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At some time all businesses need additional operating capital. Finding this money is not easy — especially for small or new businesses. Let’s be clear here — we are not talking about venture capital. Finding venture capital is a completely different process than locating operating capital.
Before you embark on the process of locating operating capital for your business, you need to know quite a few things. First and foremost you need to understand from the onset that you are marketing your business to the financial community. You need to be an expert on your business — past, present and future. You need to have a good basic understanding of financial statements and what purpose the money will be used for. This requires careful evaluation of the business assets, liabilities, cash flow, projected sales, etc. Without this basic knowledge, your chances of obtaining additional capital is just about nil.
After you have a thorough knowledge of your business financial situation, you need to determine what your finanacial needs are and how you will ensure repayment of the funds. What will you use as collateral — inventory, receivables, real estate, company assets, personal assets, or all of the above? Quite frankly, small businesses usually end up pledging BOTH business and personal assets to obtain capital. The finanacial institutions want to make sure you have everything at risk if you don’t repay the loan.
But the truth is they don’t want to be in the real estate business or whatever business you’re in — they just want you to pay off your loan on time. So, yes, they will most likely require you to pledge all assets, but even if your collateral far exceeds your loan request, it does not guarantee approval. You must be able to show that the business is capable of repaying the debt from business revenues — plain and simple.
Keep in mind that different banks accept or prefer different forms of collateral. One bank may prefer real estate, while another likes receivables and yet another will loan against inventory. You need to find a financial institution that “fits” your needs and your business.
You can interview potential banks and loan officers by phone to find potential “matches”. Please note that going to the bank where you currently have your account(s) may be a mistake, unless you do some investigation work first. You’re looking for a commercial loan, and most bank branch offices deal primarily with consumer loans. You need to find a commercial loan officer who understands your business, and small business in particular.
Before you meet with any loan officer, find out if they have a small business division or group. You may have to drive some distance to meet with these people but it’s time well spent. Otherwise you’ll risk talking to someone who really isn’t in the best position to help. And before you meet with these people, check with advisors from the SBA, Chamber of Commerce, and other county, state, and federal support groups to see what banks and what officers might be most interested in your business.
In a metropolitan area, the banks can pick and choose who they want to lend money to because the demand is so high. In rural areas, the banks may be more receptive to working with small businesses that have a proven track record or real potential. Be prepared for lots of rejection, but don’t stop looking for the money if your business is real.
Once you’ve targeted potential lenders that match your business needs, you must prepare a complete business plan to use in your loan request. If you’ve carefully evaluated the financial status and growth potential of your business, you’ll have most of the information required for your business plan. There are commercial business plan “kits” available that can guide you through the process, or you can obtain help from many public sources, such as the SBA SCORE program and others. It is extremely important that you do your homework and have a professional-level business plan before you make your loan request.
Most financial institutions will require 3 years of financial statements, personal and business tax returns, financial projections for 3-5 years, appraisals on real estate and other assets, etc. It’s a time-consuming process, but you’re the winner when all is said and done because you’ll have a much better understanding of your business. Once you complete the business plan, then and only then, are you ready to meet with a loan officer. To do otherwise is just wasting your time and their’s.
If after all your effort, conventional financing is unavailable, try an SBA, state or other government-backed loan program. There are many specific loan programs such as contract loans, export loans, minority-based loans, etc., etc. You must still have creditworthiness to use these programs, but banks are more inclined to grant a loan if the federal or state government is guaranteeing a major part of the proceeds. These agencies are funded by your tax dollars, so use them. It’s also important to find out who these public agencies work with at the banks. The banks have specially-trained SBA loan officers who are the people to see about these loans.
Finding operating capital is time consuming and frustrating. Loan officers do not see your business as you see it. They are concerned with financial ratios and tend to view your business unemotionally. Banks are conservative by nature because they are responsible to their depositors for the funds they are loaning out. Don’t be put off by this. Just put yourself in their shoes and show them, beyond a shadow of a doubt, how you will service the debt.
Purchase orders and contracts are good means of ensuring repayment on loans, but it usually takes several years of good profit statements to convince some loan officers. Finding money is probably the hardest job you will ever undertake in your business, but it is necessary. Work with your accountant and other professionals to find the right sources and to present the best view of your business.
There are many sources of information to assist your efforts. Again, use the public sources available, including your library. You may also want to read a book by Bruce Blechman and Jay Conrad Levinson, titled Guerilla Financing. This book is a contemporary “hands-on” publication that clearly details both conventional and alternative financing options. It will surely educate you on the world of financing and your options.
Ed. note: And don’t forget the Enterprise Forums, These groups are touted as the place to find venture capital, but they’re an even better place to find bankers. These groups provide an efficient means for staying in touch with the entrepreneurial activity in their local region. As such, they draw bankers — especially bankers anxious for commercial activity — like a magnet. In one meeting, if you hustle, you can meet commercial loan officers from every bank in the region and informally “feel out” their current activity and orientation.
More importantly, over the course of several meetings, you can establish informal relationships with these people — get to know them and let them get to know you and your aspirations. Then when you need money, the slide’s already greased. Business is much more about people and relationships than it is about “business plans”. Yes, to get other people’s money, you need a sound plan for employing the money — but how “sound” that plan appears to them depends enormously on how well you’ve positioned (marketed) yourself to them. The Enterprise Forums are the most useful “public” resource available to entrepreneurs — active or would-be. Any entrepreneur who is not attending regularly (at least a couple of times a year) is doing themselves a real disservice.