By Robert Nesbitt for TCAJoB
While day-to-day tasks keep the wheels in motion for any business, successful entrepreneurs always keep an eye on long-term financial goals. Securing financing for your company’s expansion can seem like a far-off concern with all of the immediate challenges of running a growing business. However, the earlier you begin to analyze future financing needs, the easier it is to find solutions.
The first step is to identify what opportunities are most feasible and the best use of your company’s time and labor resources. A growing business may have several compelling directions to consider, but resources are limited. It’s a difficult decision, and many entrepreneurs struggle to chart a course on their own. The solo approach overlooks a fantastic resource: your banker. Even if the need for financing isn’t imminent, a banker can provide perspective on potential pitfalls, suggest ways to overcome challenges and recommend other trusted advisors. It also gives you the opportunity to establish a long-term relationship with a banking partner. That way, when the time for financing arrives, he or she already understands and believes in your business.
A conversation with a professional is the best way to get an early understanding of how you can prepare your company financially for the future. But more often than not, the type of financing your business will need can be categorized by your organization’s growth phase.
Start-up and early growth phase: If you’re starting a business, banks will expect you to provide much of the capital needed, and the type of loan you can secure will largely depend on your personal credit, financial history and ability to repay the loan with a secondary source of income. Start-up and early-phase companies often need small equipment or working capital loans. These loans can buy the assets needed to kick-start the company and grow toward success.
Sustained growth and profitability phase: You’ve been in business for a few years and have established your business as a successful enterprise. As an owner, you should be delegating more of the day-to-day tasks so that you can focus more on the business’s long-term goals. Unless you are a small professional firm, revenue will likely be in the range of $500,000-$5,000,000 per year.
At this point you will be looking for larger lines of credit and term loans, in addition to potentially buying the building where your business operates. There are two main types of loans for a company to purchase a headquarters – traditional bank financing and Small Business Administration (SBA) loans. SBA financing is a popular choice for those who do not have many funds to put into a project. However, if you have enough equity to purchase a property (typically around 25 percent), it is usually an easier and lower cost process to obtain traditional bank financing. Consider both options before making a decision.
Mature phase: You have a solid balance sheet and a track record of success. Typically, companies in this stage are considering expansion or refinancing bank debt, and can now qualify for better terms. If you do expand into new markets or through acquisition, getting an early perspective on the more sophisticated types of financing options available can be invaluable. Unsurprisingly, larger companies need more comprehensive solutions for payroll, vendor and supplier payments, account security and engaging in international transactions. Budgeting and preparing for these investments can require sophisticated financing solutions as well.
Succession Phase: Finally, after many years of operation, you are ready to sell the business. Will you sell to a competitor? To employees? Pass the organization down to your children? No matter the direction, a banker can provide guidance and financing for these transactions to ensure you are getting as much out of the business as you can. Additionally, the bank’s wealth management team can create a strategy to protect the wealth you have worked so hard to create. Abrupt leadership changes tend to be difficult for the entire organization, but solid preparation will keep it straightforward. Your banking partner can help to guide that process.
Companies have lending needs at every stage of their life cycles, but preparation makes getting financed much easier. Working with a trusted banker will help business owners and entrepreneurs find solutions early, putting their companies in a position to succeed at every stage.
[panel title="About Robert Nesbitt:" style="info"]
Robert Nesbitt is a vice president and relationship manager at Washington Trust Bank. He provides commercial, small business, and real estate banking services to customers throughout the Tri-Cities and neighboring communities. He can be contacted at rnesbitt@watrust.com.