How Much Do You Need?
Instead of being coy, financial people say, it's important to be specific about the amount of money you're seeking. Saying how much you need helps set a framework for the discussion and helps show how well you understand your business. Indeed some people say if you can't provide a figure, you're not ready to ask for money.
What Do You Plan To Use It For?
Lenders and investors will always want to know how you plan to use their money. Do you need it for working capital? For marketing? Or is it to buy out your partner? different sources have different biases and different tolerances for risk. Your answer will help reveal your priorities and your approach to the business.
How Will This Money Improve The Business?
Nobody wants to pour money into a bottomless pit. Lenders and investors want to see how their loan or equity lowers your costs, and expands your capability, and moves you closer to being self-sustaining. If you're not able to provide credible cash-flow projections showing this, it will be hard to drum up serious interest.
How Are You Going To Pay It Back?
Obviously, this is of paramount concern to banks these days. The first thing bankers want to understand is how you can pay off the loan from cash flow. (They'll ask you to pledge collateral - usually business or personal assets - but only as a secondary source.) While equity investors aren't asking for the same level of predictability, they'll still want to hear your thoughts on how, and when, they might become liquid.
If Plan A Doesn't Work, What's Your Backup Plan?
If the business runs into trouble, banks and other lenders will attempt to recover their money by liquidating the collateral. But equity investors won't have that alternative. For them, the big concern is, What if you need more money? The more you can show you have other options for generating revenues and financing, the better off you'll be.
Unsecured Lending
Unsecured lending decisions are generally based on the company's earnings, assets and liquidity. The criteria for unsecured loans are not as clearly defined as those for secured lending decisions, due primarily to the necessary reliance on projections of cash flows and earnings. Thus, lenders look beyond the standard asset-based lending criteria and examine the borrower's business plan and projected financial statements to ascertain whether the debt requested is repayable.
Secured or Asset-Based Lending
Secured or asset-based lenders (e.g., commercial banks, finance companies, and finance subsidiaries of banks and corporations) base the amount of financing they will offer on the market value of the company's assets pledged as collateral. Asset-based lenders rely both on the reasonable ability to repay and the liquidation ability and value of the pledged assets . Some examples follow.
Accounts receivable are a preferred collateral for asset-based lenders because of their rapid turnover and high liquidity. Generally, a company can borrow up to 70-90% of the value of receivables that are less than 90 days old.
The principles behind inventory loans are similar to those of accounts receivable loans except that the advance rate is a more conservative 35-65%. This is because inventory is both less liquid and more susceptible to decreases in value and therefore more risky.
Loans are also made against fixed assets such as machinery and equipment although they tend to be term loans rather than revolving lines of credit. Lenders examine the purpose, value and mobility of the collateralized machinery or equipment in order to determine a forced-liquidation value on which to base the advance rate, approximately 70%.
Land and buildings can be used as collateral to obtain long-term financing. Lenders will make term loans for amounts ranging from 75-90% of the asset's market value.
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