Business Advise
Positioning Your Company for Debt Financing
By Gary Honig
Positioning Your Company for Debt Financing:
There was a time in the old days when 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 guidelines for running a company have
been revolutionized. Unfortunately this new phenomenon is only true for
companies with super "star power", because these companies have potential to
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 much like a bank. On the financial
side you will be making credit decisions
involving your customers. Some will have to pay C.O.D., some you 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 ultimately 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 or starting a company.
By knowing what commercial finance companies look for, you will become 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 then 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 obviously be detrimental to your success. Finance companies look for
incoming revenue to be spread evenly over a number of 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 here is
whether to accept a lucrative sale with a company that could never get
credit from any type of finance company. You are essentially telling
yourself that you know better than the banker about loaning money. Finance
companies will respect a business owner that has a thorough credit checking
process and a number of stable credit worthy customers.
3. Book keeping - While some businesses send out all their accounting to
outside agencies, it is helpful to have a qualified book keeper on staff.
When it comes time to seek financing, being able to produce 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 steps in and places a lien against
those same assets essentially stepping into 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 going to
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 entirely possible to receive a subordinated debt agreement from the
IRS which allows the finance company to work with you unencumbered.
5. Bankruptcy - If you have ever entered into a bankruptcy proceeding
whether personal or business, own up to it right away. It will come out, and
being up front about the circumstances will enhance the necessity to
overlook the past difficulties.
6. Applications - Finance companies ask for a variety of information when
performing their 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 own 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 in advance of asking for financing.
Typically you can start with; Interim Balance & Income Statement, Interim
Profit & Loss Statement, Last Year End Statements, Accounts Payables Aging
Report, Accounts Receivables Aging Report, and of course Tax Returns.
7. Contracts - Be prepared for onerous language. Finance companies cannot
sugar coat the reality that if something goes wrong they need to exercise
their rights. 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 for protection. By
and large 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 upon and all the tough language won't
matter. Even if you start having financial difficulties, get in touch with
your finance company immediately. You can greatly reduce the chance of
default by showing that you are pro-active with your situation.
8. Using the money for the right reasons - This sounds obvious but in
certain cases it can be highly relevant. You hear a lot about going to the
right Venture Capital Firm that would handle your type of investment. In
some ways that holds true for debt finance companies. They tend to work
within industries that 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, then 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 a period of
years.
9. Management Integrity - Also like equity investment, get a good team
together 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.
10. Be Professional - Answer calls and messages expeditiously, be prepared
with information, show up on time. When its crunch time and you need an
extra fifty thousand dollars for a week to get a better deal from a vendor,
you would be surprised how much mileage you can get by being a courteous and
thoughtful customer to your finance company.
Article by Gary W. Honig, president of Creative Capital Associates, Inc. an
invoice factoring company operating nationwide for more than a decade. See
us at http://www.ccassociates.com
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