From the November 29, 2002 print edition of Birmingham Business Journal
Corporate Lending

What Businesses Need Are Some Capital Ideas
By Marc Porte

You need money to run your business, to make payroll, pay taxes, buy new equipment. Maybe you'd like to expand. As a commercial lender, I know there are many good reasons your business may be experiencing a cash crunch.

What you may not know is, there are just as many good options for raising capital.

Your first place to turn is your own bank. To qualify for a corporate bank loan, your corporation needs to have a history of success, years of profits, and assets to secure the loan. In banking circles this is frequently called a "blanket-lien loan," and typically you can borrow no more than a 3-to-l debt-to-equity ratio.

So, if you want a $350,000 loan, you need about a million dollars in high-quality equity (assets less liabilities) and several years of rock-solid profits in your corporation.

These are not the only criteria, however; the bank will want to know a lot about your management and your customers. As the Federal Reserve guarantees the money that banks lend, the Fed is strict about whom the banks lend to. The advantages of corporate bank loans are low costs and little scrutiny for a year after initial funding. There is, however, a long due-diligence process, and it can be hard to increase the line, so make sure you know what you need going in.

Asset-based lending
If your business is precluded from bank financing, no need to panic. Young businesses, established businesses experiencing growth or losses, and businesses needing to work out IRS or other tax conflicts, turnarounds or other obstacles often turn to asset-based lending backed by solid collateral. The difference from a corporate bank loan is that your profits may be low, and the debt-to-equity ratio may well be 4-to-l, 5-to-l or even higher. What is needed for an asset-based loan are assets: accounts receivables, inventory, real estate, and machinery and equipment.

Accounts receivable financing has proven to be a good fit for a wide variety of industries, including manufacturing, service businesses and distribution companies. It can give you
access to cash immediately and more cash than traditional bank financing. So instead of selling 25 to 50 percent of your company to an equity player, you can temporarily sell your receivables. You ship the goods, sell the invoice and use the proceeds to do it all over again -grabbing market share and accelerating your growth.

Your customers make payment directly to the lender who purchased the invoice at a small discount and manages the collection process. Accounts receivable financing doesn't have to be an all-or-nothing proposition, either. You can sell only those invoices you need to sell to smooth you over the rough bumps, those awful times when you've got only 48 hours to meet payroll, your 941 taxes, a supplier's demand for payment - or all three.

This financing tool can provide you with unlimited capital because it is the only financing source that grows with your sales. It allows you to constantly have the cash to meet increasing demand. It's also an attractive option because no debt is incurred and you have the ability to eliminate bad debt, therefore improving your company's credit rating. This is the financing option of choice for many of the largest corporations in the world to improve cash flow, support growth and increase profits. In fact, nearly $100 billion worth of accounts receivable financing is done every year in the United States alone.

Warning: Be realistic
But make sure you're realistic about asset-based lending. It helps to have been in business for a couple of years, as no lender wants the headaches of repossessing your inventory and machinery. Yes, you know your company has a good chance to make it, but lenders have seen and heard it all before. A prime candidate is typically a business with at least $25,000 in new monthly receivables. These loans can be a moderate-cost option with medium scrutiny and monitoring after initial funding.

But be ready for an intense due-diligence process, as the lender wants to make certain he can recoup his money from your assets if you fail. This market has lost several players, and the market is tight. Unless you're looking for $5 million and up, if you find a lender don't quibble about the rates.

Another option companies have found workable include exports accounts receivable loans. If your business ships to good, creditworthy customers overseas, it often can be easier to obtain financing against these accounts than those domestically.

The reason is that the U.S. government chartered and maintains the ExIm Bank, which insures such accounts to promote our country's trading overseas. An import letter of credit financing loan comes into play if you have received a big order from overseas and a letter of credit to guarantee payment. Purchase order financing is a bit like import letter of credit financing but without the letter of credit. And last, but not least, venture capitalists who can provide startup funds for new or growing businesses in exchange for as much as 25 to 65 percent of your company. While this type of financing can be costly, there is no interest charged and you usually can tap into sound advice about your business.

While different in many ways, all the businesses I've worked with have one thing in common: They need working capital to grow. Even with great ideas, a bright future and staying power, companies need funding to help them bridge that critical gap.