Small Business Financing

Small Business Financing

As a small business owner, a traditional bank loan can help you boost your business, but it is not the only financing option you have. Because finance is a key part of growing your business, you need to consider not only conventional bank loans but also other sources of finance that may or may be related to banks. The method you choose to finance your working capital and how you invest the capital will determine how much your business grows and how much returns you get from the investment.

Why does your business need capital?

Small businesses need capital to maintain the continuous production of goods or services and continue making a profit. Two of the main ways that your business can use acquired capital are labor and building expansions. A business has to direct its capital towards investments that make more returns than the cost of the capital. Granted, you have to be careful when choosing the type of financing to avoid making losses from the increased cost of capital.

You need to analyze your company’s balance sheet as it is an indication of the financial health of a business. Here, you will look at the assets, liabilities, and equity. When seeking capital for your business, there are four types of capital:

Debt Capital

This involves the assumption of debt from private or government sources. Common sources of capital, in this case, include friends, family, online lenders, credit card companies, financial institutions, federal loans, and insurance companies.

To qualify for debt capital, you or your business needs to have an active credit history. After you acquire the capital, the lender will require regular repayment with interest. The interest varies based on the lender and your credit history.

Equity Capital

You get equity capital by selling off a percentage of your business to private, institution, or government investors. Private and public equity comes in the form of shares. When your business goes public, you exchange and receive equity capital with business shareholders. Private equity does not involve the public but select investors who come in and buy a section of the business.

Working Capital

Working capital is a company’s liquid capital assets available to carry out daily obligations. The capital shows the short-term liquidity of a company – which further shows a company’s ability to pay debts, accounts payable, and other business obligations.

Trade Capital

This is the capital held by small businesses or firms that trade a lot of money every day. Trade capital is the amount of money a business needs to buy and sell securities every day. As an investor, the best way to add your trade capital is to optimize your trading methods. This involves choosing the percentage of money to invest in each trade to realize more revenue.

Now that you understand the four different types of capital that your business may need, let’s look at the financing options available. No one financing option fits all businesses; just pick what allows you to make the best of the capital you acquire.

What Are The Different Kinds Of Capital Available To Businesses?

• Accounts Receivable Financing

Also called factoring, accounts receivable financing involves selling receivables to obtain finance for the running of a business. Accounts receivable refer to the amount of money customers owe your business for goods or services sold.

The idea is that your business trades money that would have been received later for money now, which comes in handy when a business needs money immediately.

How does it work?

If, for instance, your business has $1 million in receivables from customers who are yet to pay for goods or services received, you can get financing for that money. Because the amount owed is expected to be received, it appears in the balance sheet as an asset. To get funding from receivables, your company needs to call in a factor (which is an institution that purchases receivables). Factors are very expensive. In the example above, the factor might offer your business up to $750,000 for the $1 million – which means that the company charges 25 percent for the financing.

The advantage is that the factor assumes all the risk for the customers paying later than a year or failing to pay at all. Due to the risk involved, factors are very selective when working with companies. Most will look at the creditworthiness of a company’s customers before approving financing.

Note that, this financing option is not a debt as you are selling off a company’s asset.

What you get with accounts receivable financing:

• Fast cash without personal guarantee
• Financing available for all types of business
• Funding increases as a business sales increase
• No fixed payments
• The factor does the collections on your behalf

Is this option right for you? You need:

• Creditworthy customers
• An established payment collection process
• A solid business
• It is an ideal plan when you need running capital but cannot wait for weeks for customers to pay

• Asset-Based Lines of Credit

Asset-Based Lines of Credit is a form of financing that allows you to finance your company’s assets, such as receivables, equipment, and inventory. Asset-based financing works the same as a conventional business line of credit. Financing inventory and equipment works the same as a term loan where your assets stand in as collateral.

This type of financing is ideal for companies that have a shortage of running capital as a result of slow-paying customers.  The solution streamlines a company’s cash flow allowing you to invest in new opportunities.

If your business needs a minimum line of $750,000, you qualify for an asset-based line of credit with your accounts receivable as collateral. This means that, your sales must be to creditworthy customers. The factor (institution offering financing) will require that other loan options (say a business loan) do not rely on your accounts receivable. If such is the case, the existing lender needs to subordinate their position on the accounts receivable.

How does it work?

Asset-based lines of credit work almost the same as a conventional line of credit. Your business submits a borrowing base certificate a lender or factor and the lender wires funds to the business account. The borrowing base certificate is a financial report showing all eligible receivable. This means that your business needs up to date financing to create an accurate borrowing base certificate.

You will repay the funds through the standard collection process as your customers pay their invoices. The line works a revolving line of credit so you can use it as much as you need with your business’ accounts receivable setting the limit. As the value of accounts receivable increases, so does the financing. Unlike conventional lines of credit, asset based lines of credit:

• Allows you to transfer funds to your business’ bank account
• Bases your qualification on solid financial statements, substantial assets, and good records of performance
• There are no contractual covenants (such as maintaining a certain net worth) when you apply for asset-based lines of credit
• Your line increases as the business sales increase

What do you need to qualify?

• Provide updated financial reports
• No obligations should be tied to your accounts receivable (such as loans)
• Your sales should be to creditworthy customers
• Show awell-established receivables collection process

If your business has shortage of capital and customers owe you, you can leverage that to get this loan.

• Commercial Real-Estate Loans

Commercial real estate loans help businesses purchase or renovate commercial properties. Most financing options require that the real estate to be funded is owner-occupied where at least 51 percent of the commercial property is inhabited by the business.  Commercial real estate includes apartment complexes, warehouses, office buildings, mixed-use buildings, and any other property designated to make money.

