Putting the Cart Before the Horse - Financing Your Business

Over the last two years, we have seen one of the stingiest lending markets in regards to small or Main Street businesses.

Further, with the fact that our government has given billions in public money to lending institutions in hopes of stimulating small business lending, banks and other lenders are just not providing capital to small business owners.

Even with lower SBA guaranteed loans requirements and fees for both lenders and borrowers, needed growth and development capital is not flowing to business owners either looking to start or grow their business.

Banks state that they are willing to lend but are not seeing qualified borrowers. This means that credit scores and credit histories are below par (a bar that has been raised these last two years) and that business are not demonstrating an ability to repay these debt obligations (poor cash flow).

If you are in the market for debt financing for your business, the credit issue is simple - find out what is wrong with your credit history and get it fixed.

The ability to repay is a bit trickier but not impossible if you are willing to - as we have termed it - put the "cart before the horse!"

Most entrepreneurs - either looking to start a business or to expand their business - tend to seek money first before taking any personal risk. This is like trying to purchase a horse before spending the money on the cart. If you can't get the horse, there is no sense in buying the cart. Thus, no real risk to the business owner. But, this also forces the banks or other lenders to take on the risk the business owner was not willing to take themselves.

Banks and other lenders, especially when providing business capital, hate risk and want the business owners to burden as much of it as they can - just as much as the business owners wants to get rid of this risk by pushing it on lenders or customers. But it is taking this risk and the consequences that make us entrepreneurs.

So, instead of trying to get funding before getting customers, a new business owners or expanding entrepreneur may seek to drum up the business first - then seek the funds to meet that new demand - cart before the horse.

Example, a business that targets the wealthy decides that it wants to create and develop a new product related to its current offerings - but this new product will target middle-class consumers. However, the business does not have the cash flow to embark on this new endeavor (capital it needs to develop, build and market this new product). So, it goes to its bank just to hear them say "no" for the reasons described above.

There are many options for this business from fixing the issues the bank deemed important enough for the denial to just simply give up on this new project.

Or, it could seek to put the cart before the horse and take the risk in building the business first.

This business could get out and market this new product before having it developed and built. Then, with orders in hand and demand for this new product, take those orders and seek the capital needed for completion and fulfillment. Under this scenario, banks and other lenders will be more receptive as they are no longer taking a risk on the business in general but using already established business assets to both secure the loan and mitigate the repayment risks. This essentially takes the business and its issues (poor credit and lack of cash flow) out of the loan decision picture as the bank or lender will focus on the strength of the contract or order.

This can even work for start-ups. Why go out and seek capital for a business that does not exist? You would be better off growing the business first - even if you cannot deliver the products or service you are offering right now. With the business in hand, then seek the financing based on that demand.

There are even loan and advance products just for these situations:

The first and foremost is Purchase Order Financing where a lender (bank or other lender) will advance the funds need to complete projects - these advances can be used for working capital in the operating cycle to include hiring any additional labor needed.

There are Accounts Receivable Financing where completed sales can be factored for working capital to market, obtain and complete new business. Here individual invoices can be factored or your entire accounts receivable portfolio.

And, the always sought after business line of credit secured by orders in hand or accounts receivables.

For companies that bid on jobs and projects which also require some type financial guarantee like cash in the bank or a line of credit for the amount of the job, there are Letters of Credit that can be used to secure the bid and win the job which then can be in later factored through a purchase order contract for the capital needed to complete the project - complete operating cycle financing, but, it all starts with having the business in hand first?

Moreover, even private equity firms want to see some type of track record, either current revenues or sales contracts in hand before they even consider funding a company.

While it would seem very practical to seek financing before taking the personal risk of drumming up demand or opening your doors without an actual product, it is just not practical in today's lending market. Being an entrepreneur means taking risk. Thus, get out there and win the business, win the customers and take the risk (put the cart before the horse) -makings it much easier in securing financing for your business. It is better to have taken the risk and lost (not completing orders) then it is to sit on the fence and wait for lenders to change their way of doing business.

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