The Truth About Business financing

The main source of funds that banks lend to businesses is depositors’ money.

A bank, using the neighbors’ grocery money, is financing that business down the street. Among the things that are for certain, is that the bank had better not loose the neighbors’ grocery money, or the bank will never hear the end of it. Thus, banks and bankers are extra careful when lending to businesses.

Business owners expect banks to "Be there for me"! "Be there for me" is not even on the bank's list of priorities for business owners. Protecting the neighbour's grocery money is at the top of the list of priorities, as is complying with legal requirements of tens of different federal and state/provincial regulatory agencies, and turning a profit for shareholders.

A bank can advance on small inventory were there is no accounts receivable to go with it. This would include businesses that sell to consumers, and would include beauty salon, or a convenience store, or a pizza place, or a neighborhood market, or a liquor store, a fish market. The reason is that you will usually find that the bank will take as its collateral a GSA on all business and personal assets, and those assets will usually include real estate equity in first or second position.

Interesting. In other words, the loan may appear to be against inventory but it is really against real estate equity? Why not just refinance the real estate and put the money into the company? There are several logistical reasons for this, but a major credit reason is that it is much better to have the financing in the name of the enterprise even though the real collateral is personally-owned real estate. This enables the business to build up a commercial credit history, which is absolutely essential to the further development of the business.

Many small and medium size businesses could do far more in terms of developing economic opportunity if only they would reduce their dependency on banks as their primary source of business financing. Other aspects being equal, businesses can develop more and faster and can be in far healthier financial condition while doing it, if enterprise owners would learn to choose and use proper non-bank business financing products to finance their businesses. Non-bank commercial finance companies do things that banks cannot do, simply because it’s inappropriate for banks to do those things.

Non-bank financing products do things that bank loans cannot do. Non-bank is a term for a funder that is not a bank, that is, not a depository institution.

Just as it’s not a bank, it’s not a commercial credit union or a trust company either. It’s any of a number of private commercial finance companies, each selling and servicing specific commercial financing products.

Private commercial finance companies differ from banks in that they:

Take reasonable calculated business risks, as long as the risk makes sense to them.

· Generally speaking, advance more on commercial assets than do banks.

· Impose fewer restrictions (covenants) on managements than do banks (within reasonable boundaries), giving ownerships greater freedom in what they do with financing and in how they operate the company.

· Give ownerships and management a far greater range of financing products, thereby providing ownerships with more tools for managing balance sheet debt of a growing company.

· Provide greater security from having their financing called early.

· Enable ownerships to have more than one financer, so that the failure of any one financer will not trigger a financing crisis.

· Enable company ownerships to take advantage of more of the opportunity that the market place offers. This makes it possible for ownerships to grow their companies more and faster than they could with bank financing.

Does this mean that private commercial finance companies will let their finance clients go wild? That is from the reality. Rather, commercial finance companies will enable companies to go considerably farther in their development than will banks.



The Truth About Business financing - To learn more about this author, visit Rick McCoo's Website.

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