Unlike residential real estate loans, commercial loans have a short repayment period – between 5 and 20 years.

What are the common types of commercial real estate loans?

There are almost twenty types of these loans including Small Business Administration (SBA) loans, Commercial Mortgage Backed Security (CMBS) loans, commercial mortgages, bridge loans, commercial refinance, commercial construction loan, hard money loans, blanket loan, multifamily loans, office building loans, retail building loans, hotel loans, industrial building loans, portfolio loans, and fix and flip loans among others.

Each type of financing above comes in handy for specific businesses and in specific situations. For small business owners, the most appropriate and most available loans are traditional commercial mortgages, CDC/SBA 504 loans, and SBA 7(a) loans. These loan options require on-premise occupancy with your business occupying at least 51 percent of the property.

Traditional commercial mortgage loans – Not backed by the federal government, the loan is strictly between you and the bank so the bank decides the amount to lend you and the repayment process. Most banks offer between 65 and 85 percent loan-to-value with interest rates ranging from 4.75 to 6.75.

SBA 7(a) and CBC/SBA 504 are loans backed by the federal government. The loans come in handy if your business is rejected for a bank loan. Interest rates are lower with SBA loans and so are the credit score requirements but the qualifications guidelines might lock out your business.

CDC/SBA 504 is designed for the purchase of commercial real estate. Fifty percent of the amount comes from a lender while others come from community-based sources.

To qualify for commercial real estate loans, you need:

• Commercial property (any property designated to make money)
• Your business to occupy at least 51 percent (for most of the most appropriate loans for small businesses)
• Provide required documents

4.) Contract Financing

Contract financing is an avenue to finance your business with cash advance from a project you haven’t started. Once your business makes a contract with a customer, you have collateral to seek financing. The contract needs to specify milestones and payments of the project. Unlike a traditional bank loan, lenders consider the creditworthiness of your customer and the terms of the contract when approving a loan and not your company’s credit record.

How does it work?

Contract financing offers you funding for a large percentage of the invoiced amount right away and the remainder is awarded less the fee when the project client pays the invoice. If your company operates contractually, offering services or producing products for a project or event, then you can consider this type of financing.

A contract needs to specify the partial payments your business will receive with each portion of work completed. This way, the company does not have to wait for months to receive payment after submitting an invoice to the customer.

You will submit the invoice to the finance company which will pay you a percentage of the invoice amount (say 90 percent). The finance company submits the invoice to your customer. After the customer pays, the finance company deducts their fee from the payment and then sends you whatever remains. This is a great finance option for small businesses that do not qualify for bank loans.

You need the following to qualify:

• A contract showing scheduled milestones and payments
• Your customer needs to be creditworthy
• You have a good track record of performance and can complete portions of work as the contract stipulates

5. Corporate Mergers & Acquisitions

Mergers and Acquisitions refer to consolidation of two companies. While mergers refer to combination of two separate companies into one, acquisitions refer to one company buying out another. M&A allows companies to create more value than they would while standing alone. Companies are also able to explore new ways to maximize their wealth and share resources. If your business is struggling financially, you can merge or be absorbed into another business in the same or different industry and be under the umbrella of that business.

What are the different forms of mergers and acquisitions?

Mergers may either be through absorption or consolidation. Mergers can also be horizontal (two equal firms in the same industry), vertical (two firms in the same industry but at different production stages) or conglomerate (two firms in unrelated industries). Legally mergers can be short form, statutory, subsidiary, or merger of equals.

Through M&A, companies have a chance to grow by increasing their workforce, launching new products or services, expanding their market and reaching new customers. There are different types of acquisition finance including:

• Stock swap finance – Here, the acquirer exchanges its stock with that of the target company in publicly traded securities.
• Acquisition equity – This is for companies that target businesses operating in unstable industries. The acquiring company becomes a shareholder/investor in the struggling company.
• Acquisition through debt – Here, the bank looks at the financial health of the acquiring and target company before offering financing. Most common type of debt financing is asset based financing where a bank offers a loan based on collateral offered by the target company including receivables, fixed assets, inventory, and intellectual property.
• Leveraged Buyout – Here, the assets of both the acquiring and the target company are placed as collateral in a loan. To qualify for this type of financing, your company needs to be mature and have a good asset base.
• Seller Financing / Vendor Take-Back Loan (VTB) – This occurs when the source of financing is internal. This is an ideal form of financing when it is challenging to obtain capital from outside.

When to consider M&A:

• When you need lower cost capital
• When you need to accelerate company’s growth
• For diversification
• To increase market share
• To reduce tax
• When your business is under-valued

6.) Equipment Leasing

The cost of owning and operating equipment and machinery is very high. Mostly, this is due to increased rate of advancements where equipment and machinery become obsolete or inferior within a short period. Due to the high-cost, a small business might choose to lease the equipment instead of buying.

Leasing has many advantages to a small business. For starters, your business enjoys lower monthly payments spread over many months or years than the lump sum that would be spent in buying the equipment or machinery.  Most commercial equipment leases also involve service agreements or service add-ons that mean your business does not need in-house technicians.

What are the different types of equipment lease:

• Capital lease – Here, the lessee acts as the owner of the equipment with the guaranteed option to purchase the equipment at the conclusion of the lease.
• Sale/Leaseback – This type of equipment lease allows you to generate capital by using your equipment. You will continue using your equipment in business operations and in generating capital. You can use the extra capital generated to grow your business. Since you lease your equipment back, you get 100 percent tax deductible.
• True Lease – Here, you never have to make a full payout of the value of the equipment. The term of the lease should be less than 75 percent of the anticipated useful life of the equipment. You should not pay more than 90 percent of fair market value of leased equipment as lease payments. At the end of the lease, you have the option to continue leasing or release the equipment.
• Purchase Upon Termination (PUT) – This type of equipment financing establishes a mandatory purchase price shown as a percentage. It is an option to lower lease payments without creating any risk for the lessor or lessee at the end of the lease period.
• TRAC lease – This is a special true lease offered for trucks, trailers, and tractors. Here, the lessor retains the rights to vehicle depreciation.

