During tough economic times, finance is a huge challenge for business owners. In the “Going Forward” section of the January ’09 Entrepreneur Magazine, Mark Hendricks quotes some sobering statistics which frames up the extent of the recession we are experiencing:

– During the Second Quarter of ’08, 65% of bank senior loan officers stated they recently tightened lending standards for small businesses.

– In August ’08, 49% of business owners reported cutting back and by October that number grew to 69%.

– Sales Growth for businesses in all sectors fell from an 8% average increase over the last five years to 6% for the year ending October ’08.

Our best advice to meet the challenges is have a well developed and implemented Business Plan and Financial Strategy which proves your Cash Flow Model and determines which financial sources and structures fit that Model. With your Funding Business Plan, Loan Package and Investment Overview in hand, here are some real world funding options and strategies to consider when Lenders’ purse strings become increasingly hard to access:

1. Networking: Increasing your Networking activities through morning executive breakfast events, trade associations, Chamber of Commerce events and Rotary/ Kiwanis/ Lions Groups can be a great way to find suitable, local, private money. Local investors are much more approachable in hard times as they have a connection and understanding to the area and your track record. Other business owners in these groups, associations and events can be extremely helpful in finding suitable private money.

2. Supplier / Trade Finance: According to Rosalind Resuick, CEO of Axxess Business Consulting, no outside party has a bigger interest in your company’s success than your trade partners and suppliers. Having your supplier as an Equity Partner can be very advantageous when you are having difficulty making payments or want to quickly develop a new market. The participating Equity Stake is assigned to your past trends, present and future orders. Start-up Consultant, Joe Fulvio, suggests your Business Plan “show not only a direct return on investment, but also the value of future business to be gained”. By making your supplier a partner in your business, the supplier is better suited to understand your Finance needs

3. Lease Finance: When times are tough and your cash is tightening, Leasing can be the answer. Small deposit, lower payments and flexibility are often associated with Lease verses Buy Terms. At the end of the lease, you can easily upgrade equipment and roll into the Lease Payments so your out of pocket costs are much smaller than a typical finance loan.

4. Community Bank Loans: Amy Loera, owner of Tio’s Mexican restaurant chain, was denied at nine different banks, for a loan to open a new restaurant, although she ran a very successful business. These Lenders cited the Nation-wide downturn of restaurant sales due to the current recession as the chief reason for the loan declination. There is no doubt a year ago, these banks would have lent to her. Instead of throwing in the towel, Ms. Loera turned to a local, community lender, Arrowhead Credit Union, and she was approved for a $643,000 loan. What was the difference? The Credit Union was based in her business region, and she could make a strong case for the health of her restaurant chain.

Reasons Ms. Loera cited for her success in obtaining her expansion loan:

1. Low overhead costs

2. Reasonable Prices

3. Family-Style restaurants picking up the slack from people by the Fancier establishments in the area.

4. Smaller, localized lenders are typically in better shape during an Economic Downturn

5. Community Banks are more cognizant of the local economy’s health and vitality

6. Larger / Regional / National Banks are more reliant on Credit Scores and cookie cutter Applications. Local Banks rely more on a Business Plan.

7. Niche Market: Suburban market that likes an affordable meal at the end of a busy day

8. Historical Financials showing track record

9. Debt-free

10. 12 month Realistic Projection for the new restaurant

11. Comprehensive Business Plan; every detail about the business

12. Received approval from the Credit Union due to:

a. Experience

b. Existing locations cash flowing well

c. Affordable meals in a recessionary environment

d. Detailed, well-thought-out Business Plan

The Inside Story: What the Local Bank Looks for:

1. Not Credit Score Driven

2. Look behind the scenes of the business

3. Cash Flow is Key: An important indicator of the ability to pay off the loan.

4. Believable, forward-looking Cash Flow Projections for the new business. Realistic Financial Statements.

5. Provide Best & Worst Case Scenarios on your Financial Projections

6. Small, Community Banks assess a business loan on a case by case basis. This is a huge advantage over Regional Bank Loan decision making, especially, in an economic down-turn.

7. In recessionary times, certain industries will be hit harder than others, like Construction Companies or Auto Dealerships; therefore, it is very important to have a well developed Business Plan and a forward looking Strategic Plan that includes a well researched 12-18 month industry outlook, based upon a believable Marketing Plan.

8. Small Bankers can see successful pocket areas in a struggling local economy. These pocket areas often have a Strong Niche Marketing Offering

9. Financial problems are best disclosed to the bank early on so a mutual solution can be implemented

10. Small Banks do loan to Companies showing past financial “hiccups” if they can show they were proactive and overcame the issue

In my next article, I will review what businesses do well in a recession and provide more recession business tactics so you can succeed, despite this lousy economy.