You spent the last few years saving cash, cutting debt, and shrinking inventory. But burgeoning demand is on the horizon and you’re ready to gear up. All you need is a little financing to get your momentum back. Here’s how to improve your chances of getting the credit you need to grow.
1] Know What You’ll Need
Experts figure you’ll require an additional $3 in credit for every $1 in added sales each year. That’s a 20% to 30% increase in your credit needs each month. To determine what kind of financing to look for, identify what parts of your business are poised for growth. Do you just want access to a little extra cash to grease the wheels of your daily operations? Or it is time to invest in better technology, hire employees, build inventory, buy more trucks, or open a new facility? Once you know what you’re going to use the money for, you can figure out what kind of money you need.
2] Consider Your Options
Financing comes in myriad shapes and sizes, and what’s right for one business in one market with one set of problems may not be right for another. Options include unsecured lines of credit, capital and operating leases, convertible debt, equity investments, and the cash advance you can get for selling your accounts receivable.
“It’s all based on the performance of the company,” says Kyle Barker, a managing director at industry financial advisory firm Kodiak Building Partners in Aurora, Colo. Dealers that can afford to make interest payments and carry the burden of debt should consider taking it on. Those that can’t should rethink what they’re after. You may decide to sell assets or, if your goals are long-term and growth-oriented, take on equity investors; but know that you’re going to be giving up a chunk of operational control if you accept financial help from the latter.
3] Get Lots of Advice
Right-sizing your options to the areas in which you want to grow is essential to getting the cash. It requires some thought and a lot of legwork. Reach out to your internal gurus—accountants, legal counsel, financial advisers, and consultants—for tips and for contacts outside your network who can help you move forward.
Small Business Development Centers help small and mid-size companies identify growth areas, become better candidates for capital, and learn about financing. There are more than 1,000 centers nationwide that work for free or low cost as the advice-giving arm of the Small Business Administration (SBA). They also help businesses secure SBA-guaranteed loans.
Check in first with current debt and equity holders, management, employees, landlords, and suppliers to see who can up their investments, buy stock, or extend current credit and at what cost to your relationship. Get the market value of existing underutilized assets and consider the sale and lease of facilities or property. Then check in with banks outside your lending network to see if you can get better rates. If and when you talk with private equity investors, make sure their lending objectives mesh with where you want to take your company.
4] Clean Up Your Act
Close scrutiny of your financial documents may reveal a few blips. For one thing, it might be time to lose customers who are stretching out their credit terms, Barker says. Asset-backed loans are a way around dealers’ cyclical cash flow, but the notes’ reliance on accounts receivable has many smaller companies questioning past preference given to large-volume customers who were slow to pay. “The banks look at that as a credit problem and won’t loan against that amount,” Barker says. Another holdup: Products that have been on your shelves for more than a year.
Prepare a detailed pro forma document before sitting down to talk lending options. Team up with your accountant to check the current market value of your assets, figure anticipated returns, and sketch out worst-scenario payback plans. And don’t be put off if a bank says no.
5] Build the Relationship
Half of the battle today is finding an investor with room for a construction-related account. So, develop relationships with more than one credit source—and know the status of each one’s ability to lend to you before you actually need the cash. ProSales polled readers last fall and found that six in ten firms with fewer than $25 million in annual revenue kept accounts at just one financial institution; more than half of those companies worked with a local bank.
Local and regional banks are the best options for small or mid-size operations. They know the health of your market and have likely seen your business in action. Plus, says Todd McDonald, principal with financial advisory firm Broadstone Advisors in Albany, N.Y., they can often loan money faster and at a lower rate than big money centers.
In the end, it’s a relationship that demands honesty and planning. “Go to your banker today and say, ‘If I were to apply for X loan, would it be available and if so, on what terms,’” says Bob Seiwert, senior vice president at the American Bankers Association. “You need to know that now.”
Rank Your Bank
A new website is making it easier for small businesses to find banks that are likely to give them a loan. Banking Grades rates local, regional, and national banks on the percentage of deposits used to fund small business loans.www.multifunding.com/ bank-search
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