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Last Update: Sunday February 23, 2020

Key Idea: Get A Loan To Expand

When your business becomes profitable and is growing, you may find that your cash flow is tighter than ever! You have profits, net income, but no cash. This is because you are increasing your investment in inventory or receivables. One way to ease this situation is to leave the profits of the business in the business to provide the working capital the business needs. Another way is to borrow money from a financial institution.

Key Question:

A: 

Bankers are vendors; they sell the use of their money. They do this for a relatively modest return and they take modest risks. Shop for a banker the same way you would shop for anything else you buy, look for the most value at the lowest cost. Interview lots of bankers, preferably before you need one, and keep them informed of how your business is growing. Before you submit a loan application, make sure you are aware of the following: Who will prepare the loan package and what will it contain?

The loan package should not be confused with the loan application. The loan application can be as little as a one page administrative document. The loan package could be 3 feet high! It contains all the documents that you provide and other documents that the banker obtains to present to the bank's Loan Committee.

For example, the Dun & Bradstreet report is almost always considered as part of the loan package and the credit decision.

Who's on the bank's Loan Committee? What is their lending limit? If they recommend the loan be approved, is that the final word or does the loan package go on to an even higher authority? You'll probably be dealing with one banker; he or she will present your case to the Loan Committee. Your banker will be motivated, because one's compensation and career depend on making money for the bank which is only accomplished by booking loans. But nobody can tell your story as well as you can. Find out who is on your Loan Committee and invite them out to see your business and meet with you.

Editor's Footnote: If you really want to learn the language of banking, get familiar with the Rick Management Association and their credit scoring. It is the professional association for banking (over 3000 banks are members as well as 18,000 other financial institutions). If you are fully committed to making your business successful, you'll learn the key critical ratios within your industry and know where your business stands among the businesses within it.

The most expensive money to borrow is the money you get for factoring your receivables. Almost all factoring arrangements are "with recourse" which means you have to pay if the customer doesn't. Basically, you sell your receivables, at a deep discount, to the bank. The bank or factoring company advances you the discounted amount and you advise your customer to pay the factorer directly. In addition to the discount fee, the factorer withholds an amount as a reserve against uncollectible accounts receivable. If not utilized, reserves are distributed back to you. Although factored funds are expensive, the lending institution rarely has credit or reporting requirements so factoring can be a solution in small businesses with high gross margins that can absorb the cost of factoring.

Less expensive is conventional bank debt. There are basically two kinds of bank borrowings: lines of credit and term financing. Lines of credit are available up to a maximum negotiated amount, through a period of time, at a certain rate, generally collateralized by inventory and/or receivables. The amount that can be borrowed at any one time is based on the borrowing base, a certain percentage of assets.

For example, a borrowing base might be 35% of inventory and 80% of accounts receivable less than 90 days. The percentages are negotiated at the time the loan is applied for. Frequently, lines of credit are renewed as they mature, but the terms may change as the economy changes and as your business changes. These lines require interest only payments although the bank likes to see principal payments and additional withdrawals, the line going up and down, based on the seasonality and growth of the business.

Mature businesses with constant line of credit amounts make bankers nervous; the bank generally considers the note "evergreen" and, when it comes up for renewal, they'll want to convert part or all of it to term. If you obtain a line of credit, don't leave cash in your checking account, pay down on the line and borrow it back. This minimizes your interest expense and convinces your bank that you really are using the line as a line.

Term financing is just like your home mortgage or car payment. Each month you pay a fixed amount of principal and interest. If your business owns land, buildings, or equipment (capital assets) these can be used as collateral for term financing. If you own such assets personally, you can contribute them to your business as equity and then use them as collateral for a cash infusion in the business from a term financing.

Think about it

Do you need to borrow money to grow your business? How much? Do you have the collateral and the capacity to repay the debt?

Clip from: Jet-a-way

Host-producer, Hattie Bryant, with Jesse Jeter, the son of the founders

Boston: In this episode of the show we take you inside Jet-A-Way, a recycling company for construction and demolition waste, commercial waste, and recycled paper. They are also a transportation company to pick it all up and, then when it is all sorted, to bring it to refinement centers and sanitary landfills.  You'll meet Darlene Jeter and her family. 

Darlene and her husband have been recognized by their community and by the nation for their achievements.

With over $10 million in sales and 50 employees, this business has been in  operation since 1969.  Darlene has endured enormous setbacks -- the death of the love of her life,  her husband and business partner -- and major swings in the construction business in Boston. It is a dusty, tough industry. There is a lot of heavy metal -- trucks, tractors, and front-end loaders. Darlene not only survives, she thrives with grace and dignity.

Darlene Jeter has tenacity. No moaning, blubbering, sniveling, whimpering or whining; she gets the job done and then gives back to her community.

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Jet-A-Way, Inc.

Darlene Jeter, CEO

47 Kemble Street
Roxbury, MA 02119

Visit our web site: http://jet-a-way.com

Business Classification:
transportation, waste management, recycling

Year Founded: 1968

Get A Loan To Expand

HATTIE: (Voiceover) This 25,000-square-foot transfer station is just two miles from downtown Boston and is licensed by the Environmental Protection Agency to handle 450 tons per day. In this facility, over 60 percent of the incoming tonnage that once went to the landfills is diverted to be used in new ways. Jet-A-Way operates a fleet of roll-off vehicles and rear-end packer vehicles, plus trailers and heavy machinery.

DARLENE: The idea then was to move forward away from the dump trucks. We went to Ben Polashook and asked if we bought a roll-off, would you hire us, and Ben said yes. And he was working with a competitor in those days, and Ben was the type of person that wanted to help anyone that wanted to help themselves. That was just the way he was.

HATTIE: What would he have you do, pick up his trash?

DARLENE: In the roll-off, in the container...

HATTIE: Yeah.

DARLENE: Yeah. And that was a new thing for us, right? And Ben had the assurance of another major company that the job would be done. He was taking a chance on us. Well, he could always go back to them, too, if it didn't work but just the confidence was enough. So we got the roll-off. We worked for Ben, and then he recommended us to many others. And that's why we bought the second one.

HATTIE: OK. But to get the funding for the roll-off, that sounds like--I mean, I've seen these roll-off trucks out here. They look expensive.

DARLENE: They are. They are. In those days, I think the first one was $35,000. Now it's $100-something thousand.

HATTIE: Where'd you get the money?

DARLENE: Where did we get the money? Small Business Administration. We were members of Urban Marketing in those days, and their office was right around the corner here, at Upham's Corner. And it was First National Bank. They lent us the money with the SBA guarantee.

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