5 Factors in Selecting the Right Lender without Wasting Precious Time...

Almost all businesses know when they need working capital or a loan, but unfortunately, there are only a few that know where to go to find money. This is not only a problem for your small businesses, but this is an issue that plagues larger companies with sales of $1, $5 and $20 million in annual sales as well. There are 5 factors that can immediately help you to greatly narrow down and select the right lender without wasting a lot of time....

1. Be realistic. For example, if you are a small company and you have been in business less than 3 yrs with limited or no profitability, then a traditional bank is not going to be a good source for a loan or ar financing. If you are a sizable company (but still under $10 mill in sales), you need to have well kept financials… but even with ok performance, you are in what I call in "No Man's Land" (this is an idiom that of course refers to both Women and Men for my intended use). "No Man's Land" is where your loan size is too big for the easy to qualify small SBA loan, and too small for the traditional bankers who are mostly interested in loans greater than $4 million. Again, most of America falls into this "No Man’s Land" area so knowing non-traditional bank lending sources is a great way to make sure cash flow is maintained for growth. Knowing about alternative lending sources like factoring companies, a/r financing, invoice factoring, and /or inventory purchase order financing is really important. Most businesses in the US and abroad have little experience with alternative bank sources.
2. Evaluate your collateral. Is you collateral real-estate, accounts receivable, inventory, WIP, Letters of Credit, or some other item? For example, if you have a combination of receivables and inventory, then it is recommended to have an Asset Based or ar financing Line which is ideal for providing flexibility during growth periods. If your company has been profitable for at least 3 yrs and has sales above $3 million at least, then an Asset Based Line is the way to go. If you have sales under $1 or $2 million and your credit is good, then an SBA is your best route if your company is not expecting large growth and is free from liens. If you have real-estate then there are many choices if there is at least 30-40% equity in the property. If your company is not profitable, but growing, then you need a non-traditional bank lender that can provide an alternative financing structure like factoring invoices, ar financing, accounts receivable factoring, inventory financing, etc. 1st PMF Bancorp has offered these types of non-traditional invoice factoring or inventory financing lines for years.
3. Evaluate the Bank closely. Many bankers will gladly welcome your small business to complete a loan application, but few loan applications make it to the finish line so let’s save some brain damage by selecting our bank accordingly. If you have a small community bank that you know or have a currently relationship in the form of a bank account, then they should be the most likely candidate to provide flexible terms to smaller businesses. They will not offer alternative lending like invoice factoring or purchase order financing; however, they will often have SBA programs. These SBA programs often require you to pledge all your collateral and provide a personal guarantee. A personal guarantee is typical but you should get assurances that if they make a loan that you can have your accounts receivable subordinated to another lender for additional working capital as you grow because 99% of banks cannot increase SBA loans significantly to meet a company’s sales when grow expands rapidly. 1st PMF Bancorp has been advising its clients to make sure their receivables are not permanently collateralized when SBA loans are made so PMF can provide additional working capital lines for growth. Finding a non-traditional bank like 1st PMF Bancorp that can provide the ar financing and a traditional lender is optimal for a small business’s growth as it gives the business a layer of longer term debt as well as the shorter term invoice financing / working capital debt that can be used to quickly expand for new customers or opportunities.

4. Relationship verse Price. Everyone I speak to today has a lender pricing story where they brag about how they received a 1/2 percent less from their lender verses the going market rate; however, there is so much more than pricing to a loan or an ar financing line. For example, business loans or account receivable factoring at the lowest rates are great if you can get them, but if your borrowing base or covenants are so strict, then you might end up with the best priced loan that you are never able to use (or that the loan is so limited it does not really help). How good is a cheap $1 million line of credit where you can only draw down $100k? Also, getting a lender with 1/2% less in cost per yr sounds great, but if they don’t lend on inventory (or they are limited in this area), then how does this help your company grow? Remember, 1/2%,1%, or even 3% difference in pricing is really not material to many companies with 30-40% gross margins...just get the money to grow when you need it and then find a better source later. Don’t get stuck in an "Accountant's World" where a dollar saved on interest is more meaningful than the big picture of growing your company, and increasing its enterprise value which only translates. Often a factoring company charges a little more, but offers a greatly expanded opportunity to increase sales and your company’s enterprise value which far outweighs immaterial extra interest costs you may spend in a year. Alternative bank lenders like 1st PMF Bancorp offers ar financing, invoices factoring and other lines of credit for growth. Start building a relationship that is valuable with the right lender now.

5.Know where your company is on the food Chain. If your company is a larger firm, then larger lines with more flexibility are in order, but if you are a smaller company, then you need to look to smaller banks and lenders. If your priority is growing sales, then finding a commercial lender with limited credit covenants that can lend on receivables, inventory, and equipment like 1st PMF Bancorp so you are not capped by traditional bank limits and their regulations; however, if you are a smaller company with good credit that is looking for just a small loan, then an SBA Express Loan or SBA 7A loan are great if your needs are fixed and your business is not set to expand too quickly. Banks like Bank of America and small community banks can process SBAs quite well...just remember to ask them for a covenant in your loan that states if you are in good standing that your loan can be subordinated for future additional working capital needs, and then you will be in perfect shape.

Good Luck loan hunting! For more updates on getting loans and finding the right lender follow us on twitter @pmfbancorp or PMF Bancorp on Facebook

By

Stephen Perl, CEO

1st PMF Bancorp

For more information about www.invoicefactoringus.com