Thursday, April 21, 2005

Don't Go To The Bank.............It could kill your business!

Just got off the phone with an entrepreneur who actually understands the value of cash and it is a refreshing change, but her situation highlighted the dangerous situations that a growing small business may find themselves in by making the neighborhood bank their source of financing.

The point of this post is not to slag banks for being conservative and risk adverse..........I prefer that banks stay that way. They work on small spreads and need substantial amounts of security.

It is a bank's requirement for substantial amounts of security that often makes them incompatible for the growth nature of small business. The end result is that banks cannot extend as much credit to small businesses as the small businesses think they deserve, so what you end up with is an underfinanced company, that while it is not paying a lot for its financing, doesn't have the financing it needs (think using a screwdriver to tighten a just doesn't work).

What the business owner should be looking at is cash liquidity. So assuming that a business that does about $1.2 million a year in sales and carries about 60 days of sales in its A/Rs, it has the option of going to a bank, who if they are comfortable with the company's financial health AND the personal net worth of the owner, they may get a line of credit for 40 to 60,000 or they can go to a factor, whose primary interest is the A/Rs and get access to about $150,000 to put into the business.

You tell me what the right decision is!


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