07242017

Discover These Simple Solutions to Business Financing Success

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Business lines of credit and the right loans for your business depend on these key factors to financing success.

Business lines of credit and the right loans for your business deliver on working capital, cash flow and growth for your company – they can come at a painstaking price sometimes. We’re exploring the strategies that allow you to have business financial success in this area.

When business owners and financial managers have successfully negotiated working capital facilities or term loans, it should not be the end of the story. By that, we mean that the business owner and financial managers must continually focus on what the bank or other financial institution requires, and more importantly, how lenders view the customer from a control point of view. So, how does the lender exert control on your business?

Knowing the balance sheet must be a top focus for the business owner – once a firm is over leveraged, i.e. borrowing too heavily, the bank or commercial lender generally starts positioning around their overall security or your ability to de-leverage.

Borrowers must be comfortable and knowledgeable about the use of “triggers.” Triggers are the implied actions the bank or institution will take when things aren’t working out. This can include everything from general poor financial performance to very specific pre-agreed upon financial ratios. And the business owner must remember that he or she agreed to and concurred with these ratios.

Banks want to see cash flow “flowing”  to repay their debt, so there may be triggers put in place by the bank to ensure that minimum cash flow standards are kept, and also that owners and shareholders do not withdraw excess funds.

Over time, business owners will probably find, in our experience, that the bank restrictions either tighten up or loosen, depending of course on the overall comfort level the bank has with the firm. Clearly, firms that seem temporarily challenged in profits and balance sheet quality will receive much more scrutiny.

Business owners can do some very solid and valuable preparatory work in the negotiation of bank triggers. If they have a solid long term history of earnings this should be a very strong negotiating point with the institution.

Through self-introspection of the firm, the owner or financial manager can focus on what is going to go wrong resales, pricing, forex, etc. The owner needs to be able to talk to these issues and show how he could address them. Also, remember that those traditional lending sources, such as banks, are not the only way to finance a business these days.

Other solutions in the alternative sector include:

– A/R Financing/ Factoring
– Inventory Loans
– Purchase Order Financing
– Non-bank asset based lines of credit
– Tax Credit Financing
– Sale-leasebacks

Using “what if” scenarios help immensely and will position yourself as knowledgeable about your business.

Discussions with your bank need not be absolute and immediate on any time of loan negotiation – you can get a great informal sense of what the bank is thinking and work from that point forward. Try and read between the lines. Business owners need to show maximum flexibility on working capital and loan negotiations. Negotiations should be from strength, accentuating the positive.

For example, strong forecast sales and profits can potentially offset a weaker balance sheet. That’s when those alternative financials solutions should well be investigated. Trade-offs with the bank are also encouraged- and fewer triggers and covenants are better than more.

And yes, there is more than one bank in the world, although business owners should be cautioned that shopping around is not optimal at all times, and can, in fact, backfire, particularly for a small business. Business owner beware! Seek out and speak to a trusted, credible and experienced business financing advisor who can help avoid those painstaking finance errors.

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