Five Steps to Choosing the Right Financial Partner

By: L. Lynn Collins
Date: 1/1/2007

Choosing the right financial partner is one of the biggest decisions you will ever make for your business. Our previous articles have included detailed insight into working capital financing (Accounts Receivables (A/R) financing). This article will actually walk you through the process of finding the right A/R lender.

Step 1: Where Are You?
Specifically, what stage of the business lifecycle are you in - Startup, Growth, Mature, or Turnaround?

• Startups: Bank lines of credit are typically not available to Startups due to their lack of operating history. Factoring companies are the best option.

• Growing Companies: Growing companies are typically dependent on A/R financing - cash flow is critical to covering the increasing payroll burden. While a bank line of credit may be available, banks determine the size of the credit line based on historical earnings. Thus, the bank's approved credit limit is often inadequate to support these companies' continued growth. For this reason, factoring companies are typically the best option for companies with aggressive growth aspirations.

• Mature Companies: Mature companies usually require less working capital and are characterized by an established equity base from long-term accumulated earnings. They have completed their growth objectives and have stable revenues and earnings. For these companies, a bank line of credit is typically the best option.

• Turnaround Companies: These companies are trying to get back on track. They usually require increased working capital in order to return to profitability. Banks are not an option for this stage of the business lifecycle. Factoring is almost always the preferred option.

If you are unsure of which stage your business is in, talk with a business consultant or trusted advisor. Defining your situation and needs is your first step, and it will help you determine the optimal form of financing - bank line of credit versus factoring line of credit.

Step 2: Ask For Referrals!
It would be impossible to research all the financing options on your own - there are simply too many of them. So, get referrals from trusted friends and associates - your banker, accountant, colleagues in the industry, even personal friends. Make sure your colleagues are referring you to someone with whom they have first-hand experience.

Use the Internet to research the companies to whom you've been referred. But, avoid using the Internet to identify new lenders - anyone can put together a slick website these days.

Step 3: Narrow the Field of Lenders
First and foremost, avoid the temptation to "shotgun" your company's information out to all the lenders. Over-shopping your financing request can backfire, as lenders may not take the opportunity seriously. For best results, narrow the field of candidates to one or two lenders (three at the most).

To narrow the field, first interview each lender on your referral list to evaluate their fit with your company. Consider their size, industry expertise, geographic location, etc. Don't send them a full package - an A/R Aging and a list of the owners/officers should be enough for them to determine their interest and prepare a Term Sheet.

Each potential lender should provide you a written Term Sheet and a sample copy of their closing/legal documents. Review these documents carefully, or have an attorney or trusted advisor review them for you. Pay particular attention to the following:

• Fees: Low cost is important. But don't base your decision entirely on "cost" - the lowest-cost operators seldom have the level of professionalism or service you require. Identify any "hidden" fees.

• Term Commitment: Are there any minimum usage requirements or penalties if you terminate the relationship? Avoid contractual term commitments at all costs, so you maintain the flexibility to change your mind later without serious financial consequences.

Have each lender provide a list of everything required to move forward including a clear approval/funding timeline - identify any scheduling conflicts. Also, compare and contrast all the Term Sheets and legal documents. Pick the top one or two candidates.

Step 4: Get the Ball Rolling
Move forward with your selected lenders' due diligence and approval process. Be prepared to pay a small deposit up-front for due diligence. Since this deposit is required by most lenders, it's another reason you want to narrow the field of candidates.

Tell each lender the name of the other lender(s) with whom you are speaking. You will establish credibility and ensure that each company "puts their best foot forward" in their proposal. Be wary of negative comments from lenders about their competitors - remember, these companies are competing with each other to get your business!

Step 5: Pull the Trigger!
If more than one company issues an approval, you'll need to make a decision. Talk to your friends or associates again, and listen to your gut. Decide on which lender seems easiest to work with. Then, make your pick!

Since you've already reviewed the legal documents, you will sail right through the closing process, and onto initial funding!

P.S. As discussed, by having a "no-term commitment" relationship, you maintain the flexibility to make changes if necessary. We suggest evaluating your lender's performance after three to six months.

L. Lynn Collins is a business development officer for the nationwide firm Amerisource Staff Funding. She may be contacted at 704.944.3215, or by email at lcollins@amerisourcefunding.com.