Financing Your Business In 2010
by Business Money Toay - December 14, 2009
2010 is fast approaching and for many small businesses it is a welcome sight. 2009 has been wrought with disaster for Main Street businesses; from the financial crisis making access to capital nearly non-existence to the recession that has significantly curbed consumer spending - both of which has detrimentally hurt the cash flow of nearly every business (small and large) on this planet.
As we look to 2010, wiping our brow, hopefully we look forward with optimism about the possibilities of the New Year and what it can bring.
But, we should also look back in a sense to see what we can learn from the experiences we have just survived - experiences that were not accounted for in 2008 - but experiences that we met head on and overcame.
One of the most compelling and controversial issues in the coming year will again be access to capital. Prior to the financial crisis in late 2008 and 2009, money flow pretty freely. Banks could originate loans, collected fees and then sell those loans to quasi-government groups or directly to investors, collecting more fees. The end result was cheap income in the form of all those fees and no in-house risks as the loans were sold off to someone else. Thus, bank lending policies were either forgotten about or customized to fit business borrowers (qualified or otherwise). Who needed a lending policy as once the loan was approved and fees collected, the underlying risks were passed on.
Those days seem far gone now. In 2009, the massive bailouts and proposed additional banking regulations have made banks trend in the opposite direction - essentially making a 180 degree turn. Now, money is not flowing freely, it is not flowing at all.
Here is why. Our government and other leaders are pleading with these banks to open their vaults again while at the same time forcing new regulations upon these institutions. These new regulations, designed to protect borrowers, can hurt these banks if they (banks) increase their own risks and potentially put undue burdens of the U.S. economy (which will happen with increased lending to non-qualified borrowers - just as we saw in 2008 and 2009). Under these regulations, the government can come in and take over the bank(s).
Further, banks are stating that they want to lend to businesses but are just not seeing credit-worthy borrowers - which is in part understandable. With high unemployment, high debt levels and lower income as a nation, personal credit scores are bound to decline. And, as banks rely on both credit scores (the willingness of borrowers to repay obligations) and cash flow or income (the ability to repay these debt obligations) to make decisions, it is no wonder that many borrowers are deemed not credit-worthy.
But, if you are a potential borrower - individuals or business - there are some lessons that we can learn moving forward into the New Year.
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The rules have changed. Banks are now dusting off their lending policies and sticking to them word for word. That means higher credit standards as a way to lower their individual risks as they just can no longer pass those risks on to our government or private investors.
For business owners seeking capital, this means that, as borrowers, it is no longer sufficient to just go to your bank and apply for a loan or credit hoping that the bank will tweak its policies to fit the business's need. The upcoming 2010 year will require borrowers to better understand, not only the types of loans or capital that may be available to them, but to understand the rules in which to obtain this credit.
Once these new rules are understood, the business owner will be tasked to execute their business to fit these new rules - meaning that the business must tweak itself and not rely on the banks to fit the business into their requirements.
Understanding business credit in 2010 will come in two forms. First, the business borrower must understand what is available given the strength or stage of their business. Most financial institutions will not fund start-up businesses. But, just because your business is considered a start-up business doesn't mean that business credit is out of your grasp. There are many other financing products for new businesses from invoice or order factoring to business cash advances that can provide needed capital to new, growing companies. But, it starts with understanding which products are right for which business depending on stage, need or assets.
The second part of understand stems from understanding the rules. Once your business understands which bank or loan products is right for it, then your business must understand the rules of obtaining and qualifying for those products. Banks want to see both the ability to repay (positive cash flow) married with the willingness to repay (meaning high credit scores) not to mention collateral and personal guarantees. Accounts receivable factors want to see strength and collectability of invoices while business cash advancers want to see transaction inflow. Even SBA loans require banks to underwrite them - requiring even more understanding of both the bank's rules and the SBA's rules.
The bottom line is that even though your business, from your prospective, may fit a certain product or you may just simply want a certain product - if you don't understand what is available and what is best for your business and what it takes to qualify, you will be left in the dark to ultimately fail.
Continued On Next Page: Executing your business for financing
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Financing Your Business In 2010 - Business Money Today