Financing With Wiggle Room

Negotiating some flexibility into a financing deal can steady cash flow while you wait for a major new purchase to pay off.
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6 min read

This story appears in the January 2006 issue of Entrepreneur. Subscribe »

In June, entrepreneur Megan Decker received a business offer that was just too good to pass up: the ability to purchase her much larger competitor. Financing, however, could be tricky for the company, a supplier of traffic control equipment for work-zone projects. Because her business was so seasonal, cash flow didn't follow the same steady pattern that most finance payments must. Decker therefore hoped for some flexibility in the financing arrangements for the multimillion-dollar deal.

"I need a lot of operating capital in the spring to get off the ground because, at that point, I'm getting employees back from being laid off for the winter months. I have pretty high startup costs with my labor and equipment purchases to perform these jobs in the summer," explains Decker, 28, president and founder of $9.5 million Mega Rentals Inc. in Madison, Wisconsin.

While her spring startup costs are high, the bulk of her payments don't usually trickle in until late fall. Decker thought it was a lot to ask of a lender to structure loan payments around that cash-flow schedule. Much to her surprise, however, locally based First Business Bank agreed to tailor a loan payback schedule that closely matched her company's seasonal cash-flow cycle. "They addressed the fact that I have seasonality [in] my cash receipts by tailoring my revolving loan so that I'm paying the larger principal payments in November, which is when I will actually have the money," Decker explains.

"It's a tremendous advantage for me as far as my cash flow is concerned," she adds. "They took a long look at my business and understood what I was attempting to do with this acquisition, and why it made sense for my business to pursue the purchase of this other company."

Though Decker insists she would have found a way to fund the acquisition even without the flexible financing, she admits it would have required a stressful balancing act. "Instead of worrying about the things I need to do on a day-to-day basis to be successful," she says, "I would have been much more concerned with being able to work around an already established structure of financing that I didn't have as much input in."

Room to Grow

As Decker's story illustrates, having a little wiggle room when financing a major purchase can go a long way toward bolstering cash flow at a critical juncture in your company's growth. Like Decker, you may be able to structure loan payments to coincide with the cash flow generated by a major new investment, or even negotiate a delay in the first payment until the new asset--whether it's a new piece of equipment or a construction project--starts generating revenue for your business.

"It's important to ask your lender [about your options]," says Debra Lins, president and CEO of Community Business Bankin Sauk City, Wisconsin. "The environment has gotten pretty competitive, so they have been forced into having more flexibility."

Lins has plenty of experience with creative loan structuring. "Many times during a construction project, you will go interest-only for a period of time to get the equipment in there and get things up and running," Lins says. She has also offered flexible-financing arrangements to clients with seasonal businesses, such as landscaping firms, which have to contend with inconsistent cash-flow patterns. Such a company may opt, for instance, to make loan payments from April until November. "Or they may make interest [payments] on one schedule and principal [payments] on another," according to Lins. "They may pay interest quarterly but make a principal reduction once a year. It depends on [their business cycle]."

Mary Hasheider opted for an interest-only payment strategy when she needed a $20,000 loan to buy a special computer system for her PR firm, Galena LLCin Prairie du Sac, Wisconsin. "We wanted to explore ways we could ease some of our cash-flow needs and still meet our goals as far as servicing our debt on a timely basis," Hasheider recalls.

Lins, Hasheider's banker, ultimately agreed to interest-only payments for the first year--long enough for the $1 million company to gain additional footing. Says Hasheider, "Having this flexibility, even for a short period of time, helped us during a critical time of building our business."

Putting Off Payment
The reality is that for some businesses, it can take a considerable amount of time to transform a new purchase into a profitable part of their operations. For that reason, it's not uncommon for certain companies, such as manufacturing firms, to forgo payments on a new asset until it is actually generating revenue. Indeed, business financing consultant Fred Scennabrokered a deal for a manufacturer that allowed the company to put off payment for a major equipment purchase until the equipment had been installed and the necessary employees had been trained to use it--even though the financing had been finalized several months earlier.

"The loan doesn't start until they sign off on the machine from whomever they've purchased it to make sure it's up and running and the people have been trained," the Collegeville, Pennsylvania, accountant explains. "That typically could be anywhere from three to six months. You want to tell [your lender], 'I'm paying on something that's not generating any revenue, so why put me in the hole? It's to your benefit that we [have some flexibility].'"

To present lenders with a strong case for flexibility, you should develop a P&L analysis for the item being financed, clearly identifying any associated startup costs, including employee hours lost to training, Scenna suggests. He cautions, however, that these kinds of deals do not happen overnight, and he stresses the importance of notifying lenders well in advance of any major purchase plans, even if you're still just researching a new piece of equipment. "Then, when it comes time to do it, there's less education you have to do with them," Scenna observes. "They will probably be more receptive to it."

Decker, meanwhile, warns business owners against putting all their eggs in one basket, even if it means breaking away from an established lending relationship, as she did, to find financing flexibility. "You have to keep your options open and be flexible," she says. "And sometimes that can be difficult. I had a very established banking relationship and a level of comfort with [my lender] as well, but you have to be willing to look outside that sometimes for the good of the business."

Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.

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