In an economy like this, one of the biggest problems business owners face is the cash crunch. Customers are slower to pay and some have even filed for bankruptcy. Just when you were expecting a check, you get a Chapter 11 notice from some courthouse. Cash is king in any economy, so how do you get the cash during shortfalls in cash flow?
Financing vehicles
Lisa Key, from Diamond International in Kansas City, Mo., says it isn’t significantly more difficult to get a loan for a major item like a truck these days. “Things haven’t changed all that much,” she says. “I can still get customers financed through Navistar in pretty much the same routine. If a customer has good credit or other criteria appear to make them worthy, they can still get financed.”
“In terms of credit score, we’ve gone as low as 500 in some cases if the customer has a track record and we understand what has happened to put them in that rating bracket. We don’t exclude anyone because of a relatively low credit score. Other factors come into play, such as how long the company has been in business, how much business they have done with us, and what the likelihood is that they’ll be able to pay the loan off.”
So in terms of trucks, the truck dealership may be your best bet for a loan. Manufacturers remain anxious to sell vehicles and have the latitude to work with buyers.
Financing the business
Businesses were booming a year ago. Expansion was part of the mindset, and owners took on some debt to move forward. In a growing economy, perhaps some poor spending habits or inefficient processes that weren’t properly dealt with left you vulnerable when customers started cutting back or leaving.
Now, with the business hitting some bumps, you may need financing to get by until the economy starts to recover. Many owners wonder where they can get this much-needed infusion of cash. A lot of media attention has focused on federal stimulus money and the U.S. Small Business Administration. But do these programs impact the environmental service industry?
Last February, when the stimulus package got the green light, some $700 million was set aside for the SBA to help small business. Let’s look back before we move forward and see how the SBA used to operate.
As a small businessman, I had always heard that the SBA was burdensome to deal with. I never dealt with them because I never needed to, but the criticisms boiled down to two: They required too much paperwork, and banks didn’t like to administer SBA-guaranteed loans because of the slow repay from the government. Often, banks would file to get their guaranteed money and it took as much as a year for the government to pay them. The banks didn’t want to slog through a lengthy process to be reimbursed.
Recessionary times
With the onset of the recession, the SBA was brought forward to pave the way for getting money to small-business owners who needed it so badly. Many loan programs were developed, including the ARC (America's Recovery Capital) loan, which would supply up to $35,000 to a business to meet current debt obligations.
These were to be five-year loans with interest paid by the government over the life of the loan, and no payment due from the borrower until the beginning of the second year. It sounded good. I called several banks to see how ARC loans were going, and most reported that they hadn’t made any because they weren’t interested: Not enough profit and too much paperwork. A number of the bank representatives said they didn’t enjoy dealing with the SBA.
It’s important to remember that all these SBA loans go through banks. The banks gather the information, and if they deem it a good loan, they forward their approval, and the loan is approved and guaranteed by the SBA.
What banks demand
Ultimately, the bank makes the decision. And as you might imagine, they are more skittish about handing out money today than they were a few years ago. If you need a cash infusion, whether through an SBA loan or traditional bank financing, here are the requirements banks are demanding these days:
Money in their bank. Many banks don’t like loaning money to someone who isn’t “going in” on the deal with them. In some cases, they want you to pony up as much as 30 percent of the total amount in cash to establish your commitment to building back the business.
A Personal Financial Statement. Many banks require this document, showing everything you own, what you owe, and ultimately your net worth.
Collateral. The SBA recommends banks do whatever they can to secure 100 percent of the loan in business or personal assets, or a combination. And the assets are valued at fire sale prices – what the bank could raise through immediate liquidation. So, to the bank, the assets are worth 50 to 75 percent of real market value.
Your credit rating. Many banks want a rating of 700 or above. Each bank sets its own requirements on a minimum score. Some will still consider a score of 600 or above.
An up-to-date business plan. Many banks want to see a detailed and current business plan that spells out your plans for the money being borrowed.
The big question
Once they have the information in hand, loan officers will have one last and crucial question: “If you are given the loan, will you be able to pay it back?” Obviously, your business is already stressed, so will another monthly payment simply make things worse?
Before seeking more financing, jump on the other side of the table. Take on the role of the banker and look at yourself the way the banker does. Knowing what you know, would you loan the money? Remember, like any business, the bank’s job is to make money. They don’t want to gather up collateral when someone fails and start selling off assets. That’s not what they know how to do, and it’s now how they turn a profit.
When it comes to financing, be realistic. The banker is. You’ve all heard the phrase, “If you don’t need the money, the bank will lend it to you.” This has a ring of truth to it, but it doesn’t mean you can’t secure a loan in these troubled times. You just have to be smarter about navigating the loan process.
