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The hunt for funding

Financing is available in a recession, but securing it can be tricky. Here are tips for getting the cash your small business needs.

By Dave Copeland
Globe Correspondent / October 11, 2009

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Even before the economic crisis, getting financing was tough for small businesses. Banks preferred to work with borrowers that had a track record of generating revenues and repaying loans, and some avoided lending to new and young businesses altogether.

Things have only gotten tougher in the past two years, and no small business owner should expect to get 100 percent financing to fund a start-up, according to Bob Seiwert, a senior vice president and commercial banking expert for the American Bankers Association. But even after entrepreneurs have tapped out savings accounts and hit family and friends up for initial investments, there are some keys for small business owners hoping to navigate the recession:

Network with and think like bankers

The more bankers a small business owner knows, the better chance they have of getting a traditional small business loan. Know the risks of your industry and have a plan to mitigate those risks, Seiwert said. Bankers are going to do their own risk analysis, he said, but small business owners can help them find a different perspective on risk aversion.

Have two ways to repay the loan

A bank will look for primary and secondary loan repayment sources - and so should the business owner. Typical secondary loan repayment sources include business and personal collateral, as well as loan guarantees from owners, suppliers, and customers.

Carefully consider business credit card offers

Small business owners should carefully consider credit card offers in the same way they consider personal credit card offers. Does the card offer all of the features the business needs? Can the introductory interest rate be increased? How are disputes resolved? Once a credit card is secured, bills should be paid on time and personal accounts should never be mixed with business accounts. Most importantly, small business owners should use credit cards to manage cash flow and resist the urge to use them as a source of equity.

Use longer-term credit facilities for long-term funding

Credit cards are perfect for purchasing office supplies, but intermediate- and longer-term purchases should be funded with longer-term credit facilities like bank term loans, which have a fixed maturity like mortgages. These types of loans should be considered for purchases that include equipment leasing and the company’s permanent capital needs.

When loans aren’t available, look for equity

Bankers don’t take equity risks, Seiwert said. Instead, they look to make loans that will be repaid on time. Small business owners should look for equity injections - infusions of cash or capital into the business to grow the company and lower debt ratios - before turning to loans and credit facilities. Some firms are able to ask customers for deposits on pending orders, while others can negotiate favorable sales terms with suppliers. The amount of equity available will vary from company to company and industry to industry.

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