Why consider leasing?

• Low monthly payments
• No tied-up capital
• Preserve your existing lines of credit
• Stay up to date with new equipment technologies
• Significant tax and accounting advantages
• Lessors do not require down payment

7.) Equity Financing

Equity financing involves selling company stock to investors. The investors become company shareholders and receive ownership interests from the company.

Equity financing is the alternative to debt financing. Here, you will be giving away a portion of your company in exchange for cash. The portion of the company you sell will depend on the investment you made in the company and what your investment is worth at the time of selling company stock.

Equity financing can be from private investors such as an angel investor or a venture capitalist or from the public when a company goes public. Initially, you own 100 percent of the company. However, the need to expand will require more capital and this is where an investor comes in and buys a portion of the business.

What are the types of equity financing for small businesses?

Initial public offering (IPO) – This takes place when a small business decides to trade its stock in publicly-traded markets. Any member of the public can buy the company’s stock.

Small Business Investment Companies (SBIC) – These are businesses licensed and regulated by the Small Business Administration to provide financing to small businesses. The underwriting requirements are less stringent than what IPO requires.

Angel Investors – These are individual investors with a lot of money to invest in small businesses. The investors are always careful about the businesses they work with but they are willing to get into high-risk businesses.

Venture capital firms – These are businesses that provide funding in exchange for ownership of your business. Unlike angel investors, venture capitalists are groups of investors who pool money and invest in startups and struggling businesses.

Royalty financing – You need to be making sales to get approval for royalty financing. The investor provides you with upfront cash and expects to receive payments after the sale of products.

Equity Crowdfunding – Companies sell portions of their companies to the crowd. The company stays private but is able to get funds to run its day to day activities.

When to go for equity financing:

• When you need less burden/debt
• If you lack creditworthiness
• When you feel you could learn and gain from your partners/investors
• When you need to expand exponentially and you do not qualify for a large amount of money
• When you are ready to share profit and give up control of the business

8.) Franchise Financing

A franchise offers you the support and infrastructure of large corporations but the independence of a small business. However, it requires more finances that small businesses as you have to take care of huge franchise fees, ongoing royalties, paying for ads.

When you need funding for your franchise, you can consider the following funding options:

• Franchisor Financing – Corporations with a franchise business model are willing to offer tailored financing options either directly from their coffers or through partnership with a financial institution. With franchisor financing, the franchisor becomes a one-stop shop for all your needs. Some franchisors offer franchise fees as well as fees to purchase equipment and other resources. Check the Franchise Disclosure Document or ask the franchisor directly.
• Small Business Administration (SBA) – SBA guarantees up to 90 percent of a franchise financing loan. SBA will not offer you the loan but stands in as a guarantor making banks and other financial institutions approve your application.
• Franchise Registry – The Franchise Registry is a list of franchisors on SBA. These franchisors offer franchisees many advantages when they seek SBA-backed loans. The loans are quickly approved seeing that SBA already pre-approved the franchise agreement. Appearing on the Registry gives brands credibility when reviewed by banks
• Conventional Loans and financing – Bank loans, loans from friend and family, equity financing, and loan packages will work with a franchise depending on your creditworthiness.
• Alternative lenders – If you cannot get any of the above loans, consider alternative lenders. Alternative lenders might be online lenders or lenders who specialize in franchises. Most of these have less stringent lending processes and a shorter turn around. However, with increased convenience, you can expect a higher interest rate.

Although the above financing products are the main for franchise financing, there are so many more than a business might consider. As such, you can tick out the financing options as follows:

• Franchisor financing
• SBA loans
• Franchise registry
• Conventional bank loans
• Alternative lenders
• Crowdfunding
• Friends and family
• Equipment leasing

If you run a franchise, this type of finance will be right for you. Regardless of the size of the franchise, any of the options above will help you secure financing.

9.) Inventory Financing

If you have a large sum of money held up in your business inventory, you can use your assets as collateral to secure a loan. The method is common among manufacturers and dealers who might have sold goods and the customers haven’t paid the amount owed yet. Using the scheme, a business received cash to fund its operations unrelated to the inventory. In most cases, you will need this type of financing to take care of a business financial emergency.

You will need to submit the business inventory as collateral to receive instant cash. If the borrower fails to meet the terms of the loan, the lender has the right to seize the inventory presented or any other inventory of similar value.

There are two types of inventory financing:

• An inventory loan is a type of financing solution available when a business needs instant cash. It is a one-time loan offered to the borrower using the resale value of the company’s inventory.
• Inventory line of credit is common among borrowers as it allows them to take care of unforeseen business expenses. In this plan, the lender offers the borrower extra money regularly.

To increase your chances of approval, you need to have a well-organized inventory with an accurate record of inventory. You also need to ensure your inventory is protected from elements. At any time after your application, you should expect a visit from the lender. Even if the lender never visits you, being ready for the visit is important. You also need accurate sales records and to get rid of unnecessary inventory.

