Real-World Tips for Business Financing

Updated November 23, 2021

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Supply chain uncertainty has become a major concern for many small business owners. It’s also a growing reason that many companies are seeking business loans in 2021. Business financing for the purposes of ensuring an adequate and timely supply of goods is exploding according to iCapital Funding CFO, Robert Kleiber. iCapital Funding provides capital for small-to-medium-sized businesses. There are many industries that are being severely impacted by short term supply chain disruptions. Some of these conditions could linger into 2022.

“We are seeing a surge in companies seeking to finance larger purchases of raw materials and supplies due to the disruptions in the global supply chain as a result of the pandemic,” says Kleiber.

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Denver-based Felene Inc, a maker of distilled spirits is a prime example of the need for manufacturers like distilleries to increase purchases of raw materials and packaging supplies.

“We are seeing a severe shortage in glass bottle availability,” says Felene President, Kim Laderer. What we used to purchase on a two-to-three-week lead time is now taking eight-to-ten weeks minimum”, added Laderer.

Laderer’s company manufactures sugarcane vodka in Denver Colorado and says that in addition to shortages, there is also the associated rise in cost due to scarcity. She says that her distillery peers are almost all saying the same thing. “As an industry we are facing a very critical time in the year when we do almost 60% of our annual business. At this point many distilleries would be expecting bulk shipments of glass bottles to take them through the holiday season. If you did not order in bulk two months ago you may find yourself without glass bottles for the final three months of the year,” says Laderer.

Some producers such as Felene say they are relying on a mix of business financing options to fund larger purchases much further in advance than they would ordinarily do. Laderer says her company is not taking any chances with a further disruption in supply chain stability. She says she will be firming-up relationships with potential lenders as a part of her business operations.

“We were aware of the magnitude of the risks to the supply-chain earlier in the year”, says Laderer. “The first thing we did was to consolidate our purchases and tightened discretionary spending so we’d have enough capital to make larger purchases and get prepared to sit on that material in stock for longer than we would ordinarily hold inventory. We also secured lines of credit in advance as well as other sources of business financing.”

Instead of paying cash for distillery equipment Laderer says the company looked to equipment leasing to keep the cash reserves liquid. The company has also started to investigate the possibility of getting a conventional bank loan. “This is a global battle with a lot of customers fighting for limited resources. It’s pretty simple, someone is going to be left-out without the ability to bottle, it’s just simple math,” says Laderer.

The company says they prepared like they were going to battle. They limited discretionary spending and allocated cash reserves to purchasing raw materials and packaging supplies in bulk. In addition, they established relationships with funding providers and mapped-out a financing strategy that would allow them to make large purchases of goods that were becoming increasingly difficult to source. To do this they said that they are continually exploring options such as business lines of credit, business credit cards and small business loans.

“For Felene, we were hoarding cash and establishing credit lines to buy effectively. It’s kind of similar to buying an insurance policy. That also means being conservative and paying attention to our own credit scores and personal credit,” explained Laderer. Personal finances are a key factor in the loan application process that lenders consider.

“It made perfect sense for us to re-direct free cash-flow to purchases. We know we will use the materials and our insurance premium is the time value of the additional purchase price. Considering the alternative, that was a very small price to pay and an easy decision”.

But Laderer and Felene also took an additional “insurance policy” to protect against supply-chain risk. They actually establish a relationship with a funding source to set up business finance options if needed in the future. Lenders from traditional banks to Fintech firm are increasingly paying attention to a company’s bookkeeping, the receivable balances (outstanding invoices) and the business bank accounts. 

No longer a startup, Felene, like many small businesses will need to show responsible and consistent operational expertise to get a business line or other credit. This will help lenders determine what type of monthly payment they can afford and what size loan they can get.

“The best time to arrange for funding is when you don’t need it desperately,” said Laderer. Our business has been growing steadily and we are profitable. But like any business, we will need growth capital to get to the next step. By starting a relationship with our capital providers as a normal course of business, we know have a lot more financing options.” The company says they don’t fit the model for a merchant cash advance or invoice factoring (invoice financing) and don’t have the desire to pursue crowdfunding, but there are still a lot of alternatives available.

“We have also been in contact with the Small Business Administration (SBA) to determine our eligibility for an SBA loan. Good credit is the holy grail of borrowing, that’s still the most important factor in getting the best loan and the SBA has pretty tough standards,” explains Laderer. 

Qualifying for an SBA loan is not easy and it takes a bit of time to complete the loan application. Depending on the loan amount, the company’s profitability, and financial statements, an SBA loan is one of the best funding options, mostly because of repayment terms (for term loans) and low-interest rates. Be prepared with a solid business plan if you intend to apply for an SBA loan, it’s required in most cases. The most important part of your business plan is to demonstrate a business need for capital and demonstrate how the company will retain existing business as well as where new business will come from.

The company works closely with its bookkeeper and the owners keep a close eye on their credit reports and look for ways to increase their credit scores. Credit rating agencies also give tips on how to boost your score. Some of the programs carry a small fee but are well worth it.

Small Business Grants

“We are also looking into small business grants and economic development zone tax assistance,” says Laderer. It’s important to check your local county offices to see if you are in an economic development zone. There are lots of valuable perks for qualifying companies.

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