“It takes money to make money” is a phrase that most entrepreneurs have heard – and lived. Yes, there are many business models that can be started on a shoestring, particularly in some service industries, but often a new or growing business will require an injection of capital in order to adequately fund their location, payroll, insurance, marketing and working capital in their early stages and as they grow. Accounts Receivable, inventory, equipment, seasonality and even fast growth have impacts on a business’ cash flow and create a need for capital, even for a profitable business. Those businesses are facing some headwinds in the capital markets:
- Interest rates are nearly double what they were just a few years ago.
- Scrutiny of loan applications and the deals themselves is up seemingly five-fold.
- Many lenders are circling the wagons and are reverting to being Asset Based Lenders (ABL), meaning that they will lend on assets such as equipment or home equity, but not on projections, credit scores alone or historical cash flow.
- The crisis in commercial real estate has tightened the available capital, as some banks have been exposed to significant losses in that sector.
Professional small business advisors knew that capital would be a challenge after the pandemic, and that’s one reason why the Kansas Small Business Development Center invested in our novel Capital Access Center offering seasoned bankers’ guidance to our clients statewide. Kansas is one of only three states with a Capital Access Center. Their impact has been tremendous, and they have assisted Kansas companies with access to nearly $100 million in capital since the inception of the program. The Capital Access Center often serves as a matchmaker between the business owner and banks with appetites for specific business models. In addition, the CAC can “preflight” an application through a banker’s eyes so that the deal is truly “bank ready.”
We are fortunate that Kansas has some excellent public loans and loan matches for small businesses in the state. For example, the statewide GrowKS loan and equity match programs can provide additional funding to a small business loan, adding often as much as $100K on the loan side or $250K on the equity side. For loan matches, interest can be as low as 4% (versus 11.5% for many commercial loans at present). Network KS administers the GrowKS program and a host of local, often county, funding programs. For example, Miami County has a thriving E-Community Loan Fund, which can over-match a small business loan with up to an additional $50K. Wyandotte County has their own E-Community Loan Fund and also offers smaller Empower loans, up to $15K.
In addition to the classic 5 Cs of credit: character (or credit score), the cash generated by the business, the cash that the founders are bringing to the table, available collateral and overall market conditions, banks and business loan applicants should be looking at these public programs to bolster available capital. For example and with regard to asset based lending, the bank can fund the equipment (and use that equipment for collateral) and then turn to these important programs for some of the soft costs and working capital needs of a growing small business. A 6th C might be warranted: business owners, their bankers and advisors will have to be creative moving forward.