What you need to be eligible:

• Your business needs to be operational for a year or more
• A decent turnover with a commendable business credit profile
• Record of business sales where the inventory was turned into cash
• Business inventory should be in high demand and turnover
• You need to have less debt and have an established product line
• Have no major credit violations such as repossession, tax lien, or bankruptcy
• Have accurate financial documents and a working inventory management system
• If you meet the above, prepare the necessary documents as required by the finance institution

10.) Joint Venture Financing

A joint venture is more like a partnership where two parties agree to share in losses and profits of the venture. The basic joint venture financing is a win-win business association where two businesses at the same level join to share resources and maximize their earning potential. There are different types of joint ventures to consider – each suitable for different business needs:

• Affiliate Partnership – This is a type of partnership that helps you when you have products but no audience. The affiliates expose your business to an audience that is ready to buy.
• Financing agreement – This involves getting funding from a private party or a business center to execute your business plans. You and the partners have to share risks and profits. With a financial agreement, you get the flexibility to explore new business ideas.
• Vertical joint venture – This type of joint venture financing is ideal for businesses that import products. Businesses in a joint venture can share distribution channels, knowledge, funding, and work together to find effective ways to fund their businesses.
• Project-based joint venture – These are associations that have a singular goal – to work together towards a project. The association doesn’t go past the agreed task unless the businesses renew their partnership.
• APIs – Businesses can collaborate through application programming interfaces. Here, companies combine software unique to their businesses. This allows companies to enhance the existing product or service through better technology.
• Functional-Based Joint Venture – These is where two companies share expertise and resources. It is common in the food industry where one company may have the resources to produce a type of food but lack the resources to market the product.

Getting into a joint venture

• Get your business financial records and inventory records right
• Identify a business that has the resources or expertise you lack
• Research on the operations of the company and then seek a joint venture with them

11.) Large Project Financing

Is your business undertaking a large project that needs a lot of financing? Such projects include long-term infrastructure, public services, and industrial projects that require a lot of money. Funding such a project requires limited recourse or non-recourse financial structure. The debt or equity that finances such a project is paid once the project starts generating cash flow.

Large project financing relies solely on the returns from the project for repayment. Lenders hold the assets from the project, the rights, and the interests as secondary collateral until the loan is fully repaid. This form of financing is common with small businesses looking to fund major projects off the balance sheet.

There are multiple elements in a build, operate, and transfer (BOT) finance structure. BOT finance structure includes a special purpose vehicle (SPV). The company carries out the project by hiring contractors. Because the construction phase does give any revenue, the debt service only applies in the operations phase. Both parties take a risk during the construction phase.

In a large project financing model, there are so many parties involved including sponsors, lenders, off-takers, contractors, operators, advisors, regulatory agencies, multilateral agencies, and insurance and hedge providers.

Consider the following sources of project finance:

• Equity
• Debt (commercial bank loan, subordinate loan, bridge finance, bonds and other financial instruments)
• Government bonds such as supplier’s credit

12.) Medical Loans

Medical loans are available for medical professionals who seek to start their own businesses. The loans allow professionals to keep the practice running, purchase new equipment, create an inviting office, and hire qualified staff.

There are different types of loans available for doctors:

• Small business loans – These are loans to offer your practice working capital, expansion, improvement, and practice acquisition.
• Equipment Leasing – Because most medical equipment and machinery are expensive, lenders allow medical practices to lease machinery as explained in equipment leasing products above.
• Debt Consolidation – If your practice is struggling with debt, medical loans are available to allow you to consolidate debt.
• Personal loans – These loans are offered to the doctor and not their practice. It is ideal for medical professionals who are yet to start their practice and would like to use their payslip and guarantors to secure financing.

Depending on the lender and the type of loan, you will get between $1,000 and $250,000 to boost your business. It helps if you have a strong credit history, or your business has shown good performance over the past few years. You can apply most of the loans online. To qualify, you might need:

• High credit score
• Low credit-to-debt ratio
• A salary or have an established business
• The necessary documents

You need to be a doctor or a healthcare professional to qualify for this financing. With or without a business, as long as you have a good credit score, you qualify for a loan as the lenders rely on your payslip to repay the loan.

13.) Medical Receivables Financing

Medical receivables refer to invoices owed to medical practice and facility. Medical receivables financing, therefore, refers to financing with medical receivables as collateral. The receivables have to be owed by creditworthy clients or institutions such as Medicare or Medicaid, insurance companies, government institutions, and other agencies.

Instead of waiting for three to five months for the invoices to be paid, you can see medical receivables financing. If, for instance, your accounts receivable total $1 million, you can use those assets as collateral for a loan. The factor (loaning agency) might give you up to 90 percent of the total accounts receivable amount and then the rest when the invoices are paid. You are offered a lump sum amount or a line of credit to use whenever your business needs money.

Send the invoice to the factor, and the factor will send the invoice to the clients. This way, the burden of the collection is easy on you. Businesses that qualify include hospitals, nursing homes, dental offices, medical clinics, rehabilitation centers, physical therapy centers, laboratories, single and group practice physicians, chiropractors, and MRI facilities among other health care facilities.

To qualify for medical receivables, you need:

• Your financial statements showing the accounts receivables
• Be an established business (at least one year of operation)
• Have an established collection system
• Your clients need to be creditworthy

14.) Merchant Cash Advance

Also referred to as a business cash advance, this form of financing works the same as a paycheck advance for employees. MCA offers an advance on a business’s future sales. The financing option is available for businesses that have a steady volume of sales. Retail stores, medical offices, restaurants and related businesses all qualify for this type of financing.

You will need to show proof of your identity, bank statements, business tax returns, and credit card processing statements. You might also need to check your credit score.

Unlike other forms of financing, MCA is an expensive loan where you are needed to pay between 20 and 40 percent of the amount advanced. Again, there is a holdback amount that you pay every day and the repayment amount for the advance. For instance, you could pay 15 percent hold back and 30 percent of your daily sales as payment of the cash advanced.

