Over two months, we interviewed over 25 traditional and non traditional lenders looking for a $500,000 working capital loan to support a client’s operations and growth. Even though the client has some angel investors who can support, she is trying to avoid giving up equity in exchange for capital.

Does this story resonate with anyone?

I bet it does! Ultimately, the angel investment was the best route for this client. They’re lucky they had a fairy godmother swoop in because today, traditional loans are at double digit interest rates.

Some non-traditional funding has an annualized rate higher than 25% for 12-18 month term financing. At the end of last year you could access capital for less than 15%. This goes to show how quickly capital can get expensive for small business owners when there is economic uncertainty.

I want to share the lessons we learned – what to prepare, what to be aware of, what to ask for, and how to stay motivated – when seeking capital in an environment like this.

1. What to Prepare
  • Know your monthly cash burn rate – how much cash you use on a monthly basis to cover business operations, debt obligations, outstanding bills, asset investments, paying yourself and whatever else you normally spend cash on for the business. By knowing your cash burn rate, you’ll know exactly how much $ you need to get through the next 12 months. And you’ll know exactly how much to ask of lenders or investors.
  • Have your paperwork ready – two years of business tax returns, most recent P&L and balance sheet, Accounts Receivable aging report, contracts signed from customers who plan to put in big orders or fulfill a multi-year contract.
  • Know where your business is going and how you plan to get there – Be ready to share your 3-5 year goals and financial projects. This is not critical to accessing capital but it DEFINITELY signals to the lender that you are confident in the viability of the business and you have a plan to pay them back.
2. What to Be Aware of and Watch Out For:

Look everywhere when seeking funding!

  • Start with the bank and financial institutions you currently have a relationship with. Banks and lending institutions are under heavy watch and scrutiny by credit agencies and the FDIC. So, traditional forms of lending will have the most strict requirements and the least amount of flexibility in their terms.
  • Reach out to regional, small community banks or credit unions where you do not have a relationship. Let them know you are willing to bring over deposits and start a relationship if they are able to help you get capital.
  • CDFI’s (Community Development Financial Institutions) are another source of capital. Their process for lending takes a few months, but it is a good alternative if you can’t get a loan from a traditional bank.
  • The next place to go is lenders that do specialty financing that uses your accounts receivable, equipment, or some other asset as collateral to provide financing. These lenders will advance you a percentage of the value of your assets in cash. These funders tend to require a personal guarantee, and very aggressive payment terms and repayment frequency.
  • The last resort is merchant cash advances. This source of capital often requires high weekly repayment and an effective interest rate more than double that of a traditional loan. Only use these if you foresee receiving a lot of money in 3-6 months . That way you can repay the advance quickly. Otherwise, you’ll be spending more time paying them back than actually using cash to move the business forward.
  • And of course, if someone in your network comes around, like an angel investor, look at that option too. See what they would like in exchange for providing funding. Negotiate on everything, in addition to equity. There may be other things you can give or share in exchange for the money.
3. What to Ask Of Lenders:
  • Terms of funding – how much money they will give you, the term of loan, repayment frequency, interest rate or factor rates, and all fees (e.g. origination, initiation, early repayment fees).
  • Is a guarantee of some sort required?
4. How to Stay Motivated
  • Pack an extra pair of patience with you on this journey.
  • Do your research early. Come up with a list of all the potential funders you’d like to speak with.
  • Have all the frequently requested documents (mentioned above) in a file, ready to share.
  • Keep track of everything. Who you contacted, what information they requested, and offering details.

And of course, have a financial expert support you on this long, arduous journey. This should be a person on your money team who will help you decide the right options for your business, get on the phone with you and the lenders/investors and be your overall right hand through the process. These are all examples of what we’ve had to do for a couple clients this year.

If you’re looking for a right hand in the process, book a Financial Consult with us at FinCore.

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Tricia Taitt is the CEO and Chief Financial Choreographer of FinCore. She holds an M.B.A from The Fuqua School of Business of Duke University, and a BS in Economics with a Finance concentration from The Wharton School at the University of Pennsylvania. For over 20 years, she’s been a finance professional. Half of the time was spent working on Wall Street while the other half was spent in the trenches side by side with small business owners. As a result of working with FinCore, clients have been able to take control of their numbers and feel more confident in their ability to make decisions, while increasing profits by 10% and building a cash stash to invest in growth. Follow Tricia on LinkedIn and Instagram.