Insight

7 Steps on Funding the Growth of Your Business

Laptop

2018 May be a Turning Point when Interest Rates will Rise and Capital Availability Tightens

How things do change – as a small business owner, your phone is no doubt ringing off the wall from bankers wanting to lend you money – a far cry from a few years ago when they were calling for a different reason!

An indication of how the lending landscape has improved: the small business loan approval rate at small banks reached a record high in July 2018 with a loan approval rate of 49.7%. Even higher were institutional lenders, pension funds and insurance companies approved 64.8% of loan submissions. Capital is plentiful and with rising interest rates, growing businesses might consider increasing leverage to fund future growth. Even with this significant increase, new business loan demand is low and outstanding lines of credit draws are in the low 40% as compared to a traditional 60% draw average. So the banks have money and they want your business!

But many experts think that 2018 may be a turning point when interest rates will rise and capital availability tightens due to a recovering economy and of course, the effects of the coming mid term elections. So now may be the time to lock up financing to grow your business.

For private, middle-market companies, the main traditional sources of growth capital have been internal capital generation from profits and bank lines of credit. But there are many other ways to finance the growth of your business and a myriad of bank and lender products, which can be customized to the needs of your business.

The following are seven sources of capital available to private companies from banks and other lenders. They have different costs, restrictions and availability. Smart CEOs and CFOs need to be familiar with all of them.

1. Line of Credit/Asset-Based Loans – An agreement between a financial institution, generally a bank, and a borrower to provide a certain amount of loans on demand. Generally, lenders will want security such as a lien on receivables or inventory. Asset-based loans are lines of credit secured by the assets of the company. A line of credit can be called, reduced or not renewed by the bank. Relatively inexpensive money–but high risk, particularly if called and if secured by the company’s assets.

2. Term Debt – Usually funds fixed assets, such as equipment, buildings, land or machinery. Scheduled repayment term is fixed and generally extends over more than one year. Generally lower risk but a higher cost.

3. Inventory Financing – A line of credit or loan that enables a company to purchase inventory, which serves as collateral if the business cannot repay the loan.

4. Receivables Factoring – A business sells its account receivables (unpaid sales) to a third party at a discount. Typically used by companies that sell products not services. Expensive.

5. Fixed-Asset Financing – Borrowing secured by an asset used in the normal course of business that is not readily convertible to cash. Examples include machinery, buildings and fixtures. Generally lower cost and easy to obtain since fixed assets secure the debt.

6. Sale-Leaseback – A transaction between a bank or investor and a company that sells and leases back a fixed asset over a long term. More complex than a loan and involves many accounting issues.

7. Small Business Administration Loans – Often overlooked but definitely a key opportunity is the 7(a) Loan Program, the SBA’s most common loan program, which includes help for businesses with special requirements. Additionally, the 504 Loan Program provides small businesses with long-term, fixed-rate financing.

Often Overlooked Strategies – A private company has many internal ways to generate cash and create a “permanent” no interest loan through business practices, accounting policies, cutting overhead and other costs or just tapping your friends and family for a loan. For example, if your competitor pays their suppliers in 45 days and you pay in 30 days, you are leaving money on the table. Conversely, if your sales terms are overly generous, you will need to finance cash needs that could be met by better billing and collection practices. Lastly, are your suppliers giving you their best deals?

This year to looks to be an opportune time to obtain financing to fund your private company’s growth and position yourself for the future. Don’t miss the opportunity.

Michael Evans is the Northern California Managing Director of Newport LLC

Newport Logo Stacked

10 Strategies to Finance the Growth of Your Business

Fill out the form below to download the infographic.