Accessing Capital

10 April 2014
Access to Capital: Money to Mainstreet®
[1]


To beg the obvious, money is the lifeblood of business. And money from external sources is almost always necessary for start-up (beyond the kitchen table or garage stage), for growth, or for recovery from setbacks (such as the Great Recession). This is especially so for capital intensive enterprises like manufacturing.


Recently, Dunn & Bradstreet Credibility Corporation presented a workshop on sources of capital for small businesses. I found it interesting, useful and thought provoking. Presenters at the workshop included traditional bankers, along with representatives from several alternative funding sources. This post combines information from D&B’s workshop with information from other sources and from personal experience.


Banking on the Bank?


Businesses with several years of history, demonstrated profitability and a sound balance sheet usually find bankers willing to lend for growth initiatives (“growth”, in my view, means growth in net revenues: that is, increased gross revenues, improved margins, or both). Bank funding for start-ups or for recoveries is usually tough to find.


Of course, every business should be constantly nurturing banking relationships through checking accounts, credit card processing and building a business credit record, as well as through personal banking services. However, it is useful to remember several facts:


(1) A generation ago, banks were independent local institutions — today, most banks are part of large, if not global organizations. Banking, speaking generally, is less personal than it once was, hence personal banking relationships are more difficult to establish and maintain.

Very few bankers today have the personal authority to approve loans outside of an institutional underwriting structure. Also, federal regulations on loan underwriting processes have tightened substantially in the aftermath of the Great Recession and the banking system meltdown that precipitated it.


(2) Banks focus on surety of timely repayment. Bankers emphasize balance sheets much more than most business people do. Banks want collateral assets, and they want guarantees. As a business owner, don’t let a banker’s request for your personal guaranty — and for leans against your personal assets — offend you.


(3) As mentioned above, underwriting a bank loan today requires adherence to a rather bureaucratic procedure, which takes time and costs money. The cost of the underwriting process is roughly the same for a larger loan as for a smaller one. So, banks usually have minimums on the size of business loans they will even consider. The minimums may surprise you, so best to ask up front.


Fortunately, Alternatives Do Exist


>> Small Business Development Centers: For most small businesses, an SBDC is the first stop for finding capital. The SBDCs are local entities (often associated with universities or community colleges), affiliated with the U.S. Government’s Small Business Administration. There are about 900 SBDC offices across the U.S. They provide a number of useful services at little or no cost. Most importantly, they help small businesses access SBA’s loan guaranty program. With Uncle Sam as a co-signer, lenders are better positioned to provide capital. The SBDCs understand the SBA loan guaranty program and can offer real help in coping with the attendant paperwork. Further, the SBDC know which local lenders like SBA guaranteed loans and which lenders would “fit” best for your business. [2]


The SBA, a government agency, has a number of preferences and set-asides for groups such as veterans, women and minorities. There may also be preferred types of projects — clean energy projects, for example. Your local SBDC staff can advise you as to current availability and your eligibility.


>> Non-traditional Lenders: There are funding sources that are not regulated as banks are. Because these lenders are not banks, eligibility, collateral and application procedures may be very different. Here are some examples:

> Community Development Financial Institutions —  A CDFI is a financial institution that: “has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity.” There are roughly 1,000 CDFIs in the U.S. most are quite local. [3]

Accion is an example that does business in several states. Accion is “a non-profit organization that increases access to business credit, makes loans and provides training, which enable entrepreneurs to realize their dreams and be catalysts for positive economic and social change.” Accion offers business loans from $200 to $300,000 and business lines of credit from $20,000 to $100,000.[4]

> Factors — Factors lend against commercial invoices. Usually, as a business mails invoices to its customers, the Factor receives copies. The invoices specify that payment be sent directly to the Factor’s lock box. When the Factor receives copies of these invoices, the Factor credits the amount of each invoice to the sender’s account (less a fee, of course). In this manner, a business can offer payment terms to its customers without tying up working capital in accounts receivable. This form of working capital financing relies on the credit worthiness of the customer, rather than that of the seller.

In the past, there was a taboo against factoring in many industries. Today, however, factoring is both discrete and generally acceptable. After all, accepting credit cards as a means of payment is one form of factoring.

> Revenues Based Financing — I am aware of one lender that will advance funds against future credit card revenue streams. My understanding is that the credit card processor directs payments for credit card purchases to the lender. The lender subtracts an agreed payment, then remits the balance to the business that made the sale. This is a new form of cash advance financing that may prove to be of interest to businesses with substantial, demonstrated streams of credit card revenues. [5]

> Capital Equipment Lending and Leasing — Capital equipment vendors will often arrange financing, secured by the equipment purchased. Payments on the financing are (hopefully) more than offset by incremental margin dollars generated by the new equipment.

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Of course, every business and every business situation is different. There is no one size fits all for financing. That’s why access to a knowledgeable financial advisor is essential. The financing sources listed here are intended as a mind – opening examples only. In no case should mention of any financial source be regarded as a recommendation. Disclosure: Neither I nor Jera Sustainable Development has any financial interest in nor compensation from any of the entities discussed in this post.


There are a lot more ways to find funding, including guerrilla tactics. Future posts to this blog and additions to the Jera Sustainable Development website will present more on financing.


Chuck - Austrian AlpsThoughtful comments and experience reports are always appreciated. Readers are especially encouraged to share successful innovative financing experiences. E-mail to me:


…  Chuck Harrington
(Chuck@JeraSustainableDevelopment.com) 


P.S
: Contact me when your organization is serious about pursuing Sustainability … CH


This blog and associated website (
www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.


[1] “Access to Capital: Money to Mainstreet”, a registered trademark, is the name of the financial workshop discussed in this paragraph. The workshop was presented in Phoenix AZ by Dunn & Bradstreet Credibility Corporation. My understanding is that a similar workshop will be offered in San Diego in June 2014. For more information, see: http://accesstocapital.com/