The Other Colors of Money

Blue Suits

When your growing company is facing a cash emergency, it helps to go to someone who understands the dynamics of growth. Traditional bankers, who are generally looking for something "slow and steady," are probably not your best resource in this case. That's where a commercial finance company can step in.

"In general, commercial lenders will look at tougher loans, because they are not subject to the same regulations as a bank," says Douglas Mitman, managing director of investment bank Grace Matthews in Milwaukee. The more critical your need, the less useful banks become. "The commercial finance guys can be more aggressive with a struggling company," says Mitman. "But they're typically going to look for asset coverage."

"Asset coverage" is essentially another way to say "loan collateral" and can include accounts receivable, inventory and factory equipment.

While finance companies may have less stringent rules than banks, they still look for one of two things: either hard assets to use as collateral or enough cash flow to comfortably make debt payments. If you have the collateral, look for "senior" or "asset-based" loans. If you can afford to pay back the loan from cash flow but don't have hard assets, ask about unsecured, mezzanine or subordinated loans. Rates these days are roughly equivalent to those of a credit card.

Subordinated and unsecured credit are now widely available to businesses that have solid operating profits-sometimes to the tune of two or three times the business's annual cash flow.

CIT Small Business Lending Corp. (a subsidiary of CIT Group Inc.), for one, provides SBA-guaranteed loans of up to $2 million based not just on assets, but also on the company's operating history and the strength of the business plan. "We're looking at the projected cash flow-the ability of the business to repay us. And we put a lot of weight on what the business has done in the past couple of years. But it's not uncommon for us to lend based on projections, too," says Chris Lehnes, vice president of business development for CIT Small Business Lending Corp., based in Livingston, New Jersey. Franchises, professional offices and others with proven business models are most likely to qualify for credit based on projections.

For lending companies like CIT Small Business Lending Corp., seeing businesses with a substantial amount of debt is not uncommon. In fact, according to Lehnes, private businesses frequently have leverage ratios as high as 10-to-1-meaning they have 10 times as much debt as equity. "That would be outrageous for a public company," he says, "but for a small [or midsize] business, that's very common."

While the biggest commercial finance lenders include CIT Group, GE Commercial Finance and Textron, there are also hundreds of smaller shops. Some of these lend SBA money through what's called a Small Business Investment Corporation.

Mitman sums it up: "There are a million options for you if you have an up-and-running company that's either making money or has assets. And if you're large enough, with a healthy balance sheet, you'll find capital even if you're not making money."

What Financing May Come
Choosing from the variety of possible sources for financing may be as simple as going with the only option that will take you. Ideally, you'll have a choice of several alternatives. And, at least to start, you should have a good idea of what your preferred form of financing would be so you can go after the most comfortable choices first.

Your options will be dictated by several considerations, including how much money you need, how long you'll need it, what you'll need it for, and how much control you're willing to relinquish. For instance, if you need to raise several million dollars, then venture capital, a stock offering or perhaps a well-heeled angel investor will be your best bet. On the other hand, if you need only $10,000, hidden personal wealth or one of the SBA's microloans may be your best bet. Financing lasting more than a few years is usually going to come from equity investors such as VCs, angels or friends and family, unless you are financing real estate, in which case a bank loan would be suitable.

The reason you need the money will also come into play. A bank is unlikely to lend you money to allow you to increase your salary-that's going to have to come from someone with a personal interest in your business, such as an angel investor or a family member. That same family member, on the other hand, will be unable to help if what you need is an international letter of credit to wrap up an across-the-border deal. Matching your financing source to your need will eliminate many possibilities.

Control is another issue. If you want to maintain maximum control of your business, stick to hidden personal wealth, family, friends and bank financing. Angels, VCs and public markets are much more likely to want to see themselves or their handpicked assistants in the driver's seat.

Excerpted from Entrepreneur magazine's Business Start-Up Guide #1812,Growing Your Business.


David Worrell is Entrepreneur's "Raising Money" columnist.

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This article was originally published in the July 2004 print edition of Entrepreneur with the headline: The Other Colors of Money.

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