Financing Your Business

SCORE ExpertAnswers

Len Fischer, founder of Benetrends, shares expert tips on obtaining financing to start or grow your business.

 

Q:

With the economy showing signs of continuing recovery, has it become easier for small businesses to get financing?

Yes, lenders have anxiously awaited a turn in the economy that would signal it was safe to expand their lending to more types of businesses. I believe they have seen at least a few of those signs, because it has become easier for us to obtain financing for the startup businesses we've worked with this past year.

Q:

If you’re already in business, can you assume that you’ll have a better chance of getting financing for expansion or new equipment?

Lenders always prefer seeing historic cash flow sufficient to service both existing debt and new financing. But if the owner is able to demonstrate how the new project will increase cash flow and do so with a good set of projections based upon reasonable assumptions, programs such as the SBA’s loan products enable a lender to approve the requested financing based on those projections, not just on historical cash flow.

Q:

Does an existing business’ performance during the economic downturn years make a difference?

Lenders are very conscious of just how difficult the past few years have been for businesses, and want to see how well a business handled it. For example, did revenues grow or at least remain steady? Did the owner make adjustments to protect the “bottom line"? And, has there been improvement over the last four quarters? If so, then a strong case can be made that the new project will benefit the business, and that the financing makes perfect sense.

Q:

Do existing businesses have more financing alternatives than start-ups?

Yes. While the startup is generally limited to a government-guaranteed loan or a fully-secured loan by personal assets, the existing business can tap into any of the standard commercial loan products and can even borrow against accounts receivable, existing inventory, purchase orders, etc.

Q:

How can a business owner make a strong case to a lender for financing to cover unexpected costs, or as a bridge until market conditions improve?

Nothing presents your case to a lender stronger than a well-developed business plan. Taking the time to think through how the business has evolved and where you want to take it, then explaining that to the lender through a business plan makes the loan request much stronger.

When you describe the project, be sure to explain how it will help your business survive or grow. Be specific. Let the lender know the risks you are concerned about, how you will know if the project is a success, and your strategy if things do not go according to plan.

Q:

Online lending services such as your company, Benetrends, have helped make small business lending a relatively simple process. But do applicants still need to do the same kind of up-front preparation (e.g., a business plan) as if they were applying to a traditional bank or other lending service?

Yes. The difference is that we are there to assist them in the completing that preparation. The small business owner should not seek to avoid the upfront preparation. It is that very process that will help the owner determine if the project really makes sense, and to think through all potential obstacles or dangers.

Q:

What should entrepreneurs consider before pursuing crowfunding options such as Kickstarter?

Crowdfunding is a better platform for publicity, community feedback, and promotion, or to test the idea amongst your peers and investors. It’s not a viable option for all companies, and can be a gamble. The first question I would ask is "what is the value of a relationship with the investors?" Can you benefit from the investors’ advice, direction, support, and counsel after the funds have been used and you are in the repayment phase?

Also, consider what percentage of the total funds needed to start your business can be secured through a crowdfunding investment, and how that measures with your long-term financial goals and business budget.

Q:

Most small businesses are self-financed. How can they avoid the mistake of being undercapitalized?

Many entrepreneurs believe that if they have sufficient capital to cover all of the startup costs, their customers will keep them open and profitable for the next 50 years. Unfortunately that is just not the case. Every new business has a “breakeven” point – that moment when the revenue they receive is finally sufficient to cover all of the operating expenses. Until that moment, the business has to operate at a “loss,” and there must be adequate working capital available to get the business to that point and beyond.

Often that “breakeven point” is much further down the road than the owner anticipates, and his/her resources are not sufficient to get there.

Q:

Can working capital and cash flow management help with seasonal fluctuations?

Yes, it’s essential to have adequate working capital to level out those highs and lows, and get the business to the end of the year profitably. The development of a cash flow statement on a month-by-month basis is critical to helping the business owner understand this aspect of the business and hopefully avoid the potentially devastating consequences of not being prepared for seasonality.

Fortunately, SCORE can provide excellent counsel and advice when it comes to planning cash flow projections of any business.

Q:

Speaking of self-financing, one option Benetrends specializes in is using an entrepreneur’s existing 401(k) fund or other retirement accounts. What are some key factors to consider when using this approach?

You have to be sure it makes business and tax sense. This will vary for everyone, of course, but weigh the risk of using these funds versus leveraged funds if things don’t go well. Some of your retirement savings may be lost, but you may be able to build them back up. Mortgaging your house or taking out a loan, however, may be more difficult and costly to deal with.

Q:

What can an entrepreneur do to make up for a less-than-ideal personal credit history when trying to get financing for a new small business?

Significant deficiencies in a person’s credit history that reflect poor character will usually make it difficult, if not impossible, to obtain traditional funding for a new business. Often a co-borrower with strong credit can help. Fully collateralizing the loan will probably be required. Starting small by borrowing against personal assets and repaying those small loans over time will help to re-establish the credit history as well.

Q:

What if you just had difficulties getting through the difficult economy?

There may well be legitimate reasons for a poor credit history that have nothing to do with “bad character.” For example, medical bills that were fought by an insurance company will show as delinquent on a credit report, but may have nothing to do with your willingness to pay debts. This can be dealt with by a letter of explanation that is kept in the loan file along with a copy of the credit report.

Q:

With so much information about financing and other small business issues available online today, does it still make sense to consult with a SCORE mentor?

Yes. The director of our finance department, who has been involved in commercial lending for more than 35 years, tells me that nothing is more valuable than speaking with someone who has “been there and done that.” He is convinced that the quality of advice offered by SCORE is “real world.” It has passed the test of being put into practice, and has been proven over and over again.

Yes, we all can and should learn from our mistakes, but I prefer to learn from someone else’s mistakes so I won’t have to make them too. SCORE offers the client that opportunity.

Q:

How can a SCORE mentor help an experienced entrepreneur who “learned the ropes” long ago?

A SCORE mentor is not just an experienced individual with tried-and-true principles and ideas to share. My experience has been that the SCORE mentor is also up-to-date with the newest technologies and approaches to business. The mentor has the collective insight of many businesses, and is an excellent referral source of which new ideas work and which you should not waste your time with.

Q:

How do you see the small business financing landscape unfolding over the next year or two?

There remain many “unknowns” in our future: What governmental regulations will small businesses face? Will the recovery continue or sputter and fail? What advances will technology bring? At least in the short term, I believe small business financing will continue to loosen up, though we will never see it as free as it was years ago.

Q:

What skills will entrepreneurs need to make the most of this environment?

Many more businesses are learning the value of expanding into the world market, but lenders need a higher comfort level to help them with these plans. Entrepreneurs have to be visionaries who are able to clearly project future revenue streams, understand what infrastructure is necessary to support those streams and how to develop it, and what the net results of putting that structure into place will be. Then, they need to be able to communicate that clearly with strongly supported assumptions to their lender.

The business owner capable of doing that will continue to grow no matter what the economy at large may do.

Q: What’s the best bit of business advice you’ve ever received?

It’s easier to swim downstream than upstream!
 

 


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About the Author

Len Fischer, a long-time expert in corporate financing issues founded Benetrends in 1983 to help entrepreneurs use their qualified retirement savings to purchase or recapitalize companies. Since then, more than 10,000 entrepreneurs have utilized his expertise to build successful businesses.