Small Business Lending: Finding, Fitting, Financing

THE FOLLOWING IS AN ARTICLE POSTED ON FORBES.COM BY PATTI GREENE, CONTRIBUTOR. IT WAS POSTED ON JANUARY 5, 2017 AND WE THOUGHT IT WAS GOOD INFO TO PASS ALONG.  ENJOY!

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Access to capital is consistently raised as a pressure point for small businesses. However, simply saying it’s challenging to obtain capital isn’t all that helpful without getting to the crux of the issue. We recently gathered a group of Goldman Sachs 10,000 Small Businesses  alumni to probe more deeply into their experiences getting capital. One result of our discussion was a breakdown of their capital search into a series of definable steps:

  • Finding - identifying the available sources of capital
  • Fitting - deciding which source is the best fit for you and your business
  • Financing - determining what are the most important components of the deal

One thing is crystal clear, small business owners and capital providers would both benefit from a better understanding of the financing process - from both sides of the table. While equity is a choice for a few (very few), for the purpose of this piece, we have focused on the process of securing debt financing.

Finding

Babson data on Goldman Sachs 10,000 Small Businesses participants finds those who acquire external capital more often report growing to a greater degree. While this may not be surprising, it is important that we can measure this impact. As a small business owner, where do you start in your search for a loan?  The vast majority of business owners rely on financial institutions for the capital they need to grow their businesses.  Most start with their own financial institutions, then move into looking at materials from organizations such as the Small Business Administration (SBA) or the Minority Suppliers Development Council (MSDC), local Community Development Financial Institutions (CDFIs), conducting internet searches, and speaking with other business owners.  However, the search is not just about which bank, but also about which banking product.

Fitting

Capital seekers need to understand the business requirements of the capital providers in order to find the best fit. Banks typically assess borrowers on the 5 C’s of credit:  capital, collateral, character, capacity, and conditions.  Fittingly, these should be considered from the seekers side as well.

  • Capital – how much do you need? And, of course, how much are you able to qualify for, given your credit score and borrowing history. Different providers specialize in providing capital in different levels.
  • Collateral – do you have any – personally or in your business? All banks and most lenders will want to be secured by collateral and also want a personal guarantee from business owner(s).
  • Character – what is the reputation of the capital provider?
  • Capacity – what can you afford, and when? How much time do you have to put into this?  Do you value time and rate equally?
  • Conditions – is it the right time to be borrowing given any external economic conditions and/or industry trends?

Financing: Terms and the Funding Process

Businesses tend to evolve in their funding experiences as their companies grow, even over just a few years.  Perinkulam Raju, who founded a technology consulting firm, EyeCube Solutions, in 2013, connected with a bank and received an SBA loan guarantee for three years and was recently approved for a revolving line of credit, notably with no real collateral. Owner of Nation Waste, Maria Rios’s funding experience similarly evolved with growth though her business is very collateral intensive – it takes a lot of trucks and equipment to manage waste.  Maria started her relationship with her bank with a small line of credit which she converted to a long/term loan while she also kept growing her line of credit over time.

The numbers show that business owners who have a relationship with their banker are more likely to grow. These relationships can take many different forms. For Maria Rios, her relationship with her bank has been an important contributor to her company’s growth as they have provided guidance and contacts, helping her evolve to the point that banks ask, and in some cases, compete, for her business.

Changing the world of small business lending…

The small business owners in this group were dedicated to growing their businesses and had a clear vision for the possible role of acquiring external capital to support that growth.  Their suggestions, for seekers and providers of capital, include:

Finding

Broaden your horizons.  For seekers, explore a variety of types of capital providers, look at different financial institutions, and learn about the new sources such as online lending or crowdfunding or existing sources such as CDFIs.  Connect with others to learn about your options.  For providers, understand that small businesses have different fundamental needs than large businesses.  However, they can be rock solid economic citizens, with families and employees who can also utilize a range of financial products.

Fitting

Take the time to learn the business model/requirements of each other and understand what might work for you – and what won’t.   For the borrower – the goal is to become so adept at fitting with the lender business requirements that they are ultimately pursuing you for your business.  For the lender, understanding the businesses better may lead to providing more flexibility in lending.

Financing

Speak each other’s language.  For the borrowers, you absolutely must be financially literate – to speak the language of finance in order to best represent your business and to understand the terms being offered to you.  For the providers, speak small business and understand the products that best fit your small business clients.

Cardinal Capital, LLC, Financial Consultants  No License Required, Baton Rouge, LA