The holdback percentage is dependent on the amount of money your business makes, how long you would like to repay the money, and how big your monthly sales are.

The application checklist:

• Apply for business funding
• Provide necessary documentation
• Get approval
• Set up credit card processing
• Finalize the details
• Receive your funds

When should you consider this?

• When you are short on running capital
• If the shipment is delayed and you cannot sell for a while
• If you need money to increase production to meet increase demand

15.) Mezzanine Financing

Mezzanine financing is a hybrid of debt and equity financing. Here, a lender offers subordinated loans (less senior loans compared to traditional loans) and the lender gets equity in the business. These loans come at a high interest rate with a flexible payment plan. Mezzanine financing comes in handy when a business needs financing for a large project. Because a traditional lender might not be willing to finance a large project, mezzanine funding fills the gap.

As subordinate loans, mezzanine loans have lower priority compared to senior debts in case the borrower goes bankrupt. If your business goes bankrupt, the mezzanine creditors will have to wait in line as banks and senior bondholders get their share from the sale of your business assets. Such low priority means that the loans come at high interest rates. Mezzanine lenders only work with established companies. You can therefore seek the loan to acquire an existing business or expand an already established business. Depending on the lender, you will have different options of repayment – if, for instance, cash flow is not available to repay the loan, the business might consider capitalizing interest charges, known as payment in kind. This form of financing is only available for businesses with positive cash flow.

The debt has a maturity period of 5 years. If the debt is issued at the same times as a bank account, it matures later than the bank debt. The mezzanine debt securities cannot be traded unlike bonds and stocks. Granted, they have limited liability.

Mezzanine debt is advantageous to the borrower in that it comes cheaper than equity and does not result in the dilution of existing stakeholders. The interested on mezzanine financing is tax deductible. By using mezzanine financing, a business is able to create a cost-effective capital structure.

To qualify for mezzanine financing, you need:

• Credible track in the industry
• Feasible expansion plan
• Consistent profitability

16.) Mobilization Financing

Mobilization fund is the capital your need to launch your project after winning a contract. Simply put, it is the fuel your project needs to get off the ground. Mobilization funding is a form of affiliate program that companies use to see certain costs of a new project. It is common in the construction industry where contractors seek money before the first invoice is paid after the first milestone.

The funding acquired covers the working capital, construction bonds, make payrolls, obtain insurance, purchase materials, pay vendors, pay subcontractors, purchase equipment, pay overhead expenses, and much more. The lender will not approve funds for unrelated usage of funds such as taking vacations, personal use, and unapproved overhead expense.

With mobilization financing, contractors can get up to 10 percent of the entire contract amount and up to 85 percent of the issued invoice amount. However, you need to check with your lender as the caps may differ.

Most lenders also offer you invoice factoring where you (as a contractor) can raise money through invoices or accounts receivables as collateral. The amount you get from mobilization financing will depend on the figure on the contract and the invoice.

When applying, ensure you have the following:

• The contract shows milestones and payments made for each milestone
• You have evidence that you can complete the project as stipulated on the contract with no fail
• Your client is creditworthy especially if the lender decides to go with invoice factoring
• You have a proven track record of success

17.) Project Financing

Project financing seeks to offer funds for industrial, infrastructure, or public services. Most of these projects need a lot of money to run which only a few lenders are willing to offer. After the loan is awarded, you will repay it using the cash flow from the business over a long period. If you fail to comply with the terms of the loan, the lender can take over the project. Financial companies prefer these kinds of financing options as they can increase their earning margins if the company presents the scheme with partially shifted project risks.

There are so many parties involved in project financing; the most important are sponsors lenders. Between the sponsors and the lenders is an intermediary called the special purpose vehicle (SPV). The role of SPV is to supervise the funding and expenditure process to ensure that project assets are not lost of a project that fails. Most lenders will review the project to identify all associated risks and allocate them to avoid any future complications.

Lenders have to ensure the unobstructed performance of a project’s assets. Given that is SPV is only an entity established for the project, their only asset is the project.

Project finance is for ventures that require a huge amount of funds. It is more expensive than corporate loans. It drives the costs high while reducing liquidity. Projects under project finance face the risk of emerging markets and politics. Granted, the project requires expensive insurance premiums. By seeking project financing, some risk shifts to the lender which helps the sponsors mitigate some risks. The lender also enjoys better credit margins by offering project financing.

After the project is complete, the special purpose vehicle presents its report and the property goes to the concerned entity as the loan contract stipulates. The borrower only needs to concentrate in the feasibility of the project since the lender does not evaluate the assets and the borrower’s credibility. Borrowers also get tax treatment and the sponsor credit has no impact on the project.

You will follow these stages to get project financing:

• Identification of project plan
• Recognizing and minimizing risks
• Checking project feasibility
• Arrangement of finances
• Loan and equity negotiations
• Documentation and verifications
• Payment
• Project monitoring
• Project closure
• Loan repayment

18.) Purchase Order Financing

Purchase order financing acts as a short term financing option for your business. It provides capital to pay suppliers for verified purchase orders. Instead of declining an order or using all the funds in the cash reserve, businesses seek purchase order financing. Granted, your business can accept unusually large orders. If the orders drop, you can adjust the loan down or stop using it completely.

PO is ideal for small businesses that are growing and need to fulfill large orders. A business with poor cash flow or little access to working capital can also benefit from these businesses. Businesses that qualify for this type of financing include:

• Manufacturers
• Wholesalers and retailers
• Distributors
• Importers and exporters

Some lenders only consider loaning to established businesses while others fund even startups. The financing is available when you do not qualify for a bank loan, your customers have not paid their invoices, and you have received a large order. By using PO financing, you avoid losing your order and losing confidence with your customers.

