Small Business Financing Options – Despite the Credit Crunch

There’s no question that the financial crisis and ensuing credit crunch have made it more difficult than ever to secure small business financing and raise capital. This is especially true for fast-growth companies, which tend to consume more resources in order to feed their growth. If they aren’t careful, they can literally grow themselves right out of business.

Amidst all the gloom and doom, however, it’s important to keep one thing in mind: There are still options available for small business financing. It’s simply a matter of knowing where to look and how to prepare.

Where to Look

There are three main sources you can turn to for small business financing:

Commercial Banks – These are the first source most owners think of when they think about small business financing. Banks loan money that must be repaid with interest and usually secured by collateral pledged by the business in case it can’t repay the loan.

On the positive side, debt is relatively inexpensive, especially in today’s low-interest-rate environment. Community banks are often a good place to start your search for small business financing today, since they are generally in better financial condition than big banks. If you do visit a big bank, be sure to talk to someone in the area of the bank that focuses on small business financing and lending.

Keep in mind that it takes more diligence and transparency on the part of small businesses in order to maintain a lending relationship in today’s credit environment. Most banks have expanded their reporting and recordkeeping requirements considerably and are looking more closely at collateral to make sure businesses are capable of repaying the amount of money requested.

Venture Capital Companies – Unlike banks, which loan money and are paid interest, venture capital companies are investors who receive shares of ownership in the companies they invest in. This type of small business financing is known as equity financing. Private equity firms and angel investors are specialized types of venture capital companies.

While equity financing does not have to be repaid like a bank loan, it can end up costing much more in the long run. Why? Because each share of ownership you give to a venture capital company in exchange for small business financing is an ownership share with an unknown future value that’s no longer yours. Also, venture capital companies sometimes place restrictive terms and conditions on financing, and they expect a very high rate of return on their investments.

Commercial Finance Companies – These non-traditional money lenders provide a specialized type of small business financing known as asset-based lending (or ABL). There are two primary types of ABL: factoring and accounts receivable (A/R) financing.

With factoring, companies sell their outstanding receivables to the finance company at a discount of usually between 2-5%. So if you sold a $10,000 receivable to a factor, for example, you might receive between $9,500-$9,800. The benefit is that you would receive this cash right away, instead of waiting 30, 60 or 90 days (or longer). Factoring companies also perform credit checks on customers and analyze credit reports to uncover bad risks and set appropriate credit limits.

With A/R financing, you would borrow money from the finance company and use your accounts receivable as collateral. Companies that want to borrow in this way should be able to demonstrate strong financial reporting capabilities and a diverse customer base without a high concentration of sales to any one customer.

How to Prepare

Regardless of which type of small business financing you decide to pursue, your preparation before you approach a potential lender or investor will be critical to your success. Banks, in particular, are taking a much more critical look at small business loan applications than many did in the past. They are requesting more background from potential borrowers in the way of tax returns (both business and personal), financial statements and business plans.

Lenders are focusing on what are sometimes referred to as the five Cs of credit:

o Character: Does the company have a strong reputation in its community and industry?

o Capital: Lenders usually like to see that owners have invested some of their personal money in the business, or that they have some of their own “skin in the game.”

o Capacity: Financial ratios help lenders determine how much debt a company should be able to take on without stressing the finances.

o Collateral: This is a secondary source of repayment in case a borrower defaults on the loan. Most lenders prefer collateral that is relatively easy to convert to cash, especially equipment and real estate.

o Conditions: Conditions in the borrower’s industry and the overall economy in general will play a big factor in a lender’s decisions.

Before you meet with any type of lender or investor, be prepared to explain to them specifically why you believe you need financing or capital, as well as how much capital you need and when and how you will pay it back (if a loan) or what kind of return on investment a venture capital company can expect. Also be prepared to discuss specifically what the money will be used for and what kind of collateral you are prepared to pledge to support the loan, as well as your sources of repayment and what measures you will take to ensure repayment if your finances get tight.

You should also ensure that your financial statements and records are current and that your internal control systems are adequate for handling the level of accounting and bookkeeping lenders and investors expect.

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5 Common Mistakes That You Should Not Make If You Want to Get an Internship With a Top Bank

You are a student and you really want to be in a top paid position in a well-known bank. You know that you will probably have to find an internship first. And you are correct; most people working in the finance industry found their first job through an internship.

