The Business Owner’s Cheat Sheet: What Are My Financing Options?

It seems like there are almost as many lenders with financing offers as there are restaurants, but if that’s the case, why is so hard to find financing for your business?

There comes a time when you stopped doing your own tax return and handling your own legal issues because the issues became too complex and your time became too precious. The same is true with finding financing.

After the Great Recession, new legislation was introduced that made it even harder to borrow money for your business. You need someone to do the vetting for you and knock out the extraneous players that aren’t going to approve your loan.

Here’s a quick cheat sheet that may be helpful to get you pointed in the right direction.

1. Big bank vs. community bank: Do you want the best price or the best relationship? Large banks tend to have a lower cost of funds, so their rates are lower, but they typically don’t deviate much from their lending policy. Community banks typically do have higher cost of funds, but they’re more relationship focused and are willing to go the extra mile to hear your story. Based on what my clients tell me, it’s easier to have a relationship with a community bank banker than with a banker at a big bank.

2. Were you profitable last year and is your balance sheet leverage ratio less than 4 to 1? If the answer to these two questions is no, then it’s unlikely any bank will loan you money this year. They want to see a full year of profits and a balance sheet leveraged less than 4 to 1, preferably 3-1. If you’re looking for a line of credit, skip the banks and contact an asset-based lender that will loan you money.

3. Asset based lenders (ABLs) are willing to loan you money on the value of your collateral versus your balance sheet or income statement. Most will loan you 75-80% of your eligible accounts receivable. Each lender has their own eligibility requirements, which mostly deal with aging and concentrations.

4. SBA loans are made by the banks, but the SBA does offer programs that provide a guarantee to the bank as an inducement to make the loan. SBA 7a loans are used for business acquisitions, among other purposes, and the SBA 504 loan can provide up to 90%, versus the normal 75-80%, mortgage financing for an owner occupied building. There are other programs, but these are the ones used most frequently. There are very specific eligibility requirements for SBA loans, so please consult someone with SBA experience before you make application for a loan that might be ineligible.

5. Non-bank lenders, venture capitalists and private investment are all sources of financing that fall outside the banking and ABL universe, but still require funding. Many transactions do not fit the bank, conventional or SBA, or the ABL box, so these lenders play in that space. The interest rate and fees are typically higher and in some instances, the lender may ask for equity in the business.

Hopefully, this will get you pointed in the right direction. If you have additional questions, please contact us to talk further.

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