your type of investment, in some ways, that holds for debt finance companies. They tend to work within industries in which they feel comfortable. Additionally, the type of financing company will depend on your plans for the money. If you are trying to set up a new business infrastructure, a working capital line of credit is not your best option. You will probably do better with a term-style loan that will allow you to amortize the expense over years.
9. Management Integrity – Like equity investment, get a good team and hold onto them. Finance companies raise red flags when a long-time Financial Officer who has been the contact person at the company since the inception of the relationship all of a sudden leaves without explanation. Again, always fearing the worst, the finance company could unjustly feel that something untoward was afoot and begin to scrutinize your account more closely. Even though finance companies are not part owners of your business, they are partners in your success, just like your good customers. Keep them abreast of breaking news.