In the first part of this series, we introduced the five stages of entrepreneurship we work with on a daily basis.
One of our favorite entrepreneurs to work with is someone we've dubbed The Grower, although The Expander is another good description.
Why do we like The Grower so much?
Plain and simple, it's because of options--there's no shortage of potential paths to greater success.
These entrepreneurs manage businesses that are doing just fine, but are still hungry for growth and success. That's a good combination, as they are the types of business owners who are engaged and understand that to make money they're going to have spend some money, as well as take on risk.
How can they accomplish that?
One way is to add capability, which could mean installing a new production line or building out infrastructure with warehouses and transportation. It also could mean developing a new product, which might call for increased cash spent toward research and development. Maybe it means advertising, marketing or public relations (or some combination of the three) or adding to the sales force.
All of those take money and, no matter how successful a business is, few smaller enterprises have cash sitting on hand unused.
That means a loan is in order.
The Grower probably is a good fit for a Small Business Administration-backed (SBA) loan program. Many entrepreneurs are at least vaguely familiar with the SBA, but everyone should get intricately acquainted with it. That's because SBA lenders (the SBA itself doesn't make the loans) generally can offer the best rates and terms. In addition, SBA lenders tend to specialize and may have a better understand of the needs of a small business than a bank used to working with larger businesses.
In addition, the SBA offers a variety of loan programs. The most common program is the 7(a), but there also is the CDC/504 program, which offers financing for fixed assets such as real estate and equipment. Disaster loans and micro loans are other options.
The Grower also may have to choose between an asset-based loan and a cash-flow loan. Some companies are better suited for one kind of loan over the other, but many can choose between either.
Asset-based loans are best for companies with strong balance sheets, but low margins and inconsistent EBITDA, while cash-flow loans are best for companies with high-margins but minimal hard assets that can be used for collateral.
Asset-based loans tend to be a bit cheaper, as they are tied to current assets instead of upcoming revenue--the risk for the lender is thus lower. That said, receivables will need to be monitored closely, as will inventory.
Cash-flow loans don't have the same monitoring needs, but lenders likely will include strict financial covenants. Should those covenants be breached, penalties might be stiff.
And should everything pan out as expected, you may well find yourself in our final, happy category of entrepreneurs--The Exiter.