January 18, 2009
As you can tell by now, being prepared is critical to anticipate the need for capital. However, adequate advance preparation will also help you answer many of the other critical questions that your banker will want answered. These questions might include:
- Why do you need funding? How will the capital be used to help your business?
- How much do you need and when?
- Do you have a realistic business plan and financial plan to generate funds to repay the debt?
- How strong is the management team? What is their experience managing and growing a company?
Sources of Funding
Picking the right source of capital is just as important to the business as actually receiving the money. Remember that lenders/investors will become "partners", in one form or another, in your business and will have different requirements, depending on the structure of the capital arrangement. Will they want an active voice in management decisions (e.g. a position on the Board)? What are their periodic reporting requirements and do you have personnel experienced enough to handle them? Will there be weekly meetings or status updates? Also, if you’re using debt, what is the interest rate on the loan and what impact will this have on profit margins and cash flow? While all of these requirements are not necessarily bad, they are often a necessary part of accepting funding from external sources and will, therefore, have an impact on your business. Some common sources of business financing are as follows:
- Traditional Bank Financing – Local banks and credit unions are a major source of small business financing. If you need a short-term loan, a single-purpose loan, or a seasonal line of credit, your local bank may prove to be the best source. Banks can also offer other types of bank financing for specific situations.
- Customer/Supplier Financing – Customers can often be sympathetic about your need to maintain good cash flow. In some cases they may be willing to pay up front for part or all of the services or products you supply. Or, they may respond to discounts for early cash payments that will free up cash for operating your business.
- Factoring or Accounts Receivable Financing – A company with cash flow issues can turn uncollected invoices into immediate funding by assigning its accounts receivables to a factor or agent. Factoring usually involves high interest rates or a deep discount for which the factor assumes all risks involved with collecting payment. Nevertheless, factoring may be an appropriate vehicle in certain cases.
- Working Capital Financing – This type of funding works like a line of credit that’s tied to your company’s receivables and/or the dollar value of your inventory. For example, you might request that your lender provide a 70% advance on qualified receivables or advance 50% of the value of your inventory.
- Economic Development Programs – Many federal, state and local government programs offer small businesses loans and incentive programs. The funding is typically administered through banks, business development districts, and the Small Business Administration. Often, special consideration is given to ethnic groups, women, veterans and companies located in designated urban and rural locations. Funding through these special programs often requires a great deal of documentation and may also require that the company provide certain tangible assets, primarily real estate or equipment, as collateral.