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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