1 00:00:04,210 --> 00:00:07,220 Businesses can get loans from a variety of sources. 2 00:00:07,300 --> 00:00:11,400 They may come from traditional bank loans or from many nonbank lenders. 3 00:00:11,440 --> 00:00:14,740 The cost and requirements of each lender vary greatly. 4 00:00:14,770 --> 00:00:18,880 You want to find the cheapest source that best fits your cash flow needs. 5 00:00:18,880 --> 00:00:22,300 It's also good to have access to funds from multiple lenders. 6 00:00:22,300 --> 00:00:26,890 If there is a problem accessing your primary source of loan funding you'll be better able to quickly 7 00:00:26,890 --> 00:00:29,150 tap another source of funding. 8 00:00:29,200 --> 00:00:34,420 When I was the CFO of banks one of my duties was to manage the liquidity contingency plan. 9 00:00:34,420 --> 00:00:39,040 This is basically a policy that states how we will maintain access to funds when we weren't certain 10 00:00:39,040 --> 00:00:42,090 we could get cash from our usual sources of funding. 11 00:00:42,100 --> 00:00:46,820 Part of that plan was to have multiple lines of credit and to test those lines annually. 12 00:00:46,840 --> 00:00:51,490 You probably don't need something this formal for your small business but you do want to have a plan 13 00:00:51,490 --> 00:00:55,310 for monitoring your cash and for backup sources of cash. 14 00:00:55,330 --> 00:01:00,880 It's much easier to setup access to funding during good financial times than in the storms of an economic 15 00:01:00,880 --> 00:01:03,250 downturn or a cash crisis. 16 00:01:03,250 --> 00:01:06,730 When you're running out of cash time is your biggest enemy. 17 00:01:06,970 --> 00:01:11,760 Taking time now to prepare saves you time accessing cash when you need it most. 18 00:01:13,430 --> 00:01:18,800 One of the first things that may come to mind are banks but banks come in a wide variety of sizes and 19 00:01:18,800 --> 00:01:24,890 styles large national banks and large regional banks provide loans to businesses of every size. 20 00:01:25,010 --> 00:01:28,540 Smaller businesses may feel lost in the size of these banks. 21 00:01:28,700 --> 00:01:33,890 These banks may serve small businesses through highly automated and rules driven systems with little 22 00:01:34,250 --> 00:01:37,910 interaction or decision making authority by bank staff. 23 00:01:37,910 --> 00:01:44,510 Larger companies with complex needs and large loan sizes fit these larger banks well medium sized businesses 24 00:01:44,510 --> 00:01:49,040 who started with a community bank may need to move to a regional or national bank as their service area 25 00:01:49,040 --> 00:01:55,320 and complexity increases community banks are often a good choice for smaller businesses. 26 00:01:55,360 --> 00:02:00,430 These banks can't make the same size of loans as their larger banks but make loan decisions at the local 27 00:02:00,430 --> 00:02:05,590 level for faster decisions especially for loans that can't be automatically decided solely by credit 28 00:02:05,590 --> 00:02:08,470 scores or financial statement ratio analysis. 29 00:02:08,470 --> 00:02:12,580 Some businesses choose community banks because the bank leadership and many of the employees are part 30 00:02:12,580 --> 00:02:15,760 of a local community and support the local community. 31 00:02:15,790 --> 00:02:21,460 The banking system continues to consolidate as banks buy other banks with few bank starting. 32 00:02:21,460 --> 00:02:25,570 Don't be surprised if you start with a community bank that is eventually purchased by a regional or 33 00:02:25,570 --> 00:02:26,770 national bank. 34 00:02:26,770 --> 00:02:31,450 Credit unions are becoming more active in business lending and are filling the void of disappearing 35 00:02:31,450 --> 00:02:34,290 community banks to belong to a credit union. 