Finding Credit Options for your Business

It’s not easy to find, but financing is out there

As a business owner, you’d probably agree that the economy’s slow recovery has done little to ease your need for a strong cash flow. Perhaps you have to pay off bills that have piled up. Or maybe you see an opening to gain a competitive advantage and just need a few more uncommitted dollars to get you there.

Whatever the case may be, obtaining credit likely won’t be easy. Traditional banks have taken a substantial amount of heat over the last year and a half, and many continue to be hesitant about extending financing to even the most stable of businesses. There are, however, other options to consider.

Angel investors

Once upon a time, wealthy investors channeled their copious dollars into presumably worthwhile Broadway musicals. In return, theater denizens dubbed them “angels” — a sobriquet that would eventually be extended to individuals who typically invest in early-stage companies in hopes of a good return.

To help minimize risk, angel investors generally focus on industries they’re familiar with, often offering equity investments but sometimes extending loans or loan guarantees as well. To further guard against losses, some angels take on an advisory role in the business in question. Assuming the angel indeed knows what he or she is talking about, such a requirement isn’t necessarily a bad thing; it provides the recipient company with both an investor and a consultant.

Unfortunately, dollars from angel investors dropped nearly 30% during the first half of 2009, according to the University of New Hampshire’s Center for Venture Research (CVR). On the bright side, the CVR indicated that the number of such deals rose slightly in 2009, noting that angels were still interested in investing in suitable companies but generally in smaller amounts.

Venture capital

Instead of waiting for an angel investor to come to your company, you might go out and contact a venture capital firm for help. This is a somewhat riskier move because these organizations generally don’t give you an option of handing over an ownership stake — they demand one. In return, they provide money and management experience.

Venture capitalists, however, can be picky. They typically look for strong growth potential in industries such as biotechnology, software and communications. But you may find one that specializes in your line of work even if you aren’t in one of those industries.

The average venture capital deal in 2008 was $7.8 million, according to the CVR, and that figure fell to $5.7 million in the first half of 2009. Like angel investing, venture capital deals will likely remain obtainable but in smaller amounts.

SBA loans

If finding an angel or garnering a venture capital firm’s support seems unlikely, you could try the federal government’s Small Business Administration (SBA). Its SBA 7(a) loans, for instance, help startups and existing small businesses with financing guaranteed for a variety of general business purposes.

Maybe you need only a relatively small amount of capital to get you through a rough patch. If so, the SBA offers up to $35,000 via a “microloan,” an arrangement with a maximum six-year term. You may also be able to obtain a microloan from a number of SBA-approved nonprofit groups, such as local economic development organizations or state finance authorities.

The total amount of 7(a) loans approved by the SBA fell $3.4 billion in fiscal 2009 to $9.3 billion, according to the Coleman Report (an annual listing of top SBA lenders). The report says, however, that slow-arriving stimulus dollars could give SBA funds an added push in availability.

The search continues

These are but a few of your options when it comes to business financing. Others include commercial financing companies and perhaps even personal wealth you’ve been hesitant to tap. And, of course, a traditional lender (your bank or another) may not be out of the question. (See the sidebar “What about a plain old bank?”)

What about a plain old bank?

A traditional lender is still very much an option for businesses in need of credit. But, as you may have noticed, the banking industry has changed quite a bit over the last few years. So if you’re considering financing from a bank, large or small, consider the following pointers:

Start your search early. There have been several major bank mergers in recent years, which have shrunk the pool of available lenders. That friendly bank rep in the brick building across town may no longer be there, or the building itself may have a different sign out front. Take a close look at your options to get a sense of what you’re up against.

Take a walk in a banker’s shoes. Rocky credit markets and heavily increased (and well-publicized) regulatory scrutiny have put bankers under great pressure. As you go into any financing effort, take a step back and see things from the bank’s perspective — at least at first. You’ll likely have to go to extra effort to make any lender comfortable these days.

Suggest a comprehensive site visit. In the past, bank reps would occasionally pay a visit to a loan applicant’s office or facilities for a cursory walk-through, but it generally wasn’t required. These days, you might want to suggest such a move to further reassure a potential lender that you have the personnel, assets and operational procedures to pay off the loan or at least provide decent collateral.

Small business bankruptcies went up in 2009

How important is cash flow in today’s business world? Bankruptcy filings for small businesses were up 44%, according to credit analysts Equifax. California was particularly hard hit, with an astounding 81% rise in filings. Analysts point to the tight credit market and reduced consumer spending as major factors in the uptick in failed businesses.

In fact, the overall picture could be even dimmer as many small business owners file for personal bankruptcy protection rather than doing so for their companies. And, indeed, when composing loan agreements, banks are increasingly looking into business owners’ personal credit histories — including personal guarantees. This doesn’t mean obtaining financing is out of the question, but be sure to do a reality check before going shopping.

Please contact Feeley & Driscoll's Accountants and Consultants by Email or call 1 (888) 875-9770 to learn more.

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