NFIB

Funding Expansion Through Bank Financing
03/ 07/ 2002


For many small business owners trying to expand their operations, the biggest deterrent to growth often remains financing, even if their business has been operating profitably for years. Although there are a number of avenues open to those wanting to fund an expansion (such as credit cards) for most the preferred method is bank financing: an option that, depending upon the type of business you own, can prove frustratingly elusive.

There can be a number of reasons for this. If your business is in an industry that lenders are unfamiliar with, such as a tanning salon, or a day spa, their lack of knowledge about your industry can be a real stumbling block, especially where it involves trying to use your equipment as collateral.

Consider Kris Suard's predicament. This owner of three indoor tanning salons located throughout Louisiana discovered her valuable and expensive equipment(some units cost as much as $25,000-to-$30,000 on up) wasn't worth as much to the bank as she expected. When she tried to secure bank financing to fund expansion (she was eventually successful) she discovered banks were willing to give her only about ten cents on the dollar.

Another thing to consider is how stable your industry is. If your business is highly seasonal, say for example you retail swim wear or own a holiday decorating business, the variable nature of your business is going to give lenders pause. As L.J. Folse, president and CEO of Houma-based Coastal Commerce Bank explains, "Banks traditionally have an aversion to extremes because we know extremes in cash flow can be very difficult to manage."

Still, say Suard and Folse, there are steps small business owners can take to upgrade their appeal to banks, but it does take foresight and long-range planning.

"You have to show a strong personal financial statement, you must pay your bills on time and have excellent personal credit," Suard says. "Also, keep the money in your company, don't take cash out." For example, Suard explains, when her first store began showing a profit about two years after opening, she left this money in the store to use a collateral for the loan that allowed her to open two additional salons.

"Owners should have some amount of capital," Folse agrees. "To try and expand strictly on borrowed funds increases risk as well as the stress level for the borrower."

"And," Suard advises, mindful of a common temptation for many cash-based businesses, "report all of your earnings." Hiding income only makes your business look less profitable than it is, and consequently less attractive to banks.

What is absolutely essential state both, is to approach the bank with a well-thought out business plan in hand, something that most people fail to do, Folse comments. "You can't just throw a package together. We like to see that people have spent time researching and developing their plan."

According to Folse, a good business plan should provide information on:

Financial records. These records should not only demonstrate performance and profit but they should also show how cash flow is affected during the slow season. The plan should also indicate how the owner plans to address the issue of seasonal cash flow if this is an issue.

Customer demographics. Banks want to know whom the store serves, or plans to serve, especially if you're considering expansion to another location. It is important to know whether the new location will provide the type of customers the business needs to, or hopes to, attract.

The competition. How many other (like) businesses are in the local and surrounding areas. What is the saturation point? How many of your type of business will the market bear?

Advertising and marketing. It is essential to have money budgeted to promote your business.

Industry standards. "We love statistics," Folse says. "What are your sales per store? Are these higher or lower than industry standards? What about your inventory costs, higher or lower?

It is important this plan be as objective as possible, Folse continues. "People tend to do their research with the answers already in mind, which can get them into trouble. Don't look only at what will support your assumptions, and don't purposely try to avoid surprises."

Be prepared to forcefully educate the loan officer about your industry and the value of your business. And approach the task with confidence, Suard states. "You have to be a good sales person and convince them you can make your plan work."

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