How to choose the right type of loan to finance your business’s growth

Ruth Mijuskovic, Business Attorney, Jackson DeMarco Tidus Peckenpaugh

Jim Shnell, Business Attorney, Jackson DeMarco Tidus Peckenpaugh

In today’s economic climate finding financing resources for your business is especially difficult. Where do you turn to get help in locating the financing sources your business needs? Resolving these problems successfully in today’s world requires an adviser who is experienced in business issues and has a thorough understanding of the latest developments in financing facilities.

Business attorneys Ruth Mijuskovic and Jim Shnell of Jackson DeMarco Tidus Peckenpaugh note that financing methods have changed with the economic times and that the growing demand for funding has also created new sources and forms of financing.

Smart Business spoke with Mijuskovic and Shnell, who have broad experience in negotiating and closing business financings, to get their insights on the issue.

Why is it so difficult to arrange financing today?

During the recent recession, a number of banks and finance companies that had traditionally provided financing to businesses went out of business, and others merged in order to survive. The financial institutions that survived are now governed by new regulations that impose new procedures and constraints on their ability to provide financing.

What can a business do when it finds that it can’t get a line of credit or that its line of credit can’t be increased or has been reduced?

Many banks (and bank regulators) have raised the bar as to the companies that qualify for a line of credit, even when guaranteed by the principals. A company that is on the borderline of eligibility may find that a bank familiar with its industry is more willing to provide credit. If your company has tried unsuccessfully to establish a lending relationship with a bank, you may do better by seeking funding from another type of lender. Such ‘alternative’ funding may not only give your company the cash resources needed to grow into a business large enough to qualify for a bank line of credit, but also the opportunity to demonstrate your ability to manage credit issues.

One common alternative is the commercial finance lender. However, even this traditional alternative may not be available today and it is necessary to look to the newer ‘private credit funds,’ which occupy the space previously occupied by the commercial finance lenders. These funds often differentiate themselves by focusing their lending activities on particular kinds of loans, while others focus on certain industries or certain borrowers. If your company has experienced difficulty in establishing a credit relationship it may benefit from looking to a private fund that specializes in your industry or businesses similar to yours.

What should a company focus on when looking at other types of lenders?

A key issue when looking at other lenders is the purpose for the loan, as there are different lenders for different loans. For example, if you need a cash infusion to increase sales and accounts receivable, you may want to look to a lender specialized in factoring accounts receivable.

If the purpose for borrowing is to finance the acquisition of another business — perhaps a competitor or a complementary business — some private funds will make loans to enable a company to take advantage of such an opportunity and will base the loan on the borrowing capacity of the combined businesses. In some of these transactions, a private fund will provide funding that will be subordinate to a bank line of credit, thus making it easier for your company to obtain a bank line of credit and support the combined businesses with two layers of funding.

If you are planning to raise money through an equity investment, you may want to consider a convertible loan. Your potential new equity investors may be willing to make a bridge loan to support the company until the equity financing can be closed. The closing on the new equity investment (and conversion of the bridge loan into equity) may, in turn, provide your company with the additional equity base needed to arrange a bank line of credit.

What other kinds of loans are there?

Many lenders specialize in providing loans based on the collateral available in the business. Some focus on factoring of accounts receivable. If your business only sells for cash or credit card charges, you may want to consider a lender that specializes in lending against credit card cash flows. If you need funds for equipment, the solution may be to work with an equipment leasing company. Other lenders will provide loans supported by assets such as inventory, purchase orders, bank CDs and even real estate. If your business does not have ‘hard’ assets, but does have intangible assets such as patents or intellectual property, there are lenders that will lend against the cash flow generated by the IP.

Another type of funding that has seen a revival of interest and availability in this economy is lending supported by the SBA. The rules for SBA loans have recently been revised to make credit more available and, as a result, SBA loans have found new popularity. The SBA supports a variety of loans, such as the 7(a) Loan Guaranty Program, designed for a majority of financing needs including short-term and cyclical working capital needs and the 504 Loan Program, which makes long term loans available for acquiring land, buildings and equipment.

In summary, you should look at the characteristics of your business and the nature of its cash needs, then talk with experienced counsel about the financing options that may exist for your company.

Ruth Mijuskovic and Jim Shnell are business attorneys at Jackson DeMarco Tidus Peckenpaugh. Contact them at [email protected] and [email protected], respectively.