There are many options available when it comes to financing your business. Of course, there are too many to list in this article, but there a few main factors when it comes to securing the right type financing. Three of the biggest questions you will need to need to ask yourself, and most likely be asked are as follows:
How quickly do you need to have the financing in place? Yes, most sources of funding out there will advertise fast funding, or immediate approvals, next
How is the company's credit profile, and most of the time the owner's personal credit will play a major part in securing the financing as well.
What do you need the financing for?
Now let's go over 3 of the most common finance options available and how the questions above relate to each option. We will cover some of the pros and cons and hopefully give you a better idea of how you should proceed after reading the article.
Traditional Local Bank Loans: This is probably the first option someone should think of when they need to borrow money. It is a good option, the pros include; low interest rates, usually a local presence and banker you can meet with, can be set up as a line of credit and only use what you need, and overall is probably the most cost effective when it comes down to amount borrowed vs. amount paid back, especially if you can afford to pay it off early. This is great, yet every action has an equal and opposite reaction. Borrowing from your local bank where getting approved is no easy task. When is the last time you obtained a $79,000.00 "signature loan" for a used piece of construction equipment? Banks are only allowed to lend according to how the government allows them to lend. They are essential to our economy. Banks seek A+ credit customers (725 FICO), usually at least (5) years time in business UNDER THE CURRENT OWNER, and will usually need to see a couple years worth of financials from both the company and the principals of the company. Also, any downward trends or negative quarters, GAME OVER. If you are fortunate enough to be approved, congratulations; now comes the personal guaranty on the loan, plus typically will want to place a blanket lien on the business, if they do not already have one. Most banks want your business account. Not only the equipment disappears in the event that you default, so does your kingdom. They're usually going to ask for a down payment of 10-20% if it is an equipment based loan, and this type of financing will showing on your personal credit, plus count against your borrowing base which will obviously hurt your upcoming need for WORKING CAPITAL. Cash has always been king in business, so don't spend it on a depreciating asset. It's not a bad option in terms of interest rate and payback, but is it worth the risk associated with the attractive numbers? This will not work if you're in a time constraint either, as most of these loans are going to take weeks to go from application to funding.
Short term working capital loans aka MCA Loans: These burst onto the scene around the time of the real estate debacle during the latter part of the first decade of the new millennium. Institutional lenders, brick & mortar banks tightened up their lending criteria. New brokers seem to pop up almost daily, and some are gone just as fast. This type of financing is not for everyone and the attractiveness of a huge commission has brought many not-so-honest brokers into the legal spotlight recently. However, they are a necessary evil for the right purpose. New competition has forced rates to come down some. Some of the pro's to the financing offered include; lightning speed approvals and funding. With just an application and 6 months bank statements you can have access to the funds. Approvals can be reached in a matter of hours and funding as fast as the next day. Most items are scanned or faxed over and originals are not even required. Personal credit isn't weighed very heavily into the scoring and to an extent, business credit is not either. These type of loans are scored very heavily on either your credit card sales or more commonly your monthly bank deposits for the company. The lender will then make the deposit into your account and the payments start immediately. They are also unsecured loans, meaning there is no collateral. This is definitely a plus but the downside to that is they are usually secured by a blanket lien on your business. This means if you have anything that is free and clear of liens and you decide to sell it, you cannot without their permission. So, is it really an unsecured loan?
Now the downside of these loans can be the cost of them in various forms. They are very short term loans ranging from 3 - 18 months so the compounded rates can be in the 30's and being as high as 250% is not uncommon. They should only be used if the money is going to bring in revenue immediately. Think of it like this; if I borrow $1 can I use it to create $1.50 in revenue immediately? If the answer is no, this product is probably not for you. They payments are usually withdrawn daily from the company bank account, this will not work if you are constantly chasing down invoices owed in large amounts. The payback on a $50,000 loan over 6 months can be $60-$70K or even higher in some cases. They will also require a personal guaranty and in some cases they require you to sign a "confession of judgment" which automatically gives them the right to your assets if you default, without any other legal proceedings. Given the ease of access, the rapid funding time, and the need for capital- many companies have found themselves in hot water after they started "layering" or "stacking" these loans on top of each other. Facing cash flow issues the company would take out another loan to pay off the first loan. Repeat that a few times and you're looking at an inevitable BK in the near future. These really should be used in emergency situations or when all other options have been exhausted. Many compare them to modern day legal loan sharking, and in some cases, in some states, the courts have found them to not even be legal at all. When that working capital has exhausted itself yet you still are paying it back for the next who knows how many months...then "ole shoe" -- the front-loader you've been using for the last 29 years decides to unexpectedly retire. When a lender sees the MCA's draining your bank account even the 700+'s are too much risk.
Another option of financing is equipment leasing, or equipment financing depending on how the financing is structured. Leasing of items goes back to the days of Serfism lending out people, land, and EQUIPMENT for a cost, plus an additional charge in concert with its affiliated risk. The amount that is approved and the rates it is approved at will be determined by a few things. The most important factors include business credit, such as: time in business, previous borrowing history, industry, yearly revenue, and sometimes personal credit history of the owners. Other factors include the equipment type (collateral) and who it is being purchased from. The collateral is the equipment you are purchasing for your business. A new piece of heavy collateral such as an excavator (holds value longer) being purchased from a reputable vendor will be scored much higher than used computers (obsolete) being purchased from a private party which will hopefully should never happen. There are literally countless options available and rates can vary anywhere from lower than 4% all the way up to the 30's depending on the situation. For a credit qualified customer, the rates can be as competitive as your local bank. For the not-so-qualified the good news is they can still get the funding the bank will turn you down for. The rates will be higher, but start-up companies, prior BK companies, and even companies with tax liens and judgments can still get the funding they need on equipment. Depending upon the situation, these loans can also be structured as leases and used as tax write-offs with the option to purchase at the end of the lease. We will cover that in an article by itself at a later date, but some buy out options include $1.00/10-25% or Fair Market Value at the end of the term. This type of financing also will be left off your personal credit as long as you make your payments, so it wont affect your ability to borrow. Make sure you do make these payments on time since the finance industry does use a very effective pay history tool. The process is not as fast as the MCA loans, but can be depending upon the players. There is much work done "behind the the scenes" by professionals at their trade in order to fund as expeditiously as possible. Faster than a traditional bank. Overall, this type of financing offers the fairest options for your personal situation. The downside of this can be the rates, if your credit or situation is not the most favorable. You also do not own the equipment until the final payment is paid and buyout is exercised. There can also be hidden fees and buyout options unknown to you until the end of the term. A personal guaranty is usually required in most every cases, and to get the best rates possible you will be required to send in financials similar to the ones required for a traditional bank loan, and usually this will slow down the approval and funding process. Lastly, since these are for equipment, this financing will require that you are buying equipment for your business, which would be a deal killer if you just needed the money for advertising. Overall, this is the best route for your equipment needs as long as you work with the right company that has your best interest in mind.
So when we get to the bottom line , at CCR, we believe in long lasting relationships over one time commission checks. Maybe what you are trying to do is not a fit for either of us at the time, or we offer an immediate solution from the many different programs over 25 years of capital markets experience can offer.
Please give us a call and let's go over your unique situation. You deserve better than just another ring around the rosie.
Thank you for reading.
John Snyder, Owner