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Commercial credit - what does it take to get it & what types of options exist?

We're 3 years old professional services llc, profitable on $3 million gross, and no physical assets as collateral.

Is it true you can only get it if you don't need it or is that a myth?

 

Answers

Jeremy Hofer
Title: Business Development Manager
Company: Fresno CDFI
(Business Development Manager, Fresno CDFI) |

Talk to your banker about an unsecured line of credit... they are opening up as the economy improves. If they aren't ready to work with you look for a local CDFI. These nonprofit alternative finance agencies are in the business of bridging companies over to the bank... you will likely need an SBA guarantee with them due to the lack of collateral. Also...Try a community bank that specializes in business lending. Good luck!

Anonymous
(Sr Cons) |

Community bank should be able to structure a working capital line with advances tied to A/R. Personal assets may be taken as collateral as well if you and/or other partners are open to it.

Nick Visco
Title: Chief Financial Officer
Company: SEAL Consulting
(Chief Financial Officer, SEAL Consulting) |

it is certainly possible to borrow against your receivables with either a bank or 3rd party lender... most important will be to show solid controls on billing (because if it isn't accurate and timely they can't assume it will be collected) and that your collections are on time

I can give you some specifics but don't think I am supposed to on this board... you can PM me for more details

Ken Devellis
Title: CEO
Company: Executive Capital Finance
(CEO, Executive Capital Finance) |

If the bank declines or qualification for SBA is an issue regarding the difficulty and time necessary to complete, term loans (unsecured and secured) along with credit lines are available for profitable, revenue producing companies from reputable private firms. Annual interest rates will range from 10% to 20% for secured term loans and 20% to 30% for unsecured term loans (from the better lenders). Asset based credit lines and portfolio based credit lines are much less expensive but must be backed with at least 2X in marketable collateral. Care must be taken when weighing options as all private lenders are not created equal and there are some who would take advantage of your situation rather than find an equitable solution. I would recommend staying away from the higher priced options of MCA and some factors as annualized rates can be as high as 80%.

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

From the limited description of your situation, congratulations - you have jumped a few of the lending hurdles (time in business, revenue and profitability). There definitely should be some viable options out there (e.g. factoring and bank line of credit, using your accounts receivable as your primary source collateral. If you have equity on your balance sheet that can help also to move into some term debt options, and possibly the SBA route, if warranted.

Factoring companies are the most expensive source of debt; expect to pay between 20-40% interest rates (or higher, if looking at on an annualized basis). However, I wouldn’t discount them altogether, as if you need money, they can fit a need. The key, as mentioned by others, is to find a reputable group and an agreement you can live with (read the fine print, as they typically try to lock you in for 6 months to a year with termination fees, etc.).

The next step is a “hybrid line of credit”, offered by some of the factoring type firms. Instead of directly buying invoices one by one, it acts like a bank line of credit tied to your receivables, but at a lower rate. Expect to be in the 15-25% range.

Once you “graduate” to a standard bank relationship you can get below 10%. If your balance sheet and business base is strong, then the rate obviously goes lower. However, with the standard bank lines, there also comes lots of covenants, so you have to be ready for such restrictions. Run your numbers and see how your working capital ratio looks. If you are consistently above 1.50, then you’ll have a much easier time with a bank.

I am a big fan of local / regional banks, as their lending practices are typically much friendlier to small business. The big boys (e.g. BofA, Chase, etc.) always talk nice to you, but are almost never interested in approving a loan unless you don’t need the money…

Always happy to give my insight on specific situations, in confidence to interested folks, just reach out via private message.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

If the company has 3 years of tax returns, then the probability of qualifying for conventional lending (banks) is higher. You might consider putting together a "loan package" that includes the following;

1. Current Balance Sheet & Profit Loss Statements
2. A/R and A/P aging
3. Copy of Articles of Inc.
4. Copy of company IRS returns
5. Proof of up to date paid 941 payroll taxes
6. Executive Summary of company and owners

Have this readily available. The trick to improving your chances of securing a conventional loan is committing to bringing your everyday banking relationship to the bank if they approve the loan. In the current market that's a lot of bargaining power. Only work with individuals with the title Business Banker and try to get a name and number through networking with colleagues.

The good news for local banks is they will remember your name, the bad news is they are under so much pressure to not make a bad loan that the underwriting can be insanely strict. The good news for national brand banks is they are under intense pressure to lend money to small businesses, the bad news you become an unknown cog in the wheel of capitalism.

It sounds like you are a services type company, so an SBA guarantee or term loan are not a fit for you. You should first spend time seeing if you qualify for the conventional line of credit. Don't let the banker drag their heels for months - it's a sign they aren't interested. If they are interested they will walk the papers over to your office. Make sure not to settle for a LOC that is too small for your growth. It could severely trip you up at the most inopportune moment.

Receivables financing is divided into 2 levels - Asset Based Lending if you carry more than $1M regularly on your books or Invoice Factoring if you are still building up to bigger things.

Invoice factoring is seen as a temporary bridge not a final solution. Some of the rates quoted above do not match reality fortunately. Firstly, the cost of financing receivables is a service charge, not entirely an interest rate. For the service charge the factoring company must check customer credit, verify invoices, dole out the advance and reserve for all the transactions. So the cost differential is due to the extra human activity on each and every invoice transaction. But given the proper set of circumstances it can be the right type of financing to satisfy going after larger contracts.

And as mentioned a few times above - be clear on the terms and conditions of any type of commercial financing including contract periods, day to day obligations you may have to make and most importantly negotiate the terms of the UCC-1 when appropriate.

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