Searching for Capital
A broker assesses the small-business lending market.
Getting a loan for your business is not a simple proposition. There are many types of loans, and many criteria that go into evaluating how much you can borrow and what you can expect to pay. There are thousands of lenders to pick from, and each one may have a slightly different proposition to suggest.
When you’re in the market for a loan, it’s smart to do some homework and figure out where you fit. It’s also smart to hear several opinions. That said, once you’ve heard the same thing several times, you probably have a pretty good idea what your prospects are. At that point, you have a decision to make.
At MultiFunding, this is where we often see small-business owners get stuck. This is particularly true if the owners don’t love the terms of the financing they are being offered. In this situation, there are several important points to consider.
First, despite the general sense that the loan market has been all over the place, it’s actually pretty competitive. Lenders fight with one another to get different types of loans. But once you’ve figured out where your company fits into the ecosystem, you really can’t fight gravity. If you are eligible for a certain type of loan, it’s unlikely that you are going to be able to twist a lender’s arm into offering you a more favorable type of loan. The first loan you are offered will have certain pricing and conditions that are associated with the risk the lender is taking. Once the bank has made this calculation, it rarely changes.
That said, it’s important to remember that the type of loan your company is eligible for today could well change six months or a year from now. Companies change and evolve, and so do loan markets. It’s important to review your loans on an annual basis. Some small-business owners get stuck because they think the loan they pick will last forever. This is not the case.
Once you’ve nailed down your loan type and pricing, you should step back and ask yourself questions like, “Will this loan allow me to focus on growing my business and making it more profitable?” and “Will I stop lying awake at night worrying about cash flow?” If so, it’s probably worth taking the loan.
Right now, we have two clients who are trying to fight gravity. One of them is an electronics distributor. Because the business shrunk by 50 percent during the recession, its bank — even though the business stayed profitable — decided to call the line of credit. Since then, the distributor has been slowly paying down the credit line and holding on for dear life. In the last three months it has twice needed to take emergency financing in the form of expensive merchant cash advance loans.
What the company desperately needs to do is to pay off the line of credit — and move to a factor. While the factor will be more expensive, it will lend the distributor all of the working capital it needs. As a result, the owner will be able to sleep at night and focus on getting the company back to pre-recession levels. At that point, there will be no problem going back to a bank and getting a new line of credit.
We have another client who has a high-end used car business that owns its own real estate. It has been banking with the same bank for seven years where it has a floor-plan line of credit (against retail inventory) and a real estate loan. But the bank was sold and the new parent company won’t do floor-plan lines anymore. In today’s loan market, finding a floor-plan lender for used cars can be all but impossible. We actually managed to find our client one, but he wouldn’t accept the terms. He is trying to fight gravity, and it will catch up with him eventually.
It’s not enough to understand your own business — you also have to understand credit markets and where you fit into them. And most of all, you have to understand that they keep changing.
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/2012/08/16/when-looking-for-a-loan-you-cant-fight-gravity/?partner=rss&emc=rss