Most of the lenders will pay the supplier directly with cash or letter of credit. This way, the growth of your business does not stall when your money is tied in unpaid invoices. The proceeds from the sale of your supplies is distributed after the shipment arrives.

Most PO financing firms follow their own rules in lending which means you have so much flexibility with PO financing. Consider the following when applying for PO financing:

• Sufficient gross profit margin
• The ability of your business to ramp up/down production to meet demands
• The product appeals to a broad audience
• You have an established distribution system

19.) Trade Finance

If you are in the export or import business, you can rely on trade finance to run your business. Trade finance works for startups shipping their first products from overseas to large corporations importing and exporting large shipments every year around the globe.

As a small business owner, you may have little access to business funding from banks and other main financial institutions. This is because banks may not want to have their money tied up in shipment when goods could take more than six weeks to ship. On the other hand, companies cannot wait for all more than six weeks until the next shipment. To keep businesses running, companies rely on trade finance. With trade finance, companies are able to keep goods moving from one corner of the globe to the next even without enough cash flow.

Trading finance works when banks and other financial institutions work as intermediaries to over the transactions between buyers (importers) and sellers (exporters). The transactions take place either internationally or domestically. With the availability of trade finance, international trade has grown a lot. The finance covers:

• Issuing letters of credit
• Lending
• Export credit and financing
• Forfaiting
• factoring

The transactions involve a lot of parties including a buyer, seller, export credit agencies, trade financier, and insurers.

Trade finance is a way for importers and exporters to reduce payment risk. An importer is never worried to make advance payment and exporters are not afraid of sending goods and waiting for payment since the financial institutions are intermediaries. Trade finance not only helps finance buying and selling but also accelerates payments to exporters and ensures importers get their good on time. The finance also reduces pressure on importers and exporters.

There are different products and services with banks and other financial institutions. Lenders offer two types of products including:

• Line of credit – A bank or financial institution makes payment to the exporter when the importer confirms receipt of goods as in the purchase agreement.
• Bank Guarantee – Here, a bank plays as the guarantor in case either the exporter or importer doesn’t meet the terms of the purchase agreement. The bank offers to pay the sum of money in case the buyer fails to make payment.

A bank of any other financial institution will need to know that:

• You are creditworthy
• Your business is already established and you have made a few import or export transactions
• You have shipments waiting payment (account receivable)

20.) Sale-Leaseback Financing

A sale-leaseback refers to a transaction where a company sells its real estate and then leases it from the buyer. After the sale of the property, you will complete to operate out of the business by leasing it from the purchaser. This form of financing gives a company running capital without putting the company in debt or forcing the company to sell equity.

When should you consider sale leaseback?

If your business owns the real estate you operate from, you can consider SLB. You can consider this form of financing if the profit margins from your core business are way more than the returns from the real estate property. The core business can use the capital from the sale of the property to expand, launch new products, hire more experts, or whatever other capital need the business has.

Business in all industries can benefit from SLB whether their real estate is a retail, industrial, medical office or any other. Most SLB are in convenience stores, restaurants, grocery store, apparel, office, pharmacy, medical facilities, dollar stores, gyms, distribution and logistics, and movie theaters.

When should you consider a sale-leaseback?

If you need to unlock the real estate value of your company, a sale leaseback might be a great place to start. You also reduce the company’s investment in non-core business assets such as land and buildings. You will liberate cash to execute a long term lease. If you are prepping your business for sale, you might consider selling off the buildings and land.

You have a number of advantages when you go with this kind of financing. For starters, you set your lease terms when selling your property. Typical leases run for up to 15 years but you can negotiate a longer lease before selling your business. You will retain control of most parts of the business and you will be in charge of basic maintenance. There are tax savings when you are a lessee and not a building owner.

To qualify for sale leaseback you need:

• Real estate where your business operates
• The property should not be placed as collateral for a loan
• The purchaser should be willing the lease back the building

21.) SBA Loan Program (7a and 504)

The US Small Business Administration offers small business loan programs and resources to help small businesses. Of all the loan programs that SBA offers are SBA 504 and SBA 7(a) – two products that offer great options for small businesses.

One of the new products on the SBA 7(a) loan program is the Paycheck Protection Program that helps small businesses across the US maintain workers in their payroll. Through this program, SBA matches you to a lender or partner who will offer a loan at a lower interest. SBA acts as the guarantor of the loan.

The SBA 504 and SBA 7(a) loan options are both for small businesses. SBA 7(a) is the most popular loan option. It gives a loan you can use for your company’s working capital, purchase furniture and fixtures, acquire an existing business, or make leasehold improvements.

The SBA 504 loan option is ideal when you need to purchase land or building, improve existing facilities, purchasing equipment, and machinery, purchase ground-up construction commercial real estate. The SBA 504 acts as an economic development program that promotes the growth of businesses and promotes the creation of jobs in the US.

The SBA loans are not offered by SBA directly. Instead, the SBA has partnered with banks, credit unions, and other lenders. The work of SBA is to guarantee loans such that if you default on the loan, the SBA will pay on your behalf.

SBA 504 loan options are offered through Certified Development Companies (CDCs). Both SBA 504 and SBA 7(a) allow you to apply up to $5 million while the SBAExpress loan allows up to $350,000. You will have to negotiate the loan rates with the lender.

