Searching for Capital

A broker assesses the small-business lending market.

I am currently involved in two loan transactions where the small-business owner stands to save substantial money by changing lenders. In both instances, these are relatively young companies that have been working with expensive private money lenders and factors, and their companies have grown to the point where they can now work with the asset-based lending departments at Federal Deposit Insurance Corporation-insured banks.

In fact, both of these transactions are taking advantage of the Small Business Administration’s recently revamped CAPLines program, which is designed to help companies with working capital.

In one on the financings, if the small-business owner chooses to proceed, his finance costs will fall by 75 percent, and his liquidity will increase by 50 percent. In the other transaction, the small-business owner can expect his cost of capital to fall by 50 percent this year.

These decisions may seem like no-brainers, but in both instances the owners are struggling with the decision. They’re both tightly staffed, and they find change frightening. For example, the S.B.A. program will require them to have all customer payments sent to a new post office box, and they are concerned about changing their customer-billing procedures. In addition, they are nervous about upsetting their current lenders. For me, it has been surprisingly tough to get them over the finish line.

In one case, the small-business owner’s existing lender has exacerbated his concerns by telling him that all sorts of bad things will happen if he changes financiers. In my opinion, the lender is simply trying to scare him into thinking that he risks running out of money and losing the ability to finance his production. In reality, the lender just doesn’t want to lose the 40- to 50-percent interest it has been collecting.

I find this lender’s actions deplorable. There is a place in the market for expensive financing, especially when a lender is willing to take on risks that other lenders will not take. But every expensive financing situation should have a plan and a path forward. And all good lenders should be happy when their clients manage to graduate to the next level of financing.

Unfortunately, I suspect that there are hundreds of thousands of small-business owners in more expensive financing arrangements then they need to be. While their businesses and needs have evolved, they’re still doing the same old thing out of convenience and lack of focus.

It’s critical that small-business owners review their debt on at least an annual basis. If your current lending agreements have automatic renewal dates, put them in your calendar — and make sure you’re doing the right thing if you choose to renew. There could be a pot of gold waiting for you if your business graduates to the next level of financing.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/03/14/are-you-sticking-with-expensive-financing-too-long/?partner=rss&emc=rss