THOUGHTS OF THE DAY: It’s no joke saying that in small business the owner is the bank of last resort. In addition, banks lend on hard assets. Keep in mind that the more you lend out to your clients, by allowing them accounts receivable terms, the less money you’ll have in your bank account as an asset you can use to accomplish your goals.
Banks will also look for assets that the owner holds personally. When it comes to building up a portfolio of assets, make a priority list.
Banks look for security to back up lending. Most small businesses are volatile by nature with revenues and profits varying significantly from year to year. Owners are accountable to no one but themselves. Owners should be prepared to back up the loan request with hard assets that the bank can attach if things get dicey. And the loan signer, the business owner, should also be prepared to sign a personal guarantee that they will be personally liable for the loans. The bank is not your business partner, taking risks with you. They’re a vendor looking to insure they get their money back, no matter what.
In service companies, getting access to loans can be a challenge, because service companies have very little in the way of hard assets that the banks are looking for to secure their loans. Companies selling products may have inventory to lend against, but if that inventory is hard to track and varies significantly in quantity, banks may shy away from lending against something they can’t control. Manufacturing companies may have equipment that banks consider hard assets and that retain enough value after loans are paid off to engage in refinancing.
Most companies have accounts receivable, and banks will usually lend against accounts receivable that are less than 60 days from invoice. Anything over 45 days past due starts looking pretty risky to a lender and anything over 60 days is probably not worth much as a security, unless it’s a government contract. When signing terms with customers, keep that time frame in mind and insist on payment within 30 days or less. Offer to take credit cards or ACH payments to shorten the mail delivery cycle and time outstanding. But don’t put your business at risk carrying paper for an excessive period of time for another company just to get a shot at doing business with them, unless you can secure the outstanding money and charge enough to pay for the carrying costs on the amount outstanding.
If you have personal investments to lend against, make your banker aware of those. Personal assets do count as security as long as you have more in assets than you owe. Home equity is a big category to consider as are personal investment accounts.
Make sure you have enough income to make the down payment and monthly loan payments without getting caught short in terms of cash flow. Consider whether it’s better to invest in growing sales first and hold off on buying a building until cash flow improves. Another option is to ask the bank to back you on making an acquisition, since acquisitions usually start to pay returns right away in terms of additional personnel, clients and net income. Investing in personnel is most likely going to be on your dime, so invest first in people who can help to grow revenue and profits. Growing profits will result in more cash on hand, the ultimate lendable asset.
BOOK RECOMMENDATION: “Cash Flow for Dummies,” by John A. Tracy.
Andi Gray is president of Strategy Leaders Inc., StrategyLeaders.com, a business-consulting firm that teaches companies how to double revenue and triple profits in repetitive growth cycles. Have a question for AskAndi? Wondering how Strategy Leaders can help your business thrive? Call or email for a free consultation and diagnostics: 877-238-3535, AskAndi@StrategyLeaders.com. Check out our library of business advice articles: AskAndi.com.