To finance new orders (S, M) What can you do if you need money to finance the inventory, payroll, and other expenses associated with a specific contract or purchase order? If you can produce documentation for the contract, you may qualify for a guarantee from the Small Business Administration under a provision of its 7(a) loan program designed for just such financing. Most service and manufacturing businesses that have been around more than a year and that fall within the SBA's size restrictions can qualify. A service company must have revenues of no more than $3.5 million; manufacturers can't employ more than 500 people.
To pursue this, check first with your own bank. The incentive for a bank is that it can off-load most of its risk onto the SBA, which guarantees up to 85% on loans up to $750,000 (90% on smaller loans up to $155,000). For collateral, the SBA usually takes an assignment of the proceeds from the contract and a personal guarantee from the owners. This is short-term money. The loans, priced at a maximum of 2.25% over prime, typically have to be paid off within 12 months.
If your bank has never done a deal like this, suggest that it do the loan jointly with another bank with more experience. Currently there are more than 600 certified or preferred SBA lenders around the country. They all have the ability to either approve the guarantees themselves or get responses from the SBA within a few days. For a list of the certified and preferred lenders in your area, contact one of the SBA district offices, which are located in state capitals. For more information on this and other SBA programs, the national hot-line number is 800-827-5722.
To get seasonal lines of credit (S, R, M) Say you make beach toys or snow shovels, or perhaps you sell them. If you can't buy your materials or products in time, you'll miss the market. The SBA's 7(a) program is set up to guarantee seasonal lines of credit to companies that meet the age and size requirements noted above. The terms also are essentially the same as those for the contract loans. Once again, you should begin by contacting your banker.
To get revolving lines of credit (S, R, M) Even if your bank is showing every sign that it has no interest in lending against your inventory and receivables, take heart. You may be able to get credit anyway -- if you happen to be based in one of the six New England states. The sponsor, once again, is the SBA, which unveiled its one-year revolving-credit program last year to assist companies caught in the region's severe credit squeeze.
To qualify, a business needs, among other things, to be at least one year old, meet the SBA's size requirements described earlier, have enough collateral to secure the loan, and provide reasonable cash-flow projections for the 12-month period. Since the program is still relatively new, many New England bankers are in the dark about its workings. But it's worth pursuing, since the SBA has pledged to maintain the program at least until 1994. Again, your best sources of information are the SBA regional and district offices and banks that are active with other SBA loan programs.
To finance exports (S, M) Banks are queasy about lending money for exports for fear that any number of things could go awry. So if you want to do business with foreign customers, it pays to know about the programs that make bankers more inclined to help. The SBA, for example, has a special program that guarantees working-capital loans for businesses needing money to buy materials to develop and supply accounts. For companies meeting the basic criteria for SBA loans, the agency can guarantee revolving lines of credit of up to $750,000. Unfortunately, a great deal of paperwork is involved with this program, and it's tough to find bankers who will take the time to understand how it works.
The Export-Import Bank, in Washington, D.C., has a similar program for working-capital loans. Although you and your banker still need to invest time in the paperwork, this program, which has been growing in the past few years, can guarantee up to 90% of the principal. You can reach the Export-Import Bank at 202-566-8990.
If you're able to get by without working-capital loans, and you simply want to finance your foreign receivables, the easiest way to do it is with export credit insurance. The main option for companies exporting less than $5 million a year is the Foreign Credit Insurance Association, with offices in New York City and other cities. Such insurance isn't cheap -- expect it to cost 50¢ to $1 per $100 of coverage (depending on the country your customers are located in). But with it, banks are usually willing to lend against the export receivables, on the same terms that they'll lend against other receivables. The association's New York number is 212-227-7020.
Finding White Knights
To shore up your shaky credit (R, M) If you're a retailer and, because of your slipping credit, suppliers won't ship you merchandise, know that some people will see your headache as their opportunity. These middlemen didn't exist when the economy was hot and banks were aggressively lending money. For a fee, they will inject themselves between you and your suppliers, thus enabling you to get the inventory you want.
The go-betweens become the buyer; because their credit is better than yours, they're often able to get a better price, although that's offset by what they charge (around 6% of the purchase). Also, they want payments at least every week. In the event you can't pay, the go-betweens can take control of the inventory and sell it. Most people who do this get involved because they really know the inventory -- and how to get rid of it. Few people are in the business, though, and most don't advertise. The best way to find them is by talking to factoring companies and others who know the ins and outs of your industry.
With expertise (S, R, M, S-U) Finding the money to pay technical or management advisers can be difficult. But in the current environment many qualified people are willing to reduce their rates in exchange for equity or some other form of payment. Individuals who have recently left jobs with generous termination deals are prime candidates, as are independent consultants who may be looking for steady clients.