To qualify for both SBA 504 and SBA 7(a), your business must:

• Be for-profit
• Operate in the US
• Cannot be in the list of businesses considered ineligible for SBA loans
• Shouldn’t have access to other sources of funding
• Should have a sound business plan
• For the SBA 7(a), you need a ‘satisfactory’ FICO SBSS score

22.) Structured Settlement & Annuity Financing

A structured payment refers to a stream of payments given to a person so won a lawsuit. The defendant must settle the payment. This is different from lump-sum payments in the way money is released to the plaintiff.

If your business wins a case and you are supposed to receive structured settlements, you can leverage that to get a loan. However, the government makes the payments tax free and limits you from using it as collateral on loan.

So, how do you use structured payments to finance a business?

Most banks and financial institutions accept the structured settlement as proof that you can repay a loan. The bank might also look at your creditworthiness ton ensure that you can pay the loan. With the structured settlement, your business is more creditworthy. Pick proof of structured payment income from the defender’s company administrator to present to your lender. If you have received some structured payments before, you can provide the bank with bank statements to show the receipt of payment.

If your business is supposed to pay structured payments and annuity to a plaintiff, lenders are willing to approve your business loan application to cover payments through a business line of credit. To get that, your business needs to show its creditworthiness.

There are many benefits of structured payments. For starters, these payments are not counted as income and so no tax deducted. The payments are offered over an agreed period – payments can start immediately or can be deferred for a long time and requested. If your business is to pay a defendant, the long period gives you time to seek a loan. If your business is to receive payment, you will receive the payments spread over a long period you can only use the amount as running capital.

Note that:

• You cannot change the terms of structured payment
• Funds are not accessible immediately so you cannot use them for business emergencies
• Using structured payments benefits without selling payments before age 59.5 will cost you money
• Attorney’s fees and punitive damages might be taxed
• You can lose your settlement through administrative fees if insurance companies in your state are not required to disclose the structured settlement amount

23.) Unsecured Business Lines of Credit

An unsecured business line of credit offers you a revolving credit limit without asking for collateral as security. Because the loan doesn’t need collateral, it is considered a high risk loan and it will therefore come at a high interest rate, shorter repayment term, and doesn’t need a high credit score. Traditional banks may not be willing to approve this type of credit but an online lender might.  This is a great source of business financing if your business has limited assets or you are at risk of foreclosure, this type of financing might be right for you. The unsecured business line of credit works the same way as a conventional revolving line of credit. You will get a maximum amount (which can be up to $500,000 for established businesses) and you draw any amount you want whatever time you want. You also pay for the amount of money you spend and you can repay when and how you see fit.

When should you go for unsecured BLOC?

• If you do not have enough business assets or you do not want to risk your business assets
• When you do not want a lender to undervalue your assets
• You need a business line of credit quickly

You can use the unsecured BLOC to hire more staff, buy equipment, expand or relocate from the current building, pay for orders, get operating capital for your business, or move to new headquarters.

Qualification checklist

• Established business (some lenders require you be in business for at least three months and some more than a year)
• Annual gross sales of more than $100,000 (some lenders require more)
• Have a FICO score of at least 630 (some lenders do not consider the FICO score)

24.) Venture Capital

Venture Capital drives innovations around the world by supporting startups until the business goes public. Venture capitalists might have billions of dollars under their management – enough to support businesses until the IPO.

The main advantage of venture capital is that besides the financing your get, you get business expertise from analysts, principals, and partners who have been in business for a long time. For a small business, working with venture capitalists gives you access to valuable source of guidance and consultation. Help can be in the form of business decisions, financial management, and human resource management among others.

A VC also provides support in so many other areas including legal, personnel, and tax matters. They give you support at every stage in your business growth. Again, the partners are well connected people so they will help you tap into new markets and find experts who will help you grow your business.

When you work with a venture capital firm, you have to be willing to lose control of your business. Because venture capital partners inject a lot of money into your business, they might want to be more involved in the day-to-day running of the business. The size of the stake determines how much the partners are involved in the business. In some instances, the VC firm contributes more than 50 percent of your business capital which means you lose management control and you could be giving up the ownership of your business.

When considering funding from a venture capital firm, check out the following:

• You are ready to take more input from the firm
• You appreciate additional experts working with you as the firm provides
• You are willing to lose ownership and control
• You need to gain from the connection of the VC firm
• You do not have experience in business and you could use additional support

How Do You Prepare Your Business To Acquire Capital For Growth?

If you are just getting started in business, you (and not your business) needs to be creditworthy. Most banks and financial institutions will not fund an idea but a business. Because you need funds to start a business, you need to ensure that you raise your credit score enough to get enough credit to start your business. However, that is not the only way to finance a business idea. Most of the credit products above can also be used to fund a business from conception to IPO.

Prepping Your Business

Preparing your business to acquire capital means enhancing its creditworthiness making it easier for banks and financial institutions to approve your loan application. The financial health of a business is dependent on the availability of capital for the day to day running of the business and for expansion.

To get the capital needed, you need a good credit score. It is the creditworthiness of your business that determined the credit terms and the interest rates. It also determines whether other businesses or businesspeople do business with you.

As a small business owner, it is important that you take the steps to make your business a low-risk borrower. You need to demonstrate that your company can make prompt payments and manage debt to make your business attractive to banks and commercial lenders. Several factors determine your business credit risk and the steps you can take to prepare your business for funding.

Establish Your Business as a Separate Legal Entity

Creditors need proof that your business is viable and profitable. When you establish your business as a separate legal entity, you show lenders that you are serious in business and you are ready to protect your personal assets.

Note that, the legal structure you choose for your business will impact the taxes you pay, the distribution of profits, and the amount of paperwork you file. Lenders see sole proprietorships riskier than limited liability companies and corporations. When you form a corporation, you separate personal debts from business debts.

