Industry Source Networks Blog

Small business who are contemplating seeking financing should start do some year end planning to
ensure that they are ready to seek financing in the new year. The market for financing remains tight but
a well planned strategy can be the difference between success and failure in this difficult market. 2011
will also bring political uncertainty as to whether small business lending allocations will be held back by
the grid lock in Congress. With this level of uncertainty, those businesses that are best prepared will be
able to take advantage when the window of opportunity opens. So what should a small business do?

1. Get your Three years of Financial Statements in order. All lenders will want to see at least
three years of financial statements before they will consider providing financing. So you should
work with your accountant or use Quickbooks to make sure that you have Income Statements
and Balance Sheets prepared for 2008, 2009 and 2010. Organize your company data in January
so that you are ready to have your 2010 year statements prepared. Lenders are looking to lend
to companies that are profitable so at least the last year of your financials have to show that
your company has been profitable.

2. Have mechanism for updating your financials on a Monthly basis. Most lenders are going to
want to know the most updated information about the financial condition of your company.
The banks are going to ask you for partial year Income Statement and Balance Sheets. You may
have to produce partial year financials more than once if the lending process drags on for a few
months. This can be a very painful and costly process if you have not organized your reporting
system to be able to generate these results on short notice.

3. Get your business and personal taxes for the last three years in order. Get your business
(1120) and personal (1040) IRS tax returns organized. If you are applying for a loan after April
15th make sure to get your business and personal taxes filed on time. This is not the year to seek
an extension unless you absolutely have to. Also try to make your salary consistent from year
to year. Don’t lower your salary to boost company profitability as that could hurt the ratios that
lenders use to determine debt load.

4. Be able to articulate your business model clearly and concisely. Many small business owners
are experts at servicing their customers and building great products. They do it well and create
jobs and wealth in their communities. They are not use to speaking the language of lenders.
Before you meet your lenders it may be helpful to write a one page document that describes
your product or service, how you make money and why your business is sustainable. This is not
something that most small business owners are use to doing but is an excellent preparation for
being able to concisely describe your business in a way that a lender will understand.

5. Be clear on exactly how you are going to use new funding. The end of the year is a great time
to reflect on how your business has operated in the last year and to think about what you need
to do to grow or sustain your business over the next year. Lenders will want to know exactly

how you are going to use the money and how that use is going ensure that you will be able to
pay back your loan. The more speculative the use of the funds the more nervous lenders will be
about making the loan. Getting money to expand your already existing business using proven
metrics is generally the easiest use of funding to get a lender excited enough to approve a loan
to you.

Have a great end of year and if there is anything that we can do to help don’t hesitate to contact us.

There is a vicious cycle going in small business lending.    It goes something like this:

1. Small business gets battered by the economy.  The business is still profitable but less so than before.
2. The business sees its lending facility pared back or eliminated by their bank.
3. Small business cuts jobs, moves to a smaller building or stops future equipment orders so that their expenses reflect the reality of their new lower revenues.
4. Small business owner takes their austerity program to their lender in hopes of restoring some of their lost borrowing capabilities.  The lender looks at the lower revenues, layoffs and downsizing as a further deterioration of the business.  The lender lowers the business’s line of credit even further.
5. The business now has to run on even less cash and is not able to replenish inventory at the levels needed to grow its business.
6. Go back to step 1 and repeat until the business becomes truly uncreditworthy and eventually becomes insolvent.

So what can be done to break this vicious cycle?  First the Federal government must pass the small business bill which will give $30 billion to community banks to lend to small businesses.  Community banks are primarily focused on lending to small businesses.  Next, underwriters at banks lending to small businesses need to look at their lending criteria.  Credit benchmarks must be adjusted to take into consideration the current status of the economy.  This means that bank underwriters should take a longer view of the performance of the small business.  This should enable the lender to possibly provide a larger credit line than would be warranted by strict adherence to traditional underwriting guidelines.  These additional funds will enable businesses to invest in growing their businesses again and start the process of reversing the cycle and hiring will follow.  The proposed small business legislation makes some guarantees around the funds that the Federal government is providing to community banks so the banks will not be taking the additional risk of lending to small business without the federal government providing a backstop.  While this creates some exposure for taxpayers, I think this is an instance of taxpayers making an investment in their personal financial well being.

The SBA recently issued a report on how small businesses use trade credit.  The report found that  20% of small businesses don’t use trade credit, 20% only use bank credit, 20% use only trade credit and 40% use both bank and trade credit.  The interesting aspect of this study is the impact that the usage of credit had on the growth rates for these companies.  Companies that don’t use either bank or trade credit tend to be smaller companies with higher average profitability.  Companies that use both trade and bank credit tended to be the largest companies but with lower average profitability.  This makes sense because if a company does not take on debt then they also have no monthly debt payments and this will increase their average profitability.  The downside of no debt is that the company does not have the cash to buy the plant, equipment or people necessary to grow their business.  Companies that take on debt are able to buy these assets to grow their business.  They however have to be run in a disciplined manner as they have to make a monthly payment to their financing institution.  So these companies tend to have lower average profit than debt free companies.  Even though debt free companies  have a higher rate of profitability their absolute profit may bay be significantly less than companies with debt because of the scale that companies that take on debt can attain.  Small Business Owners must think through where on this scale they want to be.

A recent New York Times Article discussed all the efforts that the Obama administration and Federal Reserve have been putting into getting regional and community banks to make small business loans.  Ben Bernanke, the head of the Federal Reserve, is making small business lending one of the key priorities for his policy team.  This is in recognition that small business lending is one of the key requirements to getting small  businesses to hire more workers and end the recession that we are currently in.  Most of the $660 Billion in available financing for small businesses is being lent by regional and community oriented banks.  These banks have not been caught up in trading for their own accounts or other risky activities like the large money center banks but make their money from bread-and-butter small business loans which help companies build or renovate buildings, manage their inventories, buy new capital equipment or hire new workers.  Not for profit organizations such as churches or community organizations can also borrow from these community or regional banks to build or renovate their buildings or expand their programs to help people cope with this difficult environment.

We have in fact seen an uptick in the lending activity of community or regional banks lending to small businesses.  We have helped several companies in Washington State find financing when they thought the credit markets had closed.  So small business loans and small business financing is available.  If you need assistance with your financing needs for real estate, capital equipment or working capital then please don’t hesitate to contact us and we can match you with the right bank.

Industry Source Networks is severing the small business community across the united states by education and guidance through the small business loans process.