For a small to mid-sized company, whether startup or emerging go-getter or well established company during a coronavirus era, it’s harder than ever these days to get a bank to lend you the money to build the momentum you need to succeed. Many banks are still afraid of the current economy and its implications for loan defaults. You will invariable get questions like:
- How long have you been in business?
- How much profit are you generating?
- Do you have enough cash flow to easily make loan payments?
- How reliable is your accounting?
Frequently, the answers to those questions are not the ones your bank wants to hear, but they are the very reason you need the loan in the first place. We had a client in just that position a few years ago. Our approach was to first take a look at the various borrowing options that are available to smaller companies. This was our list:
|Type of Borrowing||Duration of Loan||Collateral||Use||Cost|
|Revolving credit line||Credit line one-year renewable, but borrowing revolves indefinitely||Accounts receivable, inventory, other assets owned, not pledged elsewhere||Temporary cash needs; replacing the cash tied up in receivables and inventory until they can again become cash||Low|
|Accounts receivable loan||Credit line one-year renewable, but borrowing revolves indefinitely||Accounts receivable||Early access to cash tied up in receivables, similar to revolving credit line||Medium|
|Factoring||Invoice by invoice 30-90 days, revolving as new sales are made||Accounts receivable||Getting cash from receivables, passing on risk of collection to the lender||High|
|Flooring||One to three years renewable, but borrowings revolve indefinitely||High-priced inventory, such as cars and boats||Financing showroom inventory of items for sale, which are also the collateral
|Term loans||Various annual terms depending on type of loan and life of asset financed—one to 30 years||Various, from collateral being purchased to all assets the company owns||Long-term purchases of assets or real estate or to provide capital for long-term projects to companies without adequate internal cash generation||Medium|
|Equipment loans and leasing||Three to five years, or longer, depending on life of the asset||The asset being acquired, or refinanced in case of sale-and-leaseback||Acquisition of large pieces of equipment or large amounts of equipment||Medium to High|
|Bonds||Variable, with lengths to 30 years and more||None, although some are mortgage-backed and others are insured as to default||Major long-term projects for large companies, including expansion and acquisition programs||Low|
|Convertible debt||Variable, with lengths to 30 years and more||None, although conversion privilege adds value, especially in a good market||Major long-term projects for large companies, including expansion and acquisition programs||Low|
We determined that the best option was a medium length term loan from a bank, the optimum compromise between cost and flexibility. Here was our approach:
- We hired a strong bookkeeper (temp-to-hire at first, then permanent) that could take direction and help us clean up the books and do some restatement of the past couple years.
- We engaged a CPA firm to perform a review of the most recent year, to validate that the books were now acceptably accurate and processes were in place to keep it that way.
- We helped the company develop a financial projection for a couple years into the future, using realistic costs, market pricing, and a defensible growth strategy (a strategic plan came later – for now the story was delivered verbally, helping to build rapport as well as tell the story).
- We invited a new banker to listen to the story, which was well structured and presented with a plausible path to success.
- Oh, and we convinced the founder to offer some of his personal real estate as added collateral for a limited time until the company could demonstrate the validity of its forecasts.
No question the collateral helped. But what got the job done was finding a bank that would listen to the story with an open mind, and then telling the story in a powerful and credible way. There’s a lot of money wanting to be put to work, You just have to convince the source that they can be certain it will get paid back. Hah, piece of cake.