Executive
Voices:
An Op-Ed Column
Tight Credit
Think outside the box when
applying for a business loan
By Wes Sturges
If
you’re responsible for your company’s growth, either as owner,
manager, or executive, you probably know it’s gotten more difficult
to get money. In the last year, with the deteriorating business
climate, it has become harder to meet banks’ credit standards.
This change has made many executives a little nervous. What would you
do if the bank withdrew your line of credit, or called in your loan?
Have you outgrown your current sources of credit, but are unsure what
to do now?
As president of a bank that caters to business owners, I’ve seen
some executives make all the right moves to attract sources of
capital. Others make mistakes that limit their company’s potential
growth. Taking these steps — in this order – could help you become
one of those success stories that never lack for capital.
Make internal improvements in payables, pricing, costs and collections. The first steps:
 Pay on time, but not before. If your cash flow seems tight, look
closely at your payables terms. Can you stretch payments out a day or
two, or more?
Examine your pricing. If one client consistently pays you late,
raise the price for that client. Or consider whether it’s worthwhile
to work with this client at all. Do the math to determine the interest
you should charge. Work that sum into your renewal quote.
Cut costs. When layoffs at your firm are imminent, perhaps you could
cut workers’ hours from 40 to 30 per week instead. In a situation
like this, the CEO should also reduce his own salary.
If your receivables are dragging, collect them more effectively. Collect
payments yourself, assign a key employee to coordinate collections, or
hire an in-house collections specialist. For difficult collections,
consider outsourcing to a collection agency.
Talk openly with your banker. Even if you don’t need capital now,
schedule a conversation with your banker. Ask what weaknesses he or
she sees in your business finances, and who might be able to assist.
If your business is having a problem, your banker would rather know
about it now, when there’s plenty of time to help fix it, then
later, when the bank could lose money because of you.
Your banker can be a wealth of information. Some banks (including my
own) have relationships with alternative funding sources through their
holding companies. That means they can make referrals with knowledge
and confidence.
Look for another bank. If your bank’s current lending philosophy
won’t accommodate your needs, it’s worth checking other banks.
Banks can vary by industry. One might lend aggressively to churches;
another, to developers. Ask your peers and your banker about banks
that have a strong interest in your type of business. You may find
another bank is more willing to offer you an unsecured bank loan or a
line secured by other assets in the company.
Use existing assets as collateral on a loan with a specialty lender.
It is true that if your company is facing short-term challenges, such
as a drop in sales or earnings, traditional methods of financing might
not be available. You may need to restructure your debt or look at
alternative financing. Here are some possibilities. You could talk
with a mortgage bank or real estate finance company about taking out a
mortgage on your plant. If you own a large amount of the equipment,
talk to a commercial financing company about a loan, using your
equipment as collateral. A third option is to sell your equipment to a
leasing company and lease it back. This method may be expensive, but
produces cash quickly.
Pending income can be collateral, too. Receivables financing allows
you to pledge pending income as collateral towards a loan. Let’s
assume you manufacture and sell cardboard boxes. Your client, a solid,
established company, is supposed to pay you in 30 days. But the client
actually pays in 45 days. The payment you anticipate can be used as
collateral.
This method is useful for short-term financing. If you go to a
receivables financing company and tell them a blue-chip company is
supposed to pay you $25,000 in 30 days, the financing company might
loan you 75 percent of that sum, payable when your client pays you.
Receivables financing is usually set up as a line of credit akin to a
home equity loan, and can be very convenient for that reason. The one
drawback: If your client doesn’t pay on time, you’re still
responsible for the loan.
No access to other credit? Try factoring. Receivables financing is
less expensive and restrictive than factoring, a funding mechanism
that’s common in the furniture and textile industries. Factoring
means that you sell your receivables to a factoring company. The
factorer is then responsible for obtaining the payments.
Let’s say you own a textile company that works with a factorer. Belk
asks you for 10,000 Michael Jordan jerseys worth $100,000.
You call the factorer to approve the deal, process and ship the order,
and send confirmation to the factorer. It’s the factorer’s job to
get the money from Belk. The factorer’s profit comes from the
difference between what Belk pays him and what he pays you.
To find receivables financiers and factorers, ask your banker for a
referral.
Consider equity partnerships. If all else fails, find an equity
partner and sell part of your business for a cash injection into the
company. I know entrepreneurs want to own 100 percent of their
business, but in tough times, 50 percent of something is better than
100 percent of nothing.
No matter where your business is now, using these guidelines can give
you a big boost. If the economic slowdown continues, you’ll have a
strategy to obtain cash. And if the economy recovers quickly, you’ll
be ready.
Wes Sturges is president of
First Commerce Bank in Charlotte and president-elect of the North
Carolina Bankers Association.
Return to magazine index
|
|
