A struggling economy and changes in lending practices during recent years made it difficult for many business owners and companies to qualify for traditional bank loans or equity lines of credit. The good news is times are changing. While, the days of securing money easily may never return, banks are beginning to ease up as the economy recovers. In other words, if you are in need of an infusion of cash, all may not be lost. In fact, you are not necessarily at the mercy of the banks. You have more power than you may think when it comes to finding and selecting a lender.
A strong relationship with the banks or lenders you work with is invaluable to the long term success of your business. But just like any other relationship, you need to make sure it is a good match before agreeing to play or work together. Do your homework. Conduct interviews. Check references. Listen to your gut.Then, choose wisely and structure things carefully.
Remember that this is your business and livelihood, and while it may not always feel like it, you are in the driver’s seat. As the driver, keep in mind a few rules and guidelines to live by:
Communication is key
Know your lender better than your spouse. Just like a marriage, the lines of communication are key. You lender can, and will, help you out of a tough situation if you communicate. Once you stop communicating, a lender is likely to become defensive and you lose any chance of working out of a bad cash flow situation.
Understand the type of loan you need
Keep in mind that needs are different than wants. You may want a $1 million dollar line of credit, but it may not be what you need. Don’t take on more debt than your business can handle.
Match long-term debt with long-term assets. This means don’t buy a piece of equipment or real estate with a line of credit. These are long term assets and should be funded with a long term loan. If you use your line of credit (i.e., short term working capital) inefficiently you won’t have available funds to meet payroll or vendor commitments.
Don’t put all your loans in one place
If you have more than one loan with a lender, chances are the loan docs have cross default language. Cross default means a lender will tie your loans together. Cross default is a provision in a loan agreement or other debt obligation stating that the borrower defaults if he/she goes into default on any other obligation. For example, a cross-default provision may state that a person defaults on his car lease if he defaults on his mortgage. This provision exists to protect the lender.
Your job is to protect yourself. Do this by planning smartly. If you have a line of credit at one lender, then make sure to secure a real estate loan at another.
Getting cash to grow your business is like driving down the road. You control the car but you have to make wise decisions to make it to your destination. There will be lots of bumps in the road and you don’t always know what is lying ahead but if you navigate correctly then you arrive safely. Pick your finance partners wisely and navigate the road with your lender as carefully as you would a winding road down the California coast line. Enjoy the ride!