Capitalizing Growth: Where Do I Get The Funds?

Office World News, Jul/Aug 2004 by Stimmel, Craig

"Money is the root of all evil or so it says in the Bible. I respectfully disagree! Money is a tool that helps businesses grow. And, without enough money, companies are stymied and prevented from continuing to grow. There are many sources of capital including:

1. Traditional sources-banks or credit unions, etc.

2. Credit lines-based on property (yours or your company's), investments or other tangible assets.

3. Government-backed-guaranteed loans-partially secured by the U.S. Government-guarantees are typically maxed out between 50-90 percent of funding requested with the balance usually based on tangible assets.

4. Friends and family-are a difficult avenue to travel, but one that often is a good "fall back position" in case other options fall through.

5. Investors-ranging from private to corporate sources.

6. Equity financing-borrowing against the value of corporate stock, inventory capital equipment (if not financed or leased)

Now that we've identified the sources, you need to figure out which source is right for you and prepare a plan of action.

LAYING THE GROUNDWORK

Before an individual or company decides to go after capital, it is necessary to have up- to- date financials, including profit & loss (P&L) statements, cash flow statements with budgets and a balance sheet.

You will also need to have an up- to- date business plan. Without one, it's almost impossible ( with the possible exception of family & friends financing) to source capital. If you have one, make sure that it accurately reflects your current position and justifies the need for additional capital.

Your business plan should contain an executive summary that is quick and easy for others to read and summarizes your business' direction and approach to growth. Your business plan must accurately present your plan for growth and what additional capital will do to achieve the required results. With borrowed capital, the plan must accurately describe how the company will repay the funds without compromising the company's ability to grow.

* A TRADITIONAL APPROACH

Banks and credit unions are good sources of capital by providing loans and lines of credit. Traditionally seen as conservative, many banks are shedding that persona in favor of a more aggressive approach to business. Depending on the company's rules and regulations, many of today's banks are willing to take chances on local business success.

Many banks and credit unions are actively involved with governmental "loan guarantee" programs like the SBA or state run programs. Speaking to your loeal bank's loan officer/branch manager should get you a 'quick read' as to whether it is the right institution to approach for capital. If not, they should be able to point you in the right direction and provide you with a formal introduction.

Knowing your credit score is helpful when approaching banks and credit unions. A credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don' t lend" answer for people who are applying for credit or loans. Unless you're a very large corporation, it is likely that you, personally, will have to guarantee the part of the loan that is NOT guaranteed by the federal or state government. There are many varieties of credit scores available to lenders but the most widely used are FICO scores, which are based on a scoring system developed by Fair, Isaac & Co., and which are provided to lenders by the three national credit bureaus - Equifax, Experian and TransUnion. Credit scores in the high 600's/700's/800's are great. Much below this range of credit scores, you're likely to be turned down or offered a loan at higher than normal interest rates.

* GIVING CREDIT WHERE CREDIT IS DUE

Property of any tangible kind can be used as collateral for a loan or line of credit. Credit Lines are often based on property ( yours or your company's) , investments or other tangible assets. Often 401K accounts and investments (stocks, bonds, and certificates of deposit) can be used without jeopardizing the remaining qualified. If your credit is not the best, then this option becomes useful.

Equity financing or borrowing against the value of corporate stock, factoring (AR), inventory, capital equipment ( if not financed or leased) is a viable option depending on what form of asset (s) you are planning on using as collateral for the loan/line of credit. Broad spectrums of sources exist for securing loans based on stock equity including: banks, stock brokers and financial advisors who will source it on your behalf for a fee. Mortgage brokers, banks, credit unions, equity financing companies and private investors are viable resources for real estate financing and banks. Leasing companies and private investors are just a few of the options available for financing inventory and capital equipment.

GOING TO THE GOVERNMENT

Government Backed Guaranteed loans e.g. SBA ( partly secured by the US Government) typically max out between 50- 90 percent of funding requested with the balance usually based on tangible assets and/or your credit score. Keep in mind that the SBA does not loan directly. That is done by area banks that can accept or reject your application based on their own SBA loan guarantee criteria. Alternatively your state (county or city government) may offer direct or indirect assistance in the form of loan guarantees. Check with your city/town manager or local bankers for help in identifying potential government sources.