BY NORMAN G. GRILL JR.
For businesses looking for financing, the news is getting better. From a variety of sources — some new, some traditional — loans are becoming more plentiful and somewhat easier to get.
It would be encouraging if this were because the economy was improving. That isn’t the reason. Improved business loan availability is because of one of the benefits of the free market: competition.
According to the Federal Reserve, domestic banks that eased requirements reported “more aggressive competition from other banks and nonbank lenders” as for why they loosened their purse strings. So, while the economy remains uncertain, competition is creating opportunities for business owners to get the capital they need.
Who or what are some of these competitors for your loan interest dollar? One option that’s been getting press recently is crowdfunding. This is the practice of turning to the general public, typically via the Internet, to sell small amounts of equity in a private company in return for ready capital.
As tends to be the case online, one website in particular has become synonymous with this phenomenon: Kickstarter. But there are others, including Crowdfunder, Wefunder and MicroVentures.
This notion of going public without actually going public has gotten so much attention recently that a specific provision in the Jumpstart Our Business Startups (JOBS) Act, signed into law this past April, addressed it. Namely, the JOBS Act allows crowdfunding participants to raise up to $1 million annually without undertaking an initial public offering. As of this writing, however, the U.S. Securities and Exchange Commission was slowly and painstakingly establishing rules regarding this provision.
Generally, crowdfunding best suits startups and small businesses, particularly those with strong local ties or legacies. A historic movie theater or beloved neighborhood bakery, for example, is likely a prime candidate for a successful run at this type of financing. When it comes to startups, a good back story and a strong sense of purpose are needed. And, whether the funding is for a new or existing company, growth potential has to be there.
The next step up from crowdfunding may be finding an angel investor. This is an individual or organization that offers equity investments, as well as loans or loan guarantees, to businesses in targeted industries. (Angel investors usually pursue industries with which they’re familiar.)
Like crowdfunding, angel investing is alive and well on the Internet. Websites such as AngelList and larger organizations such as the Angel Capital Association offer ready access to a wide variety of potential investors.
This approach may better suit well-established small to midsize businesses that want a more substantial and long-term financing arrangement than those typically found in crowdfunding initiatives. These types of companies can also generally provide the proven business plans and sophisticated financials that angels want. Some such investors, however, may seek an advisory presence in your business to mitigate risk and increase their returns.
Two of many
Before you go out looking for financing, be sure it truly will benefit your company. If financing is indeed right for you, be aware that crowdfunding and angel investors are but two of many competitors to your traditional bank’s loan offerings. Others range from the Small Business Administration, which has a wide menu of financing options, to a full-blown venture capital firm, which could demand a larger stake in your operations.
Of course, you also shouldn’t ignore or sever ties with your current lender. As indicated in the Federal Reserve’s study, it may have loosened its standards lately.
Taking on more debt in an uncertain economy may be risky. So before you hit the credit market, see if you can pass these three tests:
1. You’re turning a profit (or very close to it). This may seem counterintuitive: If we were turning a profit, we wouldn’t need the loan. But procuring credit just to keep your company afloat is definitely risky. A safer bet is to use a loan to grow an established business that already has a strong or at least stable bottom line.
2. You’ve crunched the numbers. Ask your financial advisor to help you calculate some key ratios and to compare these with your industry’s norms. For example, your debt coverage ratio (DCR) will tell you how many dollars you have for servicing interest, principal and lease payments.
3. You have a well-defined plan for the money. Again, borrowing money just to keep it on hand could put your business underwater quickly. A loan application should be part of a larger strategic initiative to grow your company in a specific, measurable way.
This has been a general discussion of a complex subject and is not intended as advice to anyone. Consult your financial advisor about the form and source of loan that best suits your specific needs.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners L.L.C. (GRILL1.com), certified public accountants and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien. Contact Grill & Partners at 254-3880.