Guide To Small Business Borrowing, Part 1

Liberty Capital is the unmatched choice for all your business capital requirements. We’re here to help you with alternatives for your business financing needs. We are always ready and willing to provide a quick analysis as to what the best direction for you and your business ought to be. We offer as many financial products as any bank. Since we have wider credit windows than the typical bank, we can instantly provide a fast business analysis, and then make an expert decision on the type of capital product that would fit your business profile and match your financial needs.

Experienced underwriters can speedily guide you in matching your business needs with the products for which you qualify; what you need to know in advance on the credit side, what to look for, and how to compare the diverse financial products so as to match your small business requirements perfectly.

In this two part series, we will give you an overview of the difficulties of small business borrowing. We have summarized for you the process in qualifying and understanding small business capital whether borrowing through your local bank or alternative funding sources.

Establishing Your Needs

Before asking to borrow money, capital or lease equipment from anyone, ask yourself this very critical question: “What do I need the money for?” If you’re unsure of the answer, you might just be in the thinking stage but not really ready to borrow. You may want to think through the following questions before you decide to borrow.

• What will I use the money for?
• How much money do I need?
• How much operating cash and revenue do I currently have?
• How will loan payments and payback affect my cashflow?
• Will this be an investment, revenue generating or cost-saving?
• Over what period of time will my revenue be affected, negatively or positively, and when might I expect to need another infusion of capital?
• What is the true opportunity cost if I don’t borrow?
• What is my cost of borrowing?

Qualifications: Do I qualify for a loan?

While most lenders keep their credit parameters and criteria secret, there are a number of simple pre-qualification you can perform to insure that you’re not spinning your wheels applying for capital you’re not likely to get. If you think your credit scores is a major concern you are dead wrong. You could have great credit, but if your business checking account has from 5-10 NSF’s (Insufficient Funds) a month, you are likely to be rejected for any loans, traditional or not. On the other hand, you would likely qualify for a merchant cash advance if you accept credit cards. Most underwriters are working with an absolute minimum bank balance and personal and business credit scores. Business lending institutions have assortment of restrictions and limitations based on industry bias. Understanding Restricted industries from the start will have save you time. Many lenders also have limits based on minimum time in business, monthly sales and gross annual revenue.

The good news is that Liberty Capital makes financing easy for you – our underwriters are highly knowledgeable about the lending guidelines. They can quickly pre-qualify your business for basic eligibility criteria for each capital product/category your business might need.

One Scenario:  A doctor is looking to buy an X-ray machine and is planning to finance it. Owing to a recent slowdown in business, his line-of-credit at his local bank has been closed, the open balance turned into a Term Loan. He has no more access to bank lines, his credit card lines are also maxed out.

As a result of low cash flow, he has fallen behind in payments to his bank. Because he has missed some payments, his credit score has gone down. Month-to-month his business is living on a margin.

The x-ray machine would generate additional revenue, instead of needing to outsource the job and income to increase work. The additional revenue from the x-ray machine would compensate for some of the operating expenses.

The dilemma: Pay cash, lease or borrow working capital to pay for equipment.

As a business owner, you have to make a decision about where you want your business to go. Are you willing to take the leap and invest to keep your business alive? No matter what your decision, you still have one question to answer. Where will the capital come from?

You know having this machine will increase revenue X% per year. But you now have to find ways to access the capital. Let’s say the x-ray machine costs $50k but your monthly ending bank balance on average is about $3k. Chances are based on your current bank account situation the maximum approval will be $35k. Additionally, you still have to pay for first and last month as required when leasing equipment.

Your Liberty Capital underwriter will run through different strategies with you to arrive at the best possible financing solution for your current need. We will try to offer equipment lease, cash advance or working capital loan. Liberty Capital can accommodate you, based on your financial needs

Application & Credit Process: It isn’t as hard as it seems!

Transforming the way you apply for working capital, Liberty Capital has state-of-the-art application process and business financing products. In general, we think the old way is time consuming, inefficient, and not very intuitive, especially when you are lacking needed collateral, cash flow and credit.

Your underwriter will help you understand the process. Getting you financed is our main goal, but just as important is the experience and integrity involved in the operation. Different financial institutions take very different approaches to establishing trust and integrity. Depending on what type of credit you’re applying for, working with the right company is extremely important. It’s not all about filling out application and throwing it against the wall and hope it sticks.

How long is the funding process? Time is money after all!

A typical bank loan, from initiation to funding, ranges from few days to several weeks to several months, depending on documentation requirements, due diligence verification, funding method, and underwriting verification process. Our process usually takes less than 7 business days.

Take a moment to consider what the loan entails, and whether it will be worth your while when compared to the amount of money funded; obviously the larger the loan, the more extra pre-caution it will be for the lender. Express loan for example requires only one month bank statements to get approved. No site inspection during funding process but maximum funding is $25,000, funding in days. Something simple like a cash advance or short term express loan, through Liberty Capital, can be secured by verifying cash flow (using bank and credit card statements), credit records and verification of identity and ownership. On the flip side, bank and SBA loans for small businesses with little revenue or credit history will require detailed documentation, collateral and personal history.

Additional Collateral Required? Not Really!

Different loan products will have varying collateral and security requirements and options. For example, the equipment itself is held as collateral for leasing option. For factoring, invoice or future receivables are held as collateral for account receivable factoring. Future Credit Card sales could also be held as security with merchant cash advance.

First consider what type of collateral you have available. Some options include real estate, stock, and personal assets that are now required by most banks. Additional business equipment or inventory could also be used as collateral.

In the case of a bank loan, pledging ‘extra’ collateral may get you a loan, but this practice (also known as over-collateralization) is risky: it can severely limit your ability to obtain future capital, since all your collateral will already be pledged to the first loan.

You’ll also want to know whether the loan will be reflected in your credit record – otherwise, it won’t help you build credit for your next loan. If not, at least have it reported to business reporting agencies to show loan payment history and capacity to pay back responsibly in your business credit history.

Get to know who you are working with.

Lending and borrowing is all about mutual trust, and integrity. Take the time to get to know the people whom you’re working with. Don’t send money up front to “get the application process moving”. You shouldn’t have to pay to apply for capital. Building trust is a two-way street and you want to know that these potential lenders are willing to do what it takes to fulfill your funding needs. It is always a good idea to check one’s options, but having a lender in whom you already have a built-in trust can give you the peace of mind that you will always be offered a fair deal.

Follow us in Part Two of this series.