Where to Get Money for a Growing Business

The following sequence of events is common to many new and expanding businesses.

You start your business with a limited amount of capital and an abundance of good ideas and ambition. The sales activity has been adequate to produce a net profit. Your inventory is about twice as large as you intended. Your accounts payable are past due to the point where some creditors want to ship C.O.D. only. To keep your creditors happy, you have been overdrawing your checking account to the dissatisfaction of your banker. You have a short-term note past due at the bank.

These are all symptoms of a very common business ailment - "too much short-term debt."

Watch Your Growth

This type of cash squeeze can be avoided if you confine your company's growth to that which can be handled from retained earnings. If the cash retained in the business from last year's profits is $25,000 and inventory grows by twice that amount, somebody (you, your banker, or a new partner) has to fund the expansion that cannot be funded by the retained earnings.

Long-Term Financing

If you can't provide additional capital and you don't want a partner, you need to look for long-term funding.

Funds From Owner

Studies indicate that as much as 60% of all small business funding comes directly from the owner or his/her immediate family. Outside of your immediate family or friends, you may find funding from other private parties or from financial institutions.

Private Lenders

There are some problems with outside private lenders. First, they are few and far between. Second, they demand a rather high rate of interest and/or want to own a percentage of the business.

Financial Institutions

The main problem in using financial institutions for small businesses is that banks are not in the "risk" business. Many small businesses that require funding have no track record. Although you may be very optimistic about your company's future and have a glowing cash flow projection, the banker is not likely to rely on it for loan purposes. You may have adequate collateral in terms of inventory, real estate, etc., but if the banker feels that you will not have adequate after-tax net profits to service a loan, he/she is not likely to lend you money. Bankers do not want to liquidate your assets in satisfaction of their loan.

Small Business Administration

If financing is not otherwise available on reasonable terms, the Small Business Administration may be available to assist with its various loan programs.

Money Brokers

There are "money brokers" who advertise in various newspapers and business publications. Many of brokers want to be paid in advance to locate possible lenders for you. Be very cautious of any broker and ask for references and credentials. Any proposal by such brokers should be reviewed by both your attorney and your accountant before you sign anything.

What the Banker Needs

If you decide to apply for a bank loan, your request must meet certain basic requirements. Your banker needs to have:

1. A written request for a specific amount of money.
2. A detailed explanation of the use of the funds.
3. A projection of how and when you will repay the loan.
4. A list of the collateral you are offering as security for the loan.

In addition to these essentials, the banker will want to know what will happen in the event of your disability or death; that is, do you carry disability, life, and general liability insurance?

The banker also wants to know:

1. The financial history of your company in the form of company balance sheets and profit and loss statements for at least the past three years.
2. A realistic projection of profits and a twelve-month (month-by-month) cash flow projection. This spreadsheet should show the specific month that cash will be received from various sources and the month that specific disbursements need to be made.
3. A narrative relating your personal business experience.
4. The company "game plan" telling where the company will be several years hence in terms of size, types of products or services, number of employees, locations, etc., to give the banker some insight into your long-range planning.

Put yourself in the banker's shoes and see what questions you'd want answered if someone asked you to risk your capital. If you have not previously assembled a loan request in this manner, engage professional assistance.

If we can assist you in assembling a loan request or in your other business concerns, please contact us.

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