However, the fact it is an internship does not mean it is easy to get. Recruitment processes in banks are tough because there are so many candidates. You have to understand how they work or you will not maximise your chances.

Here are 5 common mistakes that students make when they apply for an internship in a bank.

1. Apply for the wrong type of internship

Banks have different programs for students, depending on previous internship experience and the number of years of study you have left before graduation. If you apply for the wrong one, your application will likely be discarded.

Usually you start with a spring or an off cycle internship if you have 2 or 3 years left before graduation. Doing this kind of internship is not mandatory, but will increase your chances of getting onto the next programs.

Then, when you have one year remaining before graduation, you can apply for a summer internship. This is really important if you want to get into finance. Banks use these programs to identify those that will enter their graduate programs the following year. If you skip this step, it will be much harder to get onto a graduate program.

2. Only applying for the bank of your dreams

Some students will apply only for the four or five top banks they really want to work for, thinking the others are not worth it. If you are serious about getting into finance, you should not do this. The truth is that you should enlarge the scope of your applications as much as possible. Everybody is applying for the top banks, they are bombarded by applications each year. Even if you maximise your chances with good preparation, it is still not enough to ensure that you will get an internship. There are enough good candidates like you for banks to choose from and sometimes between two similar profiles it can even come down to pure luck.

You also should not compromise what you want to do in order to get into a top bank. Believe me, it is a lot easier to settle for a good fitting internship in a medium ranked bank than an internship in one of the best bank that does not match what you want to do ultimately.

3. Believing that a deadline far in the future means you can wait to send your application

If you want to apply for a summer internship or a graduate program, you should send your application as soon as it opens (ie, usually September of the previous year). While it is true that most banks have deadlines set as far away as March of the year of the internship, you have virtually no chance of being successful with an internship application if you apply just before the deadline. That is because banks do not wait to review applications. They have several interview sessions throughout the year and once they are full they will not even look at other applications. You have to get into the first interview session (usually in October/November). This is when recruiters are most open to “non-perfect” candidates.

4. Thinking that filling the online application is enough

The online application is important and you should put a lot of efforts into it. However, it may not be enough to guarantee success.

There are so many candidates for bank internships that if you want your chances to be high, you need to differentiate yourself from others. Most banks organise events on campuses where you can meet and talk with people from the banks. It is essential that you go to at least one of these events, and that you talk with people there. If you make a good impression, they will give you their business card, then you will be able to tell the HR person that you met with this person and that you had a nice conversation. It will have a very positive impact on your application. If they really like your profile they can even recommend you directly to the HR department. If it happens, congratulations, you are certain to get an interview.

If there are no events on your campus, you can go to the bank career website and look for events organised near your location. Then you can send an application for the event.

5. Focusing too much on finance skills in your application

If you want to work in finance, you need of course to know at least the basics of your field (derivatives, interest rates etc for market finance, the usual valuation ratios for corporate finance). However, recruiters expect every candidate to be knowledgeable on these topics. You also need something that will differentiate your application: add something more to it, such as a technical skill. There are a lot of strong finance-oriented profiles, and a lot of good technical profiles. But there are so few candidates that can combine both skills and they are the favourites of the banks. Today, finance is all about automation and algorithm. Banks know that, and they want their future employees to be comfortable with the new digital age. So learn a programming language (or more than one) and put it on your resume.

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Learn How to Manage Your Finances – Banks Versus Debt Relief Companies

When it comes to getting out of debt, you need to have money. After all, you will only get out of debt once you start paying off your balance. There are a number of ways you can get this extra money; you can trim your spending or get a second job. You can also secure a loan to payoff your debts. When it comes to getting that loan, you can deal with a local bank or a debt relief company. Which option is best? In most cases, you will find it is dealing with a debt relief company. Why is that?

Debt relief companies are designed to help those who are in financial distress. Your local bank can provide you with assistance too, but that wasn’t and isn’t their original goal. They would prefer to handout secured mortgage loans or car loans. Because of today’s economy some lenders have stopped offering personal or debt consolidation loans to those with anything less than perfect credit. You are in debt and you have a bad credit score; where does this leave you?

If you go down to your local bank and do get a debt consolidation loan, you are given a loan for the exact amount of your debts. This is good because you are seeking financial relief. Your money owed is paid and you now owe the bank. The tricky part is that you owe the same amount of money; you now just have more time to pay it. A lot of debt relief companies today combine two popular relief forms; settlement and consolidation.

