QuickBooks Online updates inspired by accountants—May 2023

How to help clients secure financing

Do you have a new or existing small business client looking for financing? Chances are pretty good you doand they will probably turn to you, their accountant and trusted advisor, for help.

The old adage “money doesn’t grow from trees” is still true in today’s economy. Not too long ago when money was plentiful, lenders and banks handed out money to new business startups, existing businesses, individuals, or anyone else who wanted money. However, we all know that during last economic collapse, the lending industry went through a major transformation.

Is it any wonder why the credit markets tanked and the economy fell into a deep recession? Fannie Mae and Freddie Mac have changed their guidelines; they aren’t lending money to those with excellent credit, let alone anyone else. So how does a small business get access to capital when it needs to expand its operations, purchase new equipment, or restructure business debt?

Several of the options are conventional financing sources; however, with the credit markets being tight and the lenders not lending, small businesses should explore all options:

  • Traditional sources include applying for a loan with a local bank, applying for a Small Business Administration (SBA) loan, or obtaining capital through a home equity line for those who are homeowners and have equity in their property.
  • Unconventional sources include accounts receivables factoring, merchant sales financing, and people-to-people loans.

Traditional sources

The best option for new and existing businesses is to apply for an SBA loan. Contrary to what most people think, the SBA does not loan money directly to borrowers. The loan is funded by an SBA-approved lender such as Bank of America or Wells Fargo Bank, and it is guaranteed by the SBA. As a result, the bank loans the money to the business owner, so if the owner defaults, the bank will be repaid by the SBA.

One of the favorable factors with an SBA loan is the long-term amortization (7-25 years) compared to the short term (2-5 years) for a non-SBA loan. Depending what the loan proceeds will be used for will determine the number of years the lender will finance. Operating capital is usually 7-10 years compared to real estate loans that have a longer repayment period ranging from 20-25 years.

With that said, there are more requirements for an SBA loan, which means that most small business owners will incur fees to retain professional help from an accountant or a business plan writer, with no guarantees that the loan will be approved. The time to close an SBA loan from initial application to the closing can range between 60-90 days, and a list of documents must be submitted for an SBA loan. No loan will be approved without the entirety of documents being submitted to the lender.

The items required for loan submission include the following:

  • Submit the SBA loan application: SBA Form 4.
  • Personal background and financial statement: Complete SBA Form 912 and Form 413.
  • Business financial statements: To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
  • Profit and Loss (P&L) statement. This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
  • Projected financial statements. Include a detailed, one-year projection of income and finances, and attach a written explanation as to how you expect to achieve this projection.
  • Business financial statements: Provide a P&L statement for the last three fiscal years, a current year-to-date statement, and a projected financial statement for one year.
  • Ownership and affiliations: Include a list of names and addresses of any subsidiaries and affiliates, including entities in which you hold a controlling interest and other entities that may be affiliated by stock ownership, franchise, proposed merger, or otherwise with you.
  • Business certificate and/or license: Your business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
  • Loan application history: Include records of any loans you may have applied for in the past 12 months. If numerous loan inquires are reporting on the borrowers credit report, an explanation must be provided to the lender.
  • Income tax returns: Include signed personal and business federal income tax returns of your business owner(s) or shareholder(s) for the previous three years.
  • Resumes: Include a personal resume for each owner or shareholder.
  • Business plan/history: Provide a brief history of the business, successes, challenges, and long- term focus. Include an explanation of why the SBA loan is needed and how it will help the business. For a new business, a full business plan may be required.
  • Business lease. If commercial space is being leased, include a copy of the business lease or note from the landlord providing the lease terms.
  • If you are purchasing an existing business: The following information is needed for purchasing an existing business:
  • Current P&L statement and balance sheet of business to be purchased.
  • Previous two years federal income tax returns of the business.
  • Proposed bill of sale, including the terms of sale.
  • Asking price with schedule of inventory, equipment and machinery, furniture, and fixtures being purchased.

Unconventional sources

The unconventional funding sources are becoming widely popular because there isn’t going to be a big list of documents required for submission, making the application a quick process.

For example, obtaining quick funding by factoring your account receivables can provide quick cash with very little red tape. Several years ago, I had the opportunity to speak with Scott Brown, then senior vice president of Midland American Capital, who told me that they offer funding in as little as 2-5 days from the time an application is received. The company offers exemplary customer service and unlike some of their competitors, it doesn’t lock its customers into 1-3 year contract commitments.

One additional benefit that I discovered about the company while talking with Mr. Brown is that his company doesn’t scrutinize the business owner’s personal credit rating. Often, this is a crucial factor for a small business owner who doesn’t have the high credit score rating that a traditional lender requires. Basically, the factoring company advances cash against invoices billed by the business. The company receives a percentage of the invoice with the balance being retained by Midland American Capital as its fee for providing the funding.

Factoring provides a small business an alternative lending source offering cash flow at any time. There is a cost associated with all lending options, and the business owner must decide which lending option is best for his/her business. Most importantly, Mr. Brown said a business owner should work with a reputable company and ask questions so they can make an informed decision for what is best for his or her business. Midland American Capital let’s its customers know that the company is a member of the Commercial Finance Association and American Bankers Association in an effort to help customers avoid the pitfall of working with unscrupulous lenders.

Another unconventional funding source includes merchant card financing. This is usually available to businesses that have high credit sales such as restaurants and retail establishments. The merchant processing company can provide capital to a business by advancing it cash against future credit card sales.

This is, by far, a cheap financing option. Rates for this type of financing can range between 18-30 percent. For example, a business that obtains $100,000 at a 25 percent rate would repay $125,000. The repayment terms are typically short term at 6-18 months. The merchant processor that provides the funding keeps a percentage of the future daily or weekly credit card sales, which many times can create cash flow problems for the business. Although this type of financing appears attractive on the surface, it is far from that when a business loses a high percentage of its weekly credit card sales, oftentimes creating cash flow problems.

People-to-people loans are another unconventional source. Individuals who want to borrow complete an online application that is reviewed, along with a credit review. Based on the risk of the borrower, the lender provides the interest rate the borrower will be charged should the loan be funded. Once approved, the borrower’s loan profile becomes accessible for people to view and invest. The people investing can put in small amounts of $100 up to thousands of dollars, depending on the amount of money they want to invest.

This unique concept has provided over $400 million in investments since inception, all from private individuals wanting to earn a rate of return higher than what they can get from their local bank, in the stock market, or any other investment source. This be a good option for small businesses that have no other options to obtain capital quickly and affordably.

Again, as your clients’ go-to advisor on all-things financial related, you can provide valuable guidance when it comes to obtaining loans. When I provide finance and loan consulting to my clients, I always recommend they gather all the necessary documents, review the various loan options offered by local banks and online lenders, perform due diligence on any approved loan to make sure they understand the rate and terms being provided, and ensure they obtain a loan from a trusted and reputable lending source.

Editor's note: QuickBooks Capital could be a viable option for your clients. Check it out.

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