36 00:02:34,300 --> 00:02:36,760 You must meet the membership criteria for it. 37 00:02:36,940 --> 00:02:41,420 That criteria used to be narrowly defined to a single industry or a company. 38 00:02:41,430 --> 00:02:46,360 Now most credit unions have what's called a Community Charter that allows people and businesses in a 39 00:02:46,360 --> 00:02:50,820 certain area which can be as large as multiple states to join the credit union. 40 00:02:50,890 --> 00:02:56,170 Further credit unions have hired many business loan officers from banks credit unions have lenders that 41 00:02:56,170 --> 00:03:03,100 are well versed with business loans credit unions offer very competitive rates for this basics of business 42 00:03:03,100 --> 00:03:08,560 loans class most of what I'll cover will be about loans you can receive from banks and credit unions. 43 00:03:08,590 --> 00:03:12,970 The fourth bullet on this slide are vendors that companies work with that aren't banks but have foreign 44 00:03:12,970 --> 00:03:15,070 business partnerships with banks. 45 00:03:15,070 --> 00:03:19,840 Examples include Amazon merchant services providers and commercial loan brokers. 46 00:03:19,840 --> 00:03:25,060 These companies act like brokers affiliates or partners to refer businesses to banks that provide the 47 00:03:25,060 --> 00:03:31,390 actual loan and deposit services there's also an ever increasing variety of lending sources outside 48 00:03:31,390 --> 00:03:38,040 of banks and credit unions captive financing companies or dealer financing or examples of this. 49 00:03:38,040 --> 00:03:42,120 Dealers may broker their loans to banks which is very common with automobiles. 50 00:03:42,240 --> 00:03:47,700 Customers of equipment dealers may receive financing from lending subsidiaries of the equipment manufacturer 51 00:03:48,090 --> 00:03:53,190 for example I used to work at a community bank that served farmers farmers who purchased new equipment 52 00:03:53,190 --> 00:03:58,470 could finance the equipment at very low rates from the manufacturers finance subsidiary. 53 00:03:58,500 --> 00:04:03,420 The loans were a loss leader to encourage purchases of equipment and related future servicing of that 54 00:04:03,420 --> 00:04:09,090 commitment with higher profits banks or credit unions could better compete for loans on used equipment 55 00:04:09,660 --> 00:04:14,330 trade financing as a funding source that many may not think of as a traditional loan. 56 00:04:14,340 --> 00:04:19,620 The ability of customers to buy items on credit with their suppliers makes these non-financial vendors 57 00:04:19,650 --> 00:04:21,390 a type of lender. 58 00:04:21,390 --> 00:04:26,940 These vendors have to create credit policies agreements and manage collections like a bank does for 59 00:04:26,940 --> 00:04:27,960 its loans. 60 00:04:28,200 --> 00:04:32,110 Trade finance is one of the earliest forms of credit a new company can receive. 61 00:04:32,130 --> 00:04:36,630 It's a crucial short term cash flow management tool for many businesses. 62 00:04:36,630 --> 00:04:40,270 Factoring in Purchase Order Management are similar sources of funding. 63 00:04:40,350 --> 00:04:45,860 Companies who need immediate access to cash can sell the accounts receivable or purchase order commitments. 64 00:04:45,930 --> 00:04:50,290 The company gets immediate cash from the factor in exchange for a fee to the factor. 65 00:04:50,400 --> 00:04:53,150 Technology makes peer to peer lending more viable. 66 00:04:53,370 --> 00:04:57,310 Banks receive loan interest as income and pay interest out to depositors. 67 00:04:57,390 --> 00:05:01,800 They keep a large part of that spread between loan interest and deposit interest. 68 00:05:01,800 --> 00:05:06,840 Peer to peer lending allows large amounts of investors to more directly provide funding for loans. 69 00:05:06,870 --> 00:05:11,580 The peer to peer lending company takes a small fee for creating the online lending program. 