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Small Business Financing Options – Despite the Credit Crunch

There’s no question that the financial crisis and ensuing credit crunch have made it more difficult than ever to secure small business financing and raise capital. This is especially true for fast-growth companies, which tend to consume more resources in order to feed their growth. If they aren’t careful, they can literally grow themselves right out of business.

Amidst all the gloom and doom, however, it’s important to keep one thing in mind: There are still options available for small business financing. It’s simply a matter of knowing where to look and how to prepare.

Where to Look

There are three main sources you can turn to for small business financing:

Commercial Banks - These are the first source most owners think of when they think about small business financing. Banks loan money that must be repaid with interest and usually secured by collateral pledged by the business in case it can’t repay the loan.

On the positive side, debt is relatively inexpensive, especially in today’s low-interest-rate environment. Community banks are often a good place to start your search for small business financing today, since they are generally in better financial condition than big banks. If you do visit a big bank, be sure to talk to someone in the area of the bank that focuses on small business financing and lending.

Keep in mind that it takes more diligence and transparency on the part of small businesses in order to maintain a lending relationship in today’s credit environment. Most banks have expanded their reporting and recordkeeping requirements considerably and are looking more closely at collateral to make sure businesses are capable of repaying the amount of money requested.

Venture Capital Companies - Unlike banks, which loan money and are paid interest, venture capital companies are investors who receive shares of ownership in the companies they invest in. This type of small business financing is known as equity financing. Private equity firms and angel investors are specialized types of venture capital companies.

While equity financing does not have to be repaid like a bank loan, it can end up costing much more in the long run. Why? Because each share of ownership you give to a venture capital company in exchange for small business financing is an ownership share with an unknown future value that’s no longer yours. Also, venture capital companies sometimes place restrictive terms and conditions on financing, and they expect a very high rate of return on their investments.

Commercial Finance Companies – These non-traditional money lenders provide a specialized type of small business financing known as asset-based lending (or ABL). There are two primary types of ABL: factoring and accounts receivable (A/R) financing.

With factoring, companies sell their outstanding receivables to the finance company at a discount of usually between 2-5%. So if you sold a $10,000 receivable to a factor, for example, you might receive between $9,500-$9,800. The benefit is that you would receive this cash right away, instead of waiting 30, 60 or 90 days (or longer). Factoring companies also perform credit checks on customers and analyze credit reports to uncover bad risks and set appropriate credit limits.

With A/R financing, you would borrow money from the finance company and use your accounts receivable as collateral. Companies that want to borrow in this way should be able to demonstrate strong financial reporting capabilities and a diverse customer base without a high concentration of sales to any one customer.

How to Prepare

Regardless of which type of small business financing you decide to pursue, your preparation before you approach a potential lender or investor will be critical to your success. Banks, in particular, are taking a much more critical look at small business loan applications than many did in the past. They are requesting more background from potential borrowers in the way of tax returns (both business and personal), financial statements and business plans.

Lenders are focusing on what are sometimes referred to as the five Cs of credit:

o Character: Does the company have a strong reputation in its community and industry?

o Capital: Lenders usually like to see that owners have invested some of their personal money in the business, or that they have some of their own “skin in the game.”

o Capacity: Financial ratios help lenders determine how much debt a company should be able to take on without stressing the finances.

o Collateral: This is a secondary source of repayment in case a borrower defaults on the loan. Most lenders prefer collateral that is relatively easy to convert to cash, especially equipment and real estate.

o Conditions: Conditions in the borrower’s industry and the overall economy in general will play a big factor in a lender’s decisions.

Before you meet with any type of lender or investor, be prepared to explain to them specifically why you believe you need financing or capital, as well as how much capital you need and when and how you will pay it back (if a loan) or what kind of return on investment a venture capital company can expect. Also be prepared to discuss specifically what the money will be used for and what kind of collateral you are prepared to pledge to support the loan, as well as your sources of repayment and what measures you will take to ensure repayment if your finances get tight.

You should also ensure that your financial statements and records are current and that your internal control systems are adequate for handling the level of accounting and bookkeeping lenders and investors expect.

Evaluating Stocks Growth Investment

A Stock Market is a public market, a loose network of economic transaction for the trading of company stock and derivatives at an agreed price. The very basic and bottom line of the stock market is to drive the best profit from it.

Evaluating stock is basic and easy work to do, but to reach the level of evaluating, one needs to know and understand the very basic difference between growth investing and value investing, and the fundamental and technical analysis. When one tends to know and learn about the basic stock measurements and understand how to read the stock pages, the evaluation process becomes much easier and interesting.

Growth Investing

Everyone whosoever interested in putting up money in stock market do so, to earn more money in less period of time with least measure of risk. Growth investors actually look forward for the companies in the market that are sales and earning machines. Such companies have more potential than the others available in the market race; the investors are ready to play with the hand look forward for repetitive sales and earnings. A growth company’s potential might stem from a new product, a breakthrough patent, overseas expansion or excellent management. A growth company without strong earning is like an Indy 500 race car without an engine. Dividends do play a role in the market but many growth companies do not give and allow the investors with dividends, instead the companies reinvest the profits to expand and improve their business; hoping to reinvestment produce even more growth of investors money in future. Most growth investors set minimum criteria for investing in a company. Perhaps it should be growing at least 20% a year and gaining new highs in stock price for the best benefits to the investors.

Growth companies which are in good business and very familiar names are Microsoft, Intel, Starbucks, and Home Depot. Now we got to know that what actually people mean when they drive past yet another Starbucks and say, “That place is growing like weed.”

Growth Investors are searching for hot hands, not great bargains. Investors look forward to yield more money in terms of profits. They’ll pay more for good companies. As a result, many growth investors don’t even look at a stock price in relation to its earnings or its book value because they know a lot of growth stocks are expensive. They look forward toward the potential of the stock and go for it, but at the back of their minds they do hope that the present success continue and get better so as to yield more monetary profits to them. They buy momentum, inertia, steam, rolling forward movement, that the nature of growth investment.

William O’Neil – a top growth investor says and explains this in a very simple way. He says in one of his seminar that growth investors are like baseball teams, they pay huge salaries to top ranking players, as they know the batter will yield them with good and winning matches. They come at high price but if they keep batting 300 and winning matches then it’s worth it. Likewise one won’t find many bargains among growth stocks.

The growth stock basically depends on its earning and the accelerations of those earnings, the expectations of analyst and investors are high. The investors put more money for better results and are more positive towards the companies’ returns and growths which some times at the same time creates a risky situation.