How to Finance Any Business – Part 1
It doesn’t matter why you need the money, you just know that if you had a little cash your problems would go away and you could grow your business. Whether a small loan to move you along or a large project that needs capital to service, here are some tips to help your company attract the attention of the people with money. I will not only tell you what they want to see, I will tell you how to create that picture.
There are four major factors that influence the decision of a potential lender as to whether or not to lend money to your company. Those factors are:
- Cash Flow
- Profitability/Financial Trends
- Leverage/Overall Debt
- Collateral
Of the four, cash flow is the most important. The company must demonstrate that it can service the new debt and still pay existing expenses.
In refinancing existing debt, reliable payment history can help demonstrate your ability to pay larger payments created by the new loan. In some cases, your company may need to make some changes to create the additional cash flow needed to service added debt. According to Christine Christian CEO of Dun & Bradstreet, 80% of all businesses fail due to poor cash management. Banks realize this and it is therefore easy to understand why they will look for good cash management as a necessary strength from you for your business. Strong cash management can also play a role in getting more favorable terms for the new debt.
We discuss ways to do this in our white paper, “9 Ways to Increase Your Company’s Cash Flow.”
In some cases, the need for financing is for immediate expansion. For example, the company may need new equipment in order to accommodate additional customers. The company may not have sufficient cash flow today to service the additional debt, but if it can demonstrate how the new business will provide the additional cash flow needed, it can go a long way towards convincing a lender that the loan is worth the risk. Ultimately, any lender wants to assess the likelihood they will be repaid, and whether the repayment would happen on schedule. All too often, entrepreneurs attempt to do this by talking to the banker and attempting to “make” them understand. In fact, this needs to be done with numbers that can be substantiated taking everything into account, including the increase in taxes created by the new business. If I just lost you and this seems impractical for your business, don’t despair. There are plenty of creative ways to fund the existence and growth of your business. Keep reading. Also see our White Paper on “Creative Financing for Your Business”.
(To be continued…)
