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Obtaining Business Financing in Today's Market By Angelo J. Bolcato, Esq. Originally printed in the New Jersey
Herald, Oct. 4, 2009 Ask small business owners today what's troubling them and you're bound to get a variety of responses. Is it the hard choices they have to make regarding layoffs? Is it tax burdens and government restrictions that are strangling their operations? Is it how to obtain financing in the present economic downturn in order to maintain or improve their business? One business sector not receiving much attention in this poor economy is the small business owner and what he or she has to endure to survive. The backbone of our economy and one of the greatest gifts we have is our entrepreneurial spirit, and no where else is this more evident than in our hometown businesses. One of the issues we see business owners struggling with is how to find the funds needed to adjust their business practices in order to cope with the current economy. Some basic preparation is essential when seeking financing. First, organize your financial documents, recent income tax returns, balance sheets, income and expense statements and existing loan documents. You should also prepare a written summary of any existing loans, including the name of the lender, date of the loan, original principal amount of the loan, current balance, interest rate, monthly payment amount and loan status. Are any of the loans in default? If so, you'll need to be prepared to explain to lenders the reason(s) for the default. Also, do you have collateral with equity which can be pledged for the loan? The second thing you should concentrate on is updating your business plan or developing a supplemental business plan, depending on your goal for the financing. A potential lender is going to want to know how you plan to spend the money and how you plan to repay the loan. If you're planning on purchasing equipment in order to produce a new product, the lender will not only want to know the cost of the equipment, but also what the cost is to operate it in terms of employees and raw materials as well as any revenue which will be derived from it. The United States Small Business Administration ("SBA") has a great website which includes a section on preparing business plans (www.sba.gov). A neat, organized binder or folder of documents shows the potential lender that you're serious and have thought through your venture. The final aspect of preparation is being able to sell the lender on why they should make the loan to you. This will include being able to answer questions concerning not only how you'll use the money and your plans for generating revenue to service the loan, but also any decreases in revenue or existing loan delinquencies. Now that you have organized your financial information and updated
your business plan, where do you go for the money? Institutional lenders
have tightened their lending practices, but they are not out of the commercial loan business. Start with the bank where you do your business banking. Depending on the bank, they may have options such as SBA guaranteed loans. One thing which makes SBA loans attractive is that as part of the "American Recovery and Reinvestment Act of 2009" ("ARRA") the SBA's fees have been temporarily suspended through the end of 2009. While the SBA does not lend the money directly to you the SBA does participate in the loan by partially guaranteeing payment to the lending bank in the event of a default. This is a benefit to the lender because it takes some of the risk of default off of them. For businesses which are seeking to expand, the ARRA also has modified the SBA's 504 loan refinancing program in order to allow for debt restructuring to enhance cash flow. The 504 program allows for refinancing if the debt sought to be refinanced does not exceed fifty (50) percent of the expected project expansion cost. "Expansion" includes the construction, acquisition or improvement of land, buildings or equipment. The SBA is also promoting "America's Recovery Capital" Loans ("ARC") which can be used to make payments of principal and interest on existing qualified small business loans for up to six months. These are interest free loans in amounts up to $35,000 and are 100% guaranteed by the SBA. The loan proceeds are disbursed over a six (6) month period and repayment is deferred for twelve (12) months. The repayment term is up to five (5) years. Another funding avenue to explore in the case of equipment purchases is seller financing. Manufacturers and/or distributors may be offering programs to help stimulate sales and therefore may be able to finance the purchase with favorable terms. As a side note for potential business acquirers, we are seeing seller financing as a primary tool in a number of business and commercial real estate sales. If the purpose of the loan is to secure financing in order to survive, consideration could be given to taking on new partners. For example, a faithful employee who may have capital or other tangible assets to contribute may not only help you survive a downturn but would also help you to keep a valued employee from going elsewhere. Depending on the industry, competitors may also be considered for possible mergers or joint ventures in order to expand into new lines of business. If the reality is that neither company will survive on its own but together you can make a viable company, it may make sense to at least explore the possibilities. The keys to securing funds in this economy are to be organized,
develop a plan, and check into the government sponsored programs which
are presently available. Watch for new federal programs which may become
available. When conventional means won't do, do what small business
owners are best known for -- use your ingenuity to develop alternate
routes to success. Angelo is a Partner at Laddey, Clark & Ryan, LLP in Sparta, and
specializes in Corporate and Business Law, Bankruptcy, Foreclosure and
Collection. please feel free to call or e-mail Angelo Bolcato, abolcato@lcrlaw.com.
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