Other steps you can take to establish your business as an entity include;

• Get an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) and also get Data Universal Numbering System business credit profile from Dun and Bradstreet.
• Separate your business phone, address, and bank accounts from your business accounts
• Prepare a business plan for your business and get a business license
• Maintain stellar financial records including income statements, balance sheets, and tax return documents

Stay on Top of the Personal Credit

While your business creditworthiness matters after the business kicks off, your personal credit score matters as well. Most investors, banks, and financial institutions consider your personal credit score as a measure of your ability to meet repay loans. Some creditors may even consider looking at both the personal and the business credit score as a measure of the risks involved in lending to a small business.

Although your personal finance is just one of the factors that creditors consider, it is might be the most important for some creditors. Granted, you need to start paying your bill on time and clear your loans to raise your credit score above average.

Keep the Credit Report of your Business Current

There is no single platform where you can access your business credit history. However, if your business is registered with DUNS (Data Universal Numbering System) you can access a small business report that looks like your personal credit report. Most banks and financial institutions consider this as the standard when establishing the relationship between lenders and creditors. Vendors and other companies who might want to do business with you will consider the D&B report when determining whether or not to do business with you.

From the D&B platform, review your business report and see if it is up to date. The system relies on information lenders and customers provide but you can also provide information about your business to make your business profile complete. You need to add as much data about your business as possible to ensure that creditors have a full picture of what your business is about. You can include AR/AP reports, financial statements, and payment records that show you are making payments for your loans every month. If you make cash payments, they may not show up on your report and you need to update on the system.

Review the Uniform Commercial Code Filings

As a small business owner, the surest way to expand is to seek financing from different sources. When you get a loan or open lines of credit, the bank files a UCC (Uniform Commercial Code) which is a document that shows collateral interest in your business’ assets. Lenders file UCC with state and local jurisdictions to protect their interests.

Every year, you need to search your business to see that a lender does not still list you even after you repay a loan. To do that, you need to understand the different types of UCC filings that a lender uses. The UCC filing does not affect your credit score but it prevents you from selling your business or accessing credit from a new lender. As soon as you repay your loan in full, you need to ensure that a lender terminates the UCC filing.

Resolve Business Tax Liens

Do not be surprised to find a tax lien on your credit report. It happens to so many people. When you have a tax lien, it means that the government has a legal right to your assets including real estate, personal property, and financial assets. The tax lien appears on your credit report when you do not pay a tax debt. This affects your credit score in almost the same way bankruptcy and judgement.

If you notice a tax lien on your credit report, follow up the situation to see if the tax lien has been paid and contact the IRS to get a release and clear the issue. The Fair Credit Reporting Act stipulates that tax liens can appear on your credit report seven years after you clear them. However, the IRS offers a Fresh Start Initiative where they can remove the report after you clear your debt.

Improving the creditworthiness of your business makes it easy for you get financing to expand your business. Some finance products such as the unsecured business lines of credit may not consider your credit score but most of the business financing options will check your creditworthiness. If you have bad credit, there are still financing options for your small business.

Is Getting Approved For Capital Really As Hard As The Banks Make It Seem?

Getting approved for capital is not hard as long as you understand your credit history and you know the finance product you need. For instance, if you have a poor credit score, applying for the traditional bank loan may not work but you can get an unsecured business line of credit by presenting your business financial statements.

Why would a bank say no?

Most banks and financial institutions do not approve business loan applications from startups. Startups are the riskiest forms of business as the bank may not tell the direction will take. However, that doesn’t mean that you will not get financing as a startup.

There are many reasons why a bank might say no your startup or small business loan application.

• Assets – New and small business have no assets, when present, the assets are not enough to generate capital for the business (or so the bank thinks).
• Collateral – New and small businesses may not have collateral unless they use personal assets or use a co-signer.
• Capacity – Banks need to know that a business has the capacity to generate enough money to repay the loan – new businesses have no proof of that.
• Character – Even if you have a good credit rating, the lenders are sure that you can run a business and they might end up turning you down.

There are so many other reasons why a lender might turn down your business including:

Lack of experience – Where the business owner has not worked in the industry for at least a year

Poor management – New and small business may not have structured management where the owner takes up all the tasks

No customer base – If your business does not have an established customer base, you may never get the loan. If you are relying on the loan to start a business, you need to find a way to get customers lined up waiting for your products or services.

Banks can give you so many reasons why they did not approve your loan. As a small business owner, you need to ready your business to ensure that you do not get a “no” from the lender. You can do that by identifying the type of finance that is most suitable for your business. If you are a startup, for instance, you can seek finance products such as venture capital, contract financing, equipment leasing, equity financing, joint venture financing, and many more.

You also need to try many lenders because the requirements are not the same from one lender to the next. If one bank does not approve your loan application, move on and try the next. Sometimes it takes longer to find financing but it is not impossible.

Find a co-signer or a partner who has a good credit score or has assets to place as collateral. Most lenders will seldom say not to collateral as they stand to gain in case you forfeit the loan. You can work with SBA Lender Match Program that connects your business with approved lenders to ensure you have a loan option at all times.

Conclusion

Debt capital is now easy to come by for startups and small businesses that have not established their customer base. These businesses can rely on equity capital, where they work with private investors to fund their ideas. If you can get good investors, they will be willing to fund an idea as long as the business plan is compelling. If your small business is already established with a customer base, you have access to so many loan options including equity capital from the public, debt capital from banks and other financial institutions.

Before your business grows to be attractive to investors and creditors, it is up to you to make the business creditworthy. When you have access to more than two finance options, choose one that charges low interest rates to reduce the cost of capital. A reduced cost of capital allows you to maximize the returns from the financing option.