Raising Operating Capital Part 2 Chapter 5

The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month is the second of several articles on raising funds for the Small Business.

Remember, Never! Ever! Run Out of Cash, NO MATTER WHAT! But that is often easier said than done, so this month we will continue our discussion on why a good business plan is required to source funds as we look at sourcing debt financing from outside the company and its owners.

Outside Debt Financing

Family and Friends can be used for more than cell phone discounts! They can be a great source of financing, particularly in the early days of the company, when other lenders are less that sold on the future of your organization. They believe and trust in you, when no one else does or will. They know your passion and desire and they know where you live too! In short they are investing in you, not the company.

Outside lenders and investors do not have that luxury. A good business plan goes a long way in letting them know that you have given significant thought on what you are doing and the expected outcomes of that effort financially.

Your banker is also interested in how you view your company, its competitors and your SWOT analysis. It helps them in their risk assessment and creates the benchmarks they need to assist in the approval process. This along with the borrowing base associated with larger loan transactions, can be garnered in part from the forecasts. Further, in today’s market, the owner’s personal credit is part of the evaluation by the lender. Being able to clearly communicate with a lender is the first step in a successful loan application.

I had lender set up a significant ($500K) financing facility, including a Letter of Credit backed by the facility, based on a succinct executive summary of the business plan and financial projections. They also acknowledged they knew we would need more capital, but that they wanted us to meet the initial projections prior to funding the next tranche of capital. Finally, what I like to hear, it was one of the best applications the underwriter had ever seen! And this was a money center bank!!!!!

Finally, remember the lender does not want to be your business partner and as part of this philosophy, they do not want to fund consistent operating losses. This is not their role. Rather, lenders are used to provide working capital and long term asset financing to fuel the company’s growth. Today banks expect your company to rest the line of credit for at least 30 days annually. A good banker will see of a part of that facility should be “termed out”, i.e. converting part of the line to a term loan for a base level of funds that are used to fund inventory and receivables to a level that make it impractical to pay off (rest) the line of credit each year.

Next Month in Part 3 of this subject of sourcing capital, we will discuss equity considerations including angel investors, venture capital and private equity groups.