“I’ve started a sales-training company. I have 10 years experience in sales and training with large companies, a good business plan and a couple of clients already signed, but I can’t get my bank to provide any operating money. I don’t have a whole lot of my own cash to put into the business, and my banker doesn’t like that. (I’m also a youngish woman, but I’m not sure this has anything to do with the problem.) What can I do to make my company more attractive to bankers, or where else can I go for money?”
Robert Bennett, president, Municipal Software Corp., Victoria
I read the dilemma facing the person who is beginning her sales training company, and could immediately understand and empathize with her situation. As a founder of a technology company almost 19 years ago, I have experienced first-hand the issues facing her, and most small business owners today, as it relates to banking relationships.
The first thing that I’ve learned over the last 19 years is that there appears to be a cyclical nature to lending decisions being made by banks. The general health of the economy, general health of the industry that you’re in, and recent bank experience all contribute to formal and informal policy that guides lending institutions in the decisions they make. Some of this has nothing to do with you or your operation — it just is. Banks have always been wary of technology companies, especially smaller ones, and especially these days!
However, we’ve also been able to find support from banks, mainly due to the most important thing that I’ve learned over the last 19 years, and that it is all based on people. You have to actively go out and find a banker who “gets you” — who understands your business, and more importantly understands you. The business plans and the cash flow projections are important too, but there’s got to be a connection that gets made between you and your banker. That could mean that you will have to change banks. That could mean that you have to change often, as many times banks will move their account personnel.
Having said all of that we have only been successful in obtaining smaller lines of credit secured by receivables, and of course personally guaranteed by the principals. We’ve also been able to obtain a Business Improvement Loan for the acquisition of key pieces of equipment. We also were lucky in obtaining some short term financing through the BDC. But by and large, we have had to be very careful about generating the sales revenue that we require to build the business and grow. Banks are not a source of funding — they do not “invest”. They will provide financing on the basis of secured assets, and my experience is that they are most comfortable with real estate. If you’re looking for investment in your company, that’s a whole other discussion on the wide variety of sources that exist, from personal lines of credit (personal credit cards, too!), to money from family and friends, new partners, etc.
It’s great to see a new entrepreneur, especially since it brings back the memories of when our company was started — the good and the painful. My best advice, keep your eye on sales (and the bottom line), and the problem with the bank will, well, not disappear altogether, but will become smaller and smaller. And if you can’t get the support from your present bank, look around — there’s probably another person at another bank who will provide the support you are looking for.
Dan Cadieux, ICG Direct
Finding operating money is always a challenge for new companies, not to mention the challenges faced by companies experiencing rapid growth. We at ICG Direct assist companies with this challenge by finding them alternative forms of financing. Our most popular product and one that will most likely work well for your reader is Accounts Receivable Financing. In working with large companies you are often at their mercy waiting for payment on your invoice (for time and work done, possibly months ago). Instead of waiting you can sell the invoice! We will arrange for a company to provide funding for the invoice and voilÃÆÃ , you have cash immediately instead of waiting for 30, 60, or 90 plus days. This infusion of cash will allow for continued operation of the business (paying suppliers, meeting payroll, etc.) and also allow for rapid expansion. There is a small fee for the service based on the length of time the receivable is outstanding. However, it is inconsequential compared to the benefit of having the cash now!
Some great questions from your reader in Ontario, and my comments are listed in no particular order of importance:
- It is good to see you have a good business plan, but does it (or the appendices) include:
- A set of 5 Year Financial Forecasts that provide extensive detail for your assumptions and calculations and results in a viable business model? Many great business plans lack a great financial component, and bankers and other investors could hesitate to provide funding if good financial forecasts are not available.
- A business valuation (estimated value of the business today)? With a 5 Year Financial Forecast, a basic business valuation can be calculated based on discounted cash flows (basically taking the estimated cash flows for the next 5 years, and then present valuing them to today, based on certain discount % rates). When you have a good idea of what the business is worth on paper (not just a number pulled out of the air), then investors could be more keen to invest, since they know you have done your homework. The investor may not agree with your valuation, but you will at least have the calculations to prove how you came up with the estimated value.
- On the “youngish” part, have you taken some entrepreneurial tests to determine how strong of an entrepreneur you are, or could be? Some online tests are found at http://www.accountplusnet.com/generic.html?pid=4. As you are young, you will have some time to develop skills which you don’t already have, and this can help your business be more successful.
- If you have signed contracts with clients, you may be able to “factor” these contracts and gain some funds up front from a financing company. The interest rates can be high, but “Cash is King” when you are starting, or growing a business.
- Bankers will only go so far, especially if you have limited personal funds at risk, and you may wish to seek out family, friends or angels (hard-to-find, wealthy investors looking to invest in early stage companies) to build more equity into your company. You may also look to acquire loans from these sources, and be willing to pay possibly 15% and greater on a yearly basis, since some risk exists.
This is a the age old question for all budding entrepreneurs. Most advisors will tell you that banks will NOT finance a start up company regardless of how good their business plan may be. Guess what? They’re correct! Banks are risk adverse and will generally only finance companies that have been around for a long time (usually greater than 5 years). In addition, they want collateral… lots of it. If they are going to loan money to you they want to be 100% sure that they’ll get all of their money back (with interest).
I don’t mean to discourage you because it’s ultimate your relentlessness and drive that will turn your business into a success. To answer you question, funding from banks will be granted based on your personal credit and situation as the company does not have a track record of operations or credit. Therefore, an operating loan or line of credit may be obtained with collateral e.g. a house, car, RRSPs, or with a personal guarantee. If you feel that you are not credit worthy or do not have adequate collateral perhaps you can have a friend or family member co-sign the loan with you.
In several years when your business takes off and you need to expand, the banks lending criteria will apply solely to your company rather than yourself. The object over the next several years is to build up your assets, keep your debt down and make sure you show positive cash flows… banks love this as it fits nicely into their calculations.
As an accountant, I can’t stress how important it is to have a good accountant to help you and the business as you grow through the phases. He / she will be able to provide you with valuable information on all facets of the of the business and financing.
That’s my experience with banks. I wish you the best of luck on your future endeavours and don’t let the banks stand in your way of great things.
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