In the current economic environment, many businesses are finding financing difficult to come by. But with the proper preparation, gaining funding for your business is not impossible, says David Shaffer, director, Audit & Accounting, Government Contracting Industry group leader at Kreischer Miller.
“Getting your business in order and presenting a strong case to your banker can improve your chances of getting financing,” says Shaffer. “It’s not as easy as it once was, but even in difficult economic times, banks and other organizations are still providing financing to businesses.”
Smart Business spoke with Shaffer about how to position your business to succeed when seeking financing.
What does a business need to have ready prior to looking for financing?
Whether you are a new business or have 50 years of history, anyone looking to provide financing is going to want to see the plan of how the business is going to repay the loan. Most lenders do not want to have to liquidate the collateral to collect the loan; they want to set up reasonable terms and conditions so the business can repay the loan, over time, and the lender can make a reasonable profit.
In most cases, this means providing the lender with a monthly budget of the business’s income, balance sheet and sometimes cash flow for 12 months, and an annual budget for at least two years from that point. The lender will use these statements to create financial covenants, so management must be comfortable that they can meet, or preferably exceed, the budgets.
Lenders are also going to review management’s history and the business’s history of repaying debt. If there have been any issues with historical debt, this should be discussed with the lender up front, prior to the bank discovering it on its own.
If you are an existing business, three years of historical financial information should also be provided. Audited financials are best, but in most cases, reviewed financials will be sufficient. If the company does not have audited or reviewed financial statements, compiled or internal financial statements should be provided, but if this is the case, be prepared for more due diligence from the lender. If there have been historical losses or other items that might give a lender concern, discuss the issues with the proposed lender prior to sending.
If this is the first time through the process, owners should consider having their CFO/controller involved, or involve their CPA or legal counsel who is familiar with typical terms and conditions of business loans. But even if you have done this before, no matter how experienced you are, make sure that you have an experienced attorney who has knowledge of these loans review all documents prior to signing.
How long does the process typically take from start to finish?
Most banks need 45 to 60 days from the initial meeting to the time of funding a loan. If the loan is more complex, it may take longer.
What collateral will a lender typically request?
Most banks will request that all business assets collateralize their loan (assuming they are the only lender) and, in most cases, will require the business owners to personally guarantee the loan. If the loan is very risky, they might also request liens on specific owner assets such as stock portfolios, personal home, and/or cash surrender value of life insurance.
What interest rate can businesses expect in the current environment?
Banks and other lenders determine their interest rates based upon the perceived risk of the loan. Most business loans that are not high risk have variable interest rates ranging from prime minus .5 percent to prime plus 1 percent. Fixed rate loans will vary depending on the length of the loan and the collateral.
Other than banks and personal savings/assets, where else can a business seek funding?
President Obama recently signed the Jumpstart Our Business Startups Act, and one aspect of that, called crowdfunding, provides up to $1 million of loans for businesses. Transactions must be administered by a broker or a funding portal that is registered and complies with the Securities and Exchange Commission requirements.
The Small Business Administration and other government-guaranteed loans also provide funding alternatives to businesses. The SBA can provide loans up to $5.5 million. Such loans require a lot of documentation from a business, but their rates are very competitive. In most cases, a bank will still need to be involved to underwrite the loan, and many banks have specific lenders specializing is SBA loans.
Some companies also consider joint ventures. However, this is quite risky because it requires a strong leader to bring together a group of businesses so that each member of the group understands the risks and responsibilities involved. It also requires the involvement of an experienced attorney who can write a joint venture agreement that everyone understands and is willing to sign. Joint ventures are often used to complete a specific project for a customer when one company does not have all the skill sets to complete the contract on its own, so will go out and find a ‘partner’ with those necessary skill sets to propose on the project.
Venture capitalist/private equity is also viable, especially if the business is promising and can grow quickly with the proper funding. Typically, these companies will get an ownership in the business. Some firms have been willing to lend money to a company, but it is typically at a much higher interest rate than a bank may charge. The advantage of venture capital/private equity, however, is that the business now has the network of contacts of the venture capitalist or private equity provider at its disposal.
David Shaffer is director, Audit & Accounting, Government Contracting Industry Group leader, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected].
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