70 00:05:11,580 --> 00:05:16,280 The application and decision making process is very automated to keep costs down. 71 00:05:16,290 --> 00:05:18,220 Loan sizes are usually small. 72 00:05:18,270 --> 00:05:20,720 These companies claim borrowers can get cheaper loans. 73 00:05:20,760 --> 00:05:25,400 Borrowers that had been turned down by banks may be able to get funding through to peer to peer lenders. 74 00:05:25,410 --> 00:05:30,690 Funding for these loans has come from both aggregating small investments by individuals and large investments 75 00:05:30,690 --> 00:05:32,090 made by large banks. 76 00:05:32,100 --> 00:05:36,870 I've invested a little in peer to peer lenders and I'll give you a quick tip if you are an investor 77 00:05:36,960 --> 00:05:41,970 make sure to check if your investment is directly collateralized by the loans or if your cash payments 78 00:05:41,970 --> 00:05:46,470 are just based on the cash receipts of the loans without being collateralized by those loans. 79 00:05:46,500 --> 00:05:50,490 It makes a big difference whether you are a secured creditor or an unsecured creditors. 80 00:05:50,580 --> 00:05:52,970 If the peer to peer lender declares bankruptcy. 81 00:05:53,040 --> 00:05:57,810 Hard Money Lenders provide short term real estate loans at much higher fees and rates than banks and 82 00:05:57,810 --> 00:06:03,330 a much lower loan to value than banks loan to value is the amount of the loan as a percent of the value 83 00:06:03,330 --> 00:06:04,020 of the property. 84 00:06:04,080 --> 00:06:06,540 I'll explain it more later in this course. 85 00:06:06,540 --> 00:06:10,880 These companies lend to borrowers that have provided much less application documentation. 86 00:06:10,890 --> 00:06:14,380 The bank loans they make loans that are riskier than bank loans. 87 00:06:14,460 --> 00:06:19,200 Hard money lenders reduce their risk by charging higher fees and by being able to sell their collateral 88 00:06:19,200 --> 00:06:21,770 property with less likelihood of a loss. 89 00:06:21,780 --> 00:06:26,340 I have a real estate investment LLC that has used hard money lenders to buy properties at foreclosure 90 00:06:26,340 --> 00:06:27,120 auction. 91 00:06:27,120 --> 00:06:31,290 I then refinanced the loan a few months later with a traditional bank credit union. 92 00:06:31,440 --> 00:06:34,320 They provide a good service in the real estate market. 93 00:06:34,560 --> 00:06:38,290 Mezzanine financing is a hybrid of debt and equity. 94 00:06:38,310 --> 00:06:42,720 If you think of the liability and equity side of the balance sheet traditional debt discussed earlier 95 00:06:42,720 --> 00:06:47,910 would be included with liabilities and common stock would be the bottom level of equities mezzanine 96 00:06:47,910 --> 00:06:53,190 financing is often listed near the bottom of the list of liabilities or the top of the list of equity. 97 00:06:53,250 --> 00:06:58,080 It's more expensive than bank debt but doesn't dilute ownership like pure common equity. 98 00:06:58,080 --> 00:07:03,600 One example is preferred stock that has a stated coupon a lower liquidation preference and bankruptcy 99 00:07:03,600 --> 00:07:08,490 than debt and preferred stockholders can't force the company into involuntary bankruptcy for missed 100 00:07:08,490 --> 00:07:09,840 payments like debtors can. 101 00:07:10,380 --> 00:07:12,240 Another example is convertible debt. 102 00:07:12,240 --> 00:07:14,100 These are generally less common. 103 00:07:14,130 --> 00:07:16,230 They may be used more in some industries. 104 00:07:16,230 --> 00:07:20,850 As I said earlier this course on loan basics will focus on traditional loans made by banks and credit 105 00:07:20,850 --> 00:07:21,690 unions. 106 00:07:21,690 --> 00:07:26,010 I wanted you to be aware of some of these other loan options and many of the concepts I discussed in 107 00:07:26,010 --> 00:07:28,620 this course will also apply to these funding sources.