When settlement and consolidation are combined, you get the ultimate form of debt relief. Not only are your bills consolidated, but they are reduced beforehand. Your relief company takes the time to negotiate with your creditors and this results in you getting a percentage of your debt eliminated. This is not something your local bank will do at all even if you ask.

In conclusion, you will typically notice more benefits when using a debt relief company to get out of debt. On that same note, you always want to consider each of your options. This means moseying on down to your local bank and speaking with a loan officer. If you have yet to speak with a debt relief company yet, be sure to not make any final decision without first doing so.

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Private Party Real Estate Mortgage Financing: Bank Financing Is Not the Only Option

Private Party Real Estate Financing is an Option

Creating a valuable financial asset

This article explains an alternate way to finance the purchase of real estate, and a way to creation a financial asset that can provide monthly income at a rate above traditional rates available in today’s market. Our discussion is about private party promissory notes used to finance the purchase of real estate. This alternative type of finance has several names-“private party financing”, “seller financing” and “owner-carry financing”.

You can create this investment (financial asset) by selling a property and not having the buyer borrow from a bank; you can become the bank and earn the interest. Or, you can buy an existing note from a private party who did the financing: you can become the lender, and earn the interest yourself. Mortgage notes (bank notes or private promissory notes) are a major component of every real estate transaction. If you creation or own the note that puts you in financial control of the transaction. At a later date you have the option of selling the note if the need for cash arises, or keeping it for monthly income.

Maximizing the value of the note

Like any item made or constructed, the note’s value to you, and to others if sold, depends on how well it is constructed. A poorly constructed note, like a poorly constructed house, is not a very desirable asset. There are several important factors that will enhance value if done correctly, or significantly detract from value if done poorly. The cash you get from your note if you hold it, and how much cash you get for your note if you sell it, depends on these factors:

Borrower

The most important consideration when originating or purchasing a note is the quality of the borrower. Two elements determine the quality of the borrower, (1) having the financial capability to keep the payment promise, and (2) having the right attitude toward the importance of the promise. If the borrower does not have the ability to keep the promise to repay, the value of the note is diminished, regardless of having a positive attitude; and, if the borrower has the financial capability to pay, but does not have the right attitude toward making the payments, the note’s value is diminished. Get a credit report on the buyer. Make sure the buyer doesn’t have a history of late payments, non-payments, lawsuits, or judgments. Financial capability and personal attitude are the two critical factors.

Collateral

The real estate pledged (by mortgage or deed of trust) is the back-up protection securing repayment if the borrower is unable or unwilling to repay. It is the safety-net. The collateral should have a market value of at least 125% of the loan amount: $100,000 loan requires $125,000 collateral security; stated differently, the loan amount should be, at most, 80.0% of the value of the collateral. Be certain that a sufficient down payment has been made.

Interest rate

The interest rate should be at the least 1.5 X the prevailing bank rate for a similar loan. Example: bank rate is 5.5% X 1.5 = 8.25% rate for a private party real estate loan. The borrower is willing to pay the higher rate because the bank is unwilling to make him the loan; the private party loan is his only option. This rate is fair because the borrower has been labeled by the bank as a “high risk borrower”. The private party lender is assuming a greater risk by making the loan.

Conclusion

Providing private party real estate financing to a qualified borrower, supported by adequate collateral security, at an appropriate interest rate is a sound investing strategy. Don’t overlook this opportunity!

Lawrence (Larry) Tepper specializes in the valuation and appraisal of promissory notes, mortgage notes, and debt cash-flow instruments nationally for banks, trust companies, self-directed IRA accounts, estates, attorneys, CPAs, and individual investors.

Consulting Services-Free Appraisal Price Quotes

EDUCATION AND TRAINING
Law Degree /Accounting Minor University of Denver
Managing Colorado Real Estate Broker– Promissory Notes Specialization CCIM)

PRACTICAL EXPERIENCE
35 + years of national promissory note and mortgage note appraisal and valuation for Banks, Trust Companies, Attorneys, CPA’s, Estates, Trusts, Executors, Administrators, and Financial Advisors.
“No charge” review and discussion of your file and documents–Fee appraisal quotes– Call or email.

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