It is common for small businesses to go directly to a bank for outside capital without fully considering the big picture strategy of growth and the future. Yes, ultimately in the long run securing a conventional loan from a bank will be your goal, but let’s consider some of the downsides of going too early.
A bank is all about history, not the future. This largely means reviewing tax returns and your large contracts track record. What can you prove you have been able to deliver? Many small companies that struggle to get going lack this sort of history. A bank is interested in consistency. This shows up in the year in year out income streams – does your accounts receivable aging report show wild fluctuations? Again, small businesses in a growth trajectory usually show peaks and valleys in their income. How will the bank adjust to conform with your financial history?
And then there is liquid collateral. A bank wants to be able to sell off something quickly in the worst case scenario – for example some equity in your personal residence. So there is pressure for the bank to meet the necessary collateral standards. All this taken into consideration usually will result in a conservative approach when deciding to approve your business financing.
So it would seem obvious what insufficient access to capital will do to a business – slowly starve it. When sitting down with your advisers you may be better off to consider receivable factoring as a half step to achieving the goal of a bank line. Used temporarily, to be better positioned for a suitable line is what factoring is meant to accomplish. Access to capital, flexibility, no personal collateral, quick turnaround, these are some of the benefits when working with a factoring company as a step to graduating to further capitalization.