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Archive for the ‘Business Finance’ Category

Finding proper business financing is not easy at the best of times for most small and medium sized business owners and managers.

There are a number of reasons that collectively explain why the business financing market can be so difficult to understand and navigate.

But probably the single biggest reason is the lack of useful information about how the business financing market actually works.

Business financing information and education sources predominantly come in two forms: 1) institutional education material; 2) major bank advertising.

If you’ve ever read through a educational finance text book or taken a business finance course, you already know how difficult it can be to apply the theories, principles, and strategies to a small or medium sized business scale.

From a formal educational point of view, there is very little useful information provided as to how the market place works, how to plan for financing requirements, how to manage periods of growth, decline, transition, start up, etc.

Sure academic books and courses can go through all these areas in great detail, but is the information practical, real world, something you can relate to and apply yourself as a manager or owner of a small or medium sized business?

In most cases, the answer is a resounding NO.

Most finance text books speak to big business financing dynamics that are not easily transferable to small and medium sized business scenarios.

Outside of the formal education system, the next great source of business financing information is the information provided by the major banks, which they tend to make available to you by the boat load through there broad based marketing campaigns.

Unfortunately, the information by itself seldom helps you determine if a particular institution would be able to provide you with financing, or what would be required to qualify for a loan.

The massive brand advertising campaigns run by the major banks have told us for years that these institutions will take care of all our banking needs, and that basically all we have to do is show up on their door step and they’ll take care of the rest.

Depending on whose numbers you look at, in reality major banks provide less than 30% of the financing required by small and medium sized businesses and this number is on the decline.

So, when equipped with little or no useful information, the average business owner or manager for a small or medium sized business will first approach their existing bank for financing.

After all, you just need to show up at the door step of a major bank and they will take care of your needs, especially if you are a long time customer, right?

Despite the branded messages to the contrary, major banks tend to be very selective when providing business financing to small and medium sized businesses.

So, if your bank can’t provide you with the business financing you require, what is your alternative?

The good news is that business financing sources continue to grow in numbers as more and more lenders carve out a particular piece of the market to service.

In order to take advantage of these alternatives, you need to have a solid approach in place when seeking business financing.

Here’s a short list of things to consider

>>> Develop a thorough understanding of both your personal and business assets, income, and cash flow.

Regardless of financing model, these elements will always come into play to some degree.

A good practice to follow is to maintain a personal net worth statement and update it at least quarterly so that when you do need to access this information you don’t have to dig through stock certificates, pension statements, life insurance policies, etc., to come up with a current value for the assets you own and the debts you owe.

Your knowledge of your own business financials is also an indication of your ability to manage your business.

>>> Monitor and manage your personal and business credit.
Small and medium sized business financing is focused on both personal and business credit histories.
Regular reviews of both personal and business credit reports from the credit reporting agencies are important to avoid errors and credit practices that can severly damage your borrowing power.
>>> Develop your marketing position.
Yes, seeking business financing is a marketing exercise.
When applying for business financing, you are marketing your business to lending sources.
In order for them to seriously consider your application, they need to know what’s in it for them.
What will they make as a return?
What is the risk of you not paying the money back?
What are the business risks and how do you intend to manage them?
When will they get their money back?
How will you secure the loan, and so on.
>>> Research Lending Sources
Your goal when seeking business financing is to locate the amount of capital you require to accomplish a specific purpose from a financing source that meets your business needs.
Again, there are lots of business financing sources. But there is also lots of variation in the types of business applications each one can consider.
Broad based lenders reply on credit history and net worth. As you get more specific in terms of financing application and industry, lender applications become more narrow and can be harder to locate.
Financing consulants and business loan brokers can be an excellent source of information.

>>> Qualify The Lender
Before you make a formal application, find out if the lender has the programs and lending track record to meet your specific needs.
Too often, only the lender does any amount of qualification. Both sides should get comfortable with what each can offer the other before proceeding with a formal application process.
>>> Compare your options
Depending on the scenario, there can be several financing strategies that could work for your business.
Make sure you take the time to compare before making a decision. The extra time spent could save you considerable time and money in the long run.
>>> Start Today
Regardless of what your business financing needs are right now, you should regularly invest time in staying on top of your business’s financials and researching financing sources that fit your industry and potential future applications.
When the time comes to acquire additional capital, your proactive efforts can make all the difference in getting the capital you require, when you need it, for terms that are acceptable to your business.

Anyone who has responsibility at any level in guaranteeing the continued existence of a business understands quite well how important cash flow is. There isn’t a day that goes by without some expense needing to be met or a new function needing to be added to keep the gears working and the customers happy. Technology upgrades, site expansion, and consulting costs as well as payroll and taxes will keep any CFO at the office well past closing hours.

This applies to the start-up venture as well. Having an innovative business approach or product design is all well and good, but neither will see the light of day unless a solid business plan and the financing to back it up are in place.

There are many avenues available to obtain financing for a business. Relevant factors like length of term for loans and amount needed figure in, as do the credit standing and revenue trends of the business itself. When the need for some financial assistance becomes an issue, some serious introspection should be undertaken first before signing any agreement.

When approaching a bank or other lending institution, be ready to answer some tough questions. The health and financial status of a business will be investigated with a fine tooth comb, and budget and sales forecast figures along with monthly payroll and other expenses need to be on hand for the lender to be able to assess the risk. Short-term and long-term loans are very different and require different commitments from both the lender and the business alike.

Taking on a partner or two can be an option, yet this approach has obvious drawbacks. Any prospective partner will most likely be seeking the same reassurances that a lender would, and for the same reasons. Unlike a loan from a bank, however, a partner will likely become more involved in the day to day operation of the business and will also likely want a say in how things are done. This should be considered before a partnership is entered into.

Although business financing by means of credit is also an alternative, it carries many risks and raises additional repayment issues, like interest rates and credit standing. Even in calm economic times this should be a little farther down the list when looking for a hand up with financing.

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Business finance risks can be effectively measured and reduced by commercial borrowers. However this requires an in-depth understanding of commercial financing as well as a realization of the underlying importance of undertaking such a difficult task in the first place. Since one or both of these conditions are more often than not lacking, the most likely outcome is unfortunately a variation of skipping the whole issue.

A critical piece of the puzzle for finding business solutions for virtually any problem is to evaluate the costs, risks and benefits associated with the process in question. While this principle can be applied to working capital management and commercial mortgage loans, it is admittedly an arduous task for those who are not experienced at doing so. It is an ingrained element of human nature to try to fix problems without outside help. To truly complicate matters, business financing is probably more complicated than a commercial borrower might realize.

Risk measurement as applied to commercial finance decisions is simply too important to omit even when there appear to be prudent reasons to do so. Stop and ask who might be suggesting that management of financial risks is simply not necessary. Is it a banker with a vested interest in finalizing an agreement that results in fees for them? Is it a loan broker trying to close a deal? Is it an advisor who might not be the business finance expert that you think they are?

For many small businesses, the process of obtaining working capital and commercial real estate financing has begun to feel like a maze without the possibility of accomplishing a positive result. While this might seem like the perfect time for borrowers to reach out to their banker for help, the increasing number of bank failures and the reduction in bank loans to small businesses has demonstrated that banks are turning out to be the problem and not the solution in an increasing number of instances.

Such problematic circumstances should help business owners to realize that this is an excellent climate in which to be more prudent and thorough when evaluating their options. The good news in all of this is that a core group of risk factors can be measured before commercial loans are obtained. While this will not guarantee the desired outcome, it does increase the probability of avoiding unnecessary problems before they impact the long-term financial health of a business.

Stephen Bush is Chief Executive Officer of AEX Commercial Financing Group and works with small business owners throughout the United States to provide effective risk measurements and business solutions for commercial finance problems. Please contact Steve for candid and practical advice about business consulting and commercial real estate loans.