January 24, 2013
Research your options when deciding to grow your business
By Lucas Deal, Associate Editor
It takes a lot of work and careful planning to expand your business. You have to make major changes to your business plan, find a location, add staff, promote your expansion; the list goes on and on. One of the most important steps on that laundry list is securing the financing necessary to grow.
According to Greg Kenepp, chief marketing officer at The Receivables Exchange, researching your financing options is one of the first steps toward expansion.
“Given the state of the lending climate, if a business owner is looking to expand, he should consider his financing options very early on,” he says. “Unless the business already has a sizable line of credit or cash reserves, the owner is going to need some level of outside financing.”
Outside financing for expansion can be acquired from multiple locations, Kenepp says. The most common form of financing comes from bank loans, but Kenepp says the financial crisis of last decade has added another degree of difficulty to obtaining a loan.
“The economic downturn has caused most banks and financial institutions to tighten their lending standards,” he says. “For example, to satisfy bank loan requirements, a business is usually required to put up a mix of collateral, including cash and hard assets, to secure the loan, which is a tough requirement for many businesses, especially smaller businesses.”
Kenepp also says some banks have started requesting a personal guarantee from business owners when providing loans. Under this plan the dealer principal risks losing his business and personal assets if he defaults on his business loan.
That’s a terrifying proposition. But those risks don’t mean businesses can’t use conventional financing to expand.
A business that has a long working and successful relationship with a bank or financing institution will have an immediate advantage when inquiring about a loan. Because the two sides know each other, they can use their knowledge of the business and its normal loan/payment structure to create another loan viable for an expansion.
Having a strong business plan helps, too. Most of the above risks associated with financing are the result of defaulting on a loan. If your plan to expand your dealership works, then it should allow you to slowly and safely pay back your loan without financial damage.
However, if you want to expand and avoid heading to the bank, there are other options.
“With the rise in customers extending payment terms beyond 30 days, newer financing options that leverage accounts receivable are gaining in popularity,” says Kenepp.
Leveraging accounts allows a company to sells its receivables as a way to quickly provide cash when trying expand or grow, says Leif Founds, vice president at Corporate Billing, LLC.
“We’re able to help [businesses] free up capital that is tied up in their receivables to re-invest into their business any way they see fit,” he says. “If a guy has a $1,000,000 on the books in receivables, we can take those accounts and provide him a cash value in return.”
Founds and Kenepp say leveraging account rates are flexible and vary depending on the size and scope of a transaction, and there are no personal guarantees.
“The lower the transaction; the lower the rate,” Founds says.
Once a deal is approved, cash loans can be provided in one business day.
While leveraging accounts does not require long-term contracts, there are some parameters when finalizing receivables transfers. Kenepp says businesses are obligated to repurchase invoices of non-paying customers when working with The Receivable Exchange, and Founds says his customers must undergo a 90-day trial before his company officially shoulders the financial burden of outstanding accounts.
Kenepp says a business can sell as many receivables as it sees fit. Founds says his company has purchased receivables ranging from several thousand dollars to several millions.
“We have never had a client come back and say this isn’t working,” says Founds.
So that’s another option; and when you are trying to expand it is best to look into every financing option possible. After all, you can’t expand without financial backing.