The Seller:
A seller should be more than willing to do some financing of the sale of his business. If you are attempting to obtain an SBA loan, it is almost mandatory that the seller is involved in financing at least a 20% potion of the purchase price of the business. After all if the seller doesn’t have any confidence that the business will make the buyer sufficient profits to pay its debts, why would or should anyone else believe it can? Any financing arrangements with the seller should place him in last place as a secured creditor. If nothing else, the seller must rank second behind any banks with respect to his security interest.
Put your business financing in place when times are good and you don’t need any additional money. Even if you do not currently need any additional financing arrange for a line of credit with your bank.
The most common business financing is a “line of credit” or “revolving loan”. It is a loan predicated upon the security of the businesses primary assets, its receivables and/or inventory. Most banks will finance good inventory to a maximum of 50% and good receivables to a maximum of 75% without a lot of difficult negotiations. Good inventory is usually inventory that has been purchased within the last six months, but the definition of “good” inventory is very dependent on the type of inventory being used as security for the line of credit. Good receivables are usually receivables that are less than 90 days overdue, however this also may vary depending on the type of business. Some banks charge a yearly stand-by fee for lines of credit that are in place but not utilized, this can vary but should not exceed 0.25% per annum. If you have a $200K line of credit that is not utilized it will cost you $500 per year.
The line of credit will usually have a daily interest rate based on your “banks” prime plus an additional percentage. The term “prime” can and usually is very confusing to a lot of people. There are numerous “prime” numbers, the FED has a prime, bank’s and other financial institutions have there own prime (each bank and financial institution has its own prime), which is higher than the FED prime and some financial institutions utilize financial indicators such as “LIBOR” (London Inter Bank Overnight Rate) as their prime. In my opinion they are all meant to thoroughly confuse you, the borrower. If when making a loan or setting up a line of credit, the documents indicate a percentage above prime, it is your responsibility to make sure you understand what prime is being used. Prime can never be negotiated (very good accounts may borrow at prime less a percentage, but this will generally not happen in a small business scenario) the percentage above prime can definitely be negotiated and the better your finances appear when you put the line of credit in place, the lower that percentage will be. Shop the line of credit that you are trying to obtain to numerous local, regional and national financial institutions, you will be amazed at how much they will vary. If you wait until you need the money, it will be much more difficult and probably much more expensive for you to obtain. When you need the money is when banks and other financial institutions will not be anxious to deal with you.
As a general statement bankers invest in management not in businesses. They will look at the successes of the management, their history at running successful businesses. Always keep your bankers and financial people informed. They don’t like surprises. In most cases as long as they think that you are in control they will work with you. If you go to your bankers today, when business is good and tell them that four months from now you will need an additional $50K in order to finance a larger than normal project that you have you will find that most bankers will be more than pleased to extend the additional financing.
If on the other hand you wait until you really need the funds before you approach your lender it will be much harder for you to obtain the additional money. They want to know that you are in control and if they think that this requirement for additional financing surprised you they will equate that with you not having control of your business, this truly scares most lenders! If you are operating with a positive cash flow then meeting with your account manager on a quarterly basis is probably more than sufficient. If you operate your business utilizing your line of credit on a continuing basis then I would definitely recommend monthly meetings.
Give your financiers copies of your financial statements every month. Make them feel like they know everything that is occurring within your business, the good and the bad. Make them feel as if they are part of the team!
When arranging for your financing, bear in mind that everyone is bound to ask for personal guarantees. Just because they ask for personal guarantees does not mean you have to give them. Most financial institutions want your business as much if not more than you want to give it to them. Personal guarantees will also appear on vendor credit forms and property lease agreements. I always recommend the initial approach of “I do not give personal guarantees” and wait to see what the reaction is. You can always add your personal guarantee if the vendor or landlord refuses to accept the agreement without them, however it is almost impossible to have personal guarantees removed once you have agreed to them.