Lenders expect working capital loans to be repaid through cash generated in
the short-term operations of the business, such as, selling goods or
services and collecting receivables. Liquidity rather than overall
profitability supports such borrowing programs. Growth capital loans are
usually scheduled to be repaid over longer periods with profits from
business activities extending several years into the future. Growth capital
loans are, therefore secured by collateral such as machinery and equipment,
fixed assets which guarantee that lenders will recover their money should
the business be unable to make repayment.
For a growth capital loan you will need to demonstrate that the growth
capital will be used to increase your cash flow through increased sales,
cost savings, and/or more efficient production. Although your building,
equipment, or machinery will probably be your collateral for growth capital
funds, you will also be able to use them for general business purposes, so
long as the activity you use them for promises success. Even if you borrow
only to acquire a single piece of new equipment, the lender is likely to
insist that all your machinery and equipment be pledged.
Instead of bank financing a particular piece of new equipment, it may be
possible to arrange a lease. You will not actually own the equipment, but
you will have exclusive use of it over a specified period. Such an
arrangement usually has tax advantages. It lets you use funds that would be
tied up in the equipment, if you had purchased it. It also affords the
opportunity to make sure the equipment meets your needs before you purchase
Major equipment may also be purchased on a time payment plan, sometimes
called a Conditional Sales Purchase. Ownership of the property is retained
by the seller until the buyer has made all the payments required by the
contract. (Remember, however, that time payment purchases usually require
substantial down payments and even leases require cash advances for several
months of lease payments.)
Long-term growth capital loans for more than five but less than fifteen
years are also obtainable. Real estate financing with repayment over many
years on an established schedule is the best example. The loan is secured
by the land and/or buildings the money was used to buy. Most businesses are
best financed by a combination of these various credit arrangements.
When you go to a bank to request a loan, you must be prepared to present
your company’s case persuasively. You should bring your financial plan
consisting of a Cash Budget for the next twelve months, Pro Forma Balance
Sheets, and Income Statements for the next three to five years.
You should be able to explain and amplify these statements and the underlying
assumptions on which the figures are based. Obviously, your assumptions
must be convincing and your projections supportable. Finally, many banks
prefer statements audited by an outside accountant with the accountant’s
signed opinion that the statements were prepared in accordance with
generally accepted accounting principles and that they fairly present the
financial condition of your business.
If borrowing growth capital is necessary and no private conventional source
can be found, the U.S. Small Business Administration (SBA) may be able to
guarantee up to 90 percent of a local bank loan. By law, SBA cannot
consider a loan application without evidence that the loan could not be
obtained elsewhere on reasonable terms without SBA assistance. Even for
such guaranteed loans, however, the borrower must demonstrate the ability
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