“I own a business and we need some money, can you help?”
“What do you need the money for?”
“Oh lots of things…”
“How long do you need the money for?”
“Maybe 6 months to a year”
“How will you pay it back”
“Well we are having a really good year and just seem to be a little short so we need to borrow some money to get over the hump”
This is the most common conversation I have with small businesses who are looking to borrow money. They do not always know exactly why they need money and are not able to articulate how they are going to pay it back. The most popular business loan request we get is for a business line of credit. The problem is that a business line of credit usually means “working capital” (see blog here). Working capital (and lines of credit) are very difficult to get.
I visited with a client this past week that has managed to keep his business afloat and is now seeing the fruits of hard decisions that he had to make such as refocusing, cutting expenses and micro managing costs. We met because his business is still using every penny of cash that comes in and he is not able to produce excess cash to make strategic investments for his business. In past postings I have spoken about factoring Continue reading “Cash is still king”→
We see a trend with small business owners and their need for capital. For most small businesses cash flow is critical and most cash flow challenges come from the difference between their accounts receivable and their accounts payable. Factoring or accounts receivable financing is very popular today as most business do not qualify for a working capital loan or line of credit. The reason for this is that a bank or lender who can provide a working capital loan or a line of credit will need to review two or three years of financial statements to determine whether or not a business meets the criteria. The challenge lies in most businesses not being able to demonstrate over a two or three year period that their business is healthy. Most businesses today can prove that the past 12 or 18 months have been good but that is not a long enough period of time for most banks to use in determining an approval for a working capital loan or line of credit. Working capital loans or line of credit are more affordable and less expensive than factoring or accounts receivable financing but most businesses today are still too far away to qualify. In the meantime, it is worth a business understanding their cash flow challenges to see if there are other ways in which they can address the problem. Using other assets for secured debt might be more affordable or at the very least making sure that factoring or accounts receivable financing is being used properly.
A business approached us that has just come out of two years of very difficult times but seems to have turned a corner for the better. Going into 2008 they had plenty of capital and then used that capital to pay expenses for 2008 and most of 2009. Near the end of 2009 business began to pick up and it appears that they know have over 6 months of strong cash flow and future business prospects. They own their building and have a mortgage that is less than 60% of what the property is worth. Because of the way in which their financial statements present 2008 and 2009, the bank that holds the mortgage has become very difficult to deal with and they are looking for us to help them payout the mortgage and get them a new one. At the same time, one of the principals of the business is looking to have money he put into the business paid out which would be added to the new mortgage amount.
If you would like some feedback or comments on your situation, please email firstname.lastname@example.org or visit www.bridgecap.ca/dylan