Businesses can get loans from a variety of sources.
They may come from traditional bank loans or from many nonbank lenders.
The cost and requirements of each lender vary greatly.
You want to find the cheapest source that best fits your cash flow needs.
It's also good to have access to funds from multiple lenders.
If there is a problem accessing your primary source of loan funding you'll be better able to quickly
tap another source of funding.
When I was the CFO of banks one of my duties was to manage the liquidity contingency plan.
This is basically a policy that states how we will maintain access to funds when we weren't certain
we could get cash from our usual sources of funding.
Part of that plan was to have multiple lines of credit and to test those lines annually.
You probably don't need something this formal for your small business but you do want to have a plan
for monitoring your cash and for backup sources of cash.
It's much easier to setup access to funding during good financial times than in the storms of an economic
downturn or a cash crisis.
When you're running out of cash time is your biggest enemy.
Taking time now to prepare saves you time accessing cash when you need it most.
One of the first things that may come to mind are banks but banks come in a wide variety of sizes and
styles large national banks and large regional banks provide loans to businesses of every size.
Smaller businesses may feel lost in the size of these banks.
These banks may serve small businesses through highly automated and rules driven systems with little
interaction or decision making authority by bank staff.
Larger companies with complex needs and large loan sizes fit these larger banks well medium sized businesses
who started with a community bank may need to move to a regional or national bank as their service area
and complexity increases community banks are often a good choice for smaller businesses.
These banks can't make the same size of loans as their larger banks but make loan decisions at the local
level for faster decisions especially for loans that can't be automatically decided solely by credit
scores or financial statement ratio analysis.
Some businesses choose community banks because the bank leadership and many of the employees are part
of a local community and support the local community.
The banking system continues to consolidate as banks buy other banks with few bank starting.
Don't be surprised if you start with a community bank that is eventually purchased by a regional or
national bank.
Credit unions are becoming more active in business lending and are filling the void of disappearing
community banks to belong to a credit union.
You must meet the membership criteria for it.
That criteria used to be narrowly defined to a single industry or a company.
Now most credit unions have what's called a Community Charter that allows people and businesses in a
certain area which can be as large as multiple states to join the credit union.
Further credit unions have hired many business loan officers from banks credit unions have lenders that
are well versed with business loans credit unions offer very competitive rates for this basics of business
loans class most of what I'll cover will be about loans you can receive from banks and credit unions.
The fourth bullet on this slide are vendors that companies work with that aren't banks but have foreign
business partnerships with banks.
Examples include Amazon merchant services providers and commercial loan brokers.
These companies act like brokers affiliates or partners to refer businesses to banks that provide the
actual loan and deposit services there's also an ever increasing variety of lending sources outside
of banks and credit unions captive financing companies or dealer financing or examples of this.
Dealers may broker their loans to banks which is very common with automobiles.
Customers of equipment dealers may receive financing from lending subsidiaries of the equipment manufacturer
for example I used to work at a community bank that served farmers farmers who purchased new equipment
could finance the equipment at very low rates from the manufacturers finance subsidiary.
The loans were a loss leader to encourage purchases of equipment and related future servicing of that
commitment with higher profits banks or credit unions could better compete for loans on used equipment
trade financing as a funding source that many may not think of as a traditional loan.
The ability of customers to buy items on credit with their suppliers makes these non-financial vendors
a type of lender.
These vendors have to create credit policies agreements and manage collections like a bank does for
its loans.
Trade finance is one of the earliest forms of credit a new company can receive.
It's a crucial short term cash flow management tool for many businesses.
Factoring in Purchase Order Management are similar sources of funding.
Companies who need immediate access to cash can sell the accounts receivable or purchase order commitments.
The company gets immediate cash from the factor in exchange for a fee to the factor.
Technology makes peer to peer lending more viable.
Banks receive loan interest as income and pay interest out to depositors.
They keep a large part of that spread between loan interest and deposit interest.
Peer to peer lending allows large amounts of investors to more directly provide funding for loans.
The peer to peer lending company takes a small fee for creating the online lending program.
The application and decision making process is very automated to keep costs down.
Loan sizes are usually small.
These companies claim borrowers can get cheaper loans.
Borrowers that had been turned down by banks may be able to get funding through to peer to peer lenders.
Funding for these loans has come from both aggregating small investments by individuals and large investments
made by large banks.
I've invested a little in peer to peer lenders and I'll give you a quick tip if you are an investor
make sure to check if your investment is directly collateralized by the loans or if your cash payments
are just based on the cash receipts of the loans without being collateralized by those loans.
It makes a big difference whether you are a secured creditor or an unsecured creditors.
If the peer to peer lender declares bankruptcy.
Hard Money Lenders provide short term real estate loans at much higher fees and rates than banks and
a much lower loan to value than banks loan to value is the amount of the loan as a percent of the value
of the property.
I'll explain it more later in this course.
These companies lend to borrowers that have provided much less application documentation.
The bank loans they make loans that are riskier than bank loans.
Hard money lenders reduce their risk by charging higher fees and by being able to sell their collateral
property with less likelihood of a loss.
I have a real estate investment LLC that has used hard money lenders to buy properties at foreclosure
auction.
I then refinanced the loan a few months later with a traditional bank credit union.
They provide a good service in the real estate market.
Mezzanine financing is a hybrid of debt and equity.
If you think of the liability and equity side of the balance sheet traditional debt discussed earlier
would be included with liabilities and common stock would be the bottom level of equities mezzanine
financing is often listed near the bottom of the list of liabilities or the top of the list of equity.
It's more expensive than bank debt but doesn't dilute ownership like pure common equity.
One example is preferred stock that has a stated coupon a lower liquidation preference and bankruptcy
than debt and preferred stockholders can't force the company into involuntary bankruptcy for missed
payments like debtors can.
Another example is convertible debt.
These are generally less common.
They may be used more in some industries.
As I said earlier this course on loan basics will focus on traditional loans made by banks and credit
unions.
I wanted you to be aware of some of these other loan options and many of the concepts I discussed in
this course will also apply to these funding sources.