Small Business Borrowing in Today's Market

BOCA RATON, Fla. - July 14, 2013 - PRLog -- Many small and medium size businesses owners and their advisors seek different types of funding for different reasons. However, a large percentage are not aware of exactly what the current market for commercial lending is and the factors that are used in making funding decisions.

We all know where most people go first when they need money for their business - the bank. If the business and business owner is able to satisfy the strict requirements, the reward is a very low interest rate over a long-term repayment period.  As many business owners and advisors know, the banks do not approve most businesses for their requests for money. The bank's small box to fit into requires the business to be well established, have a lot of money in the bank, have owners with very good credit and that can provide collateral to secure the funds the bank is providing. About 85% or more of businesses cannot meet the bank's stanards and guidelines for getting funded. When declined they must go to alternative funding solutions.

What most business owners and their advisors do not understand is that there is really not much of a middle ground between bank rates and private lening rates. Private lending is more costly but the business owner is able to obtain lower costs when they can show they are not a very large risk compared to other businesses.

There are many options in private lending that have tiered pricing based on factors that the business owner can control and their advisors should be telling them about. Everyone should know the reason that borrowing with no collateral is more expensive is simply due to the risk of lending money to a small business. There is a significant difference in lending to a restaurant owned by one or two people and lending to Office Depot or Walmart. In the later companies, if something happens to one of the executives or management the company functions exactly the same and they hire a new person but in a small business if something happens to the owner or one of two owners it is almost certain that the business goes out of business. This is a huge risk factor that prevent banks from lending to small businesses and drive the costs of alternative borrowing up significantly.

Taking the risk factors and the percentage of small businesses that fail within the first 5 years (80%) into consideration, there are certain things that all alternative funding sources look at in deciding whether to fund a business or not. Many of these key items can be controlled by the business owner to give them the best opportunity to obtain the funds they seek at the lowest rates possible. Unfortunately, most business owners still do not unerstand how important their personal credit is in getting business funding of ny kind. The next item is the cash flow of the business and how much money is kept in the business bank accounts regularly. Another extremely important item is payment history and how the business manages its funds. Let's look at each of these separately.

Personal and business credit is probably the most important asset the business and business owner has. Although in some situations the business credit is heavily favored and things like the business' D&B or Paydex information are at the top of the list, in most small business funding, the personal credit scores of the owner(s) are the biggest factor in determining approvals and declines. How you manage your personal credit tells a lending source a lot about whether you are a good risk and gives them a liklihood that you will make sure your business repays the funds provided to you. The higher your credit score and cleaner your personal credit reports are, the more likely your business is to get approved and the lower your interest or repayment rates will be. We always encourage everyone that contacts our company for assistance to let us help them with their personal and business credit so the future funding becomes that much easier.

Cash flow is also very important in obtaining funds. I know a lot of people have great ideas but very few sources want to lend money to a business that is not making any money as the source does not see any way to have those funds repaid and make a profit. No matter what you think about this, it is just the reality of business borrowing. In almost every case (with the exception of one or two borrowing options) the business has to make money to borrow money. The lenders in today's market determine cash flow and ability to make required payments by looking at the business bank accounts. A business that keeps no money in the account and has a very small average daily balance is much less likely to get funded. When there is a strong average daily balance a lender is very likely to fund you based on seeing money available to make payments. The owner still has access to that money in case of emergenct but they have put themselves in a much better light to get an approval.

The same must be said and it is related to the above concept, funding sources are not very likely to fund businesses that are constantly bouncing checks, having negative bank balances and using overdraft protection to cover payments. This is within the control of the business owner and must be managed properly. One incident on rare occassion is not a big deal but three to five or more per month is an issue that will most likely result in a decline every time.

We work with a lot of very good advisors (accounants and attornys) but most are not lending experts because they focus on other things. When it comes to business borrowing, the owner and advisor MUST be able to take emotion out of the equation.  Borrowing money is not personal, it is all about making a profit in your business with the borrowed funds. We have told countless clients the following and although some business owners get it, many still let emotions cloud their thinking: if you can use someone else's money to make money at no risk, it does not matter what the cost of that money is.  We know every business wants to make as much as possible but if you are going to lose a customer and make nothing, isn't it better to make half your normal profit and provide financing to the customer.  In the same regard, if you borrow working capital with no collateral at a cost of 35% for a year but make an additional 90% on that money you would not have made without the loan, are you better off with the 55% difference at no risk or making nothing without the loan.

We provide strategies for many different types of client and would be happy to discuss your particular situation if you contact us.  We believe in providing our clients with the facts and reality of the opportunities they have and never sugar coat things because that does not help our client.  Call us at 561-450-7850 with any questions or visit our web site at www.